Episode 76: The Nerd Fundraising Guide: Tips, Advice, and Lessons from PostPilot's Series A

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‍Transcript

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Announcer

Welcome to Nerd Marketing, an original podcast for e-commerce operators and marketers looking to level up. Drew Sanocki and Michael Epstein will bring you actionable strategies from their decades of running eight and nine figure brands, along with interviews and insights from the leaders of some of the most successful brands in the world.

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Drew 

Hey everybody, it's Drew Sanocki at the Nerd Marketing Podcast. Big news, we closed our Series A, led by Summit Partners in Boston, the Klaviyo co-founders came in. That's the subject of today's podcast. I'm joined by Michael Epstein, my co-founder. You probably don't care that we raised money, what you might care about is what the market's like out there to raise money, some hacks, how we did it, some tips, what to avoid, what might work for you, why we did it, those kind of things. So that's what we get into today. We had a lot of fun with it. And hope you enjoy this podcast announcing our Series A. Thanks.

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We'll start with the announcement. So we raised money, right? Our first major equity around for PostPilot, we've been at this for three or four years, grown profitably, so never really felt the need to raise capital. We did. We just wrapped it up really at this point a little over a month ago. And yeah, we feel good about it. Summit Partners out of Boston led the round, Summit being one of the early growth equity firms in Klaviyo. They're in Brooklyn. They're in a lot of DTC brands.

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Michael

Solo brands, Dr. Squatch. They're big. They're big and prestigious and that helped.

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Drew
Right. They're big, prestigious, and big in the categories we want to be in and play in. And then the Klaviyo founders came in. Andrew and Ed kind of figured that it was quicker for them. They are a big public company now, so quicker for them to act as individuals versus through corporate, which makes total sense. So let's talk about that today.

And actually let's start with why do we do it? I'm interviewing you, Mike. You're running a largely bootstrapped, profitable, cash flowing company. It's grown tremendously. So why'd you raise money?

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Michael 

I think in large part you touched on it at the very beginning because we didn't have to. And that is, I think that's really key. You have more leverage when you don't need to get the money. These are sharp people. They're gonna pick up on the signs that you're bleeding cash and you have X amount of runway left and they've got a lot of leverage when you need the capital.

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We were fortunate in that we've been profitable really the whole way. And we came off just a blockbuster year, particularly in Q4. I mean, we killed it. And that put us in a really good spot where we thought we could test out the market. You always want to take capital when you don't need it. That's sort of like an idiom. So we decided this is the right time and we're coming off a very strong year. We don't need the capital. So now we are in a good position to go out, test the market and see, you know, if we were happy with the types of terms that we were going to get. And ultimately we were. What about you, Drew?

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Drew

Yeah, I'm trying to remember. I think we talked about it like late, late last year, December. You know, it was clear that point we were going to have a killer Q4 and killer year. You and I are talking, I mean, December for us is actually a bit of a down month because the Black Friday surge happens in November, a chance to catch our breath and just say, hey, why don't we raise a little bit in Q1, you know, on the heels of this incredible year. They'll see the spike through the end of the year. I mean, psychologically, it just looks like you're on a tear. It's a good time to do it. And it's also a good time for us because you don't want, we don't want to be doing that in the second half of the year when we're just like pounding the beating drums on Black Friday, right through the end of the year. 

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So Q1 seemed like a good idea. You know, capital can do a lot of things for a business, take some of the risk out of the business. I mean, we, when we say we're profitable, we were profitable, but we weren't like socking away a lot of money, you know, because all the money was going into growth. You know, you figure we're tripling every year - we went from five people to almost a hundred over, I don't know what it was a year or two, a couple of years. And when you're just growing at that pace, you don't have a lot of cash lying around, even though you're technically cash flowing. It's all going back in. To get that kind of build up a cushion, a bit of a war chest, enables a lot of things going forward. I like the idea of accelerate, you know, stepping on the gas, we can do a little bit of hiring, do some of the hiring that usually would trickle out through the year, all earlier. You know, maybe it opens the door to doing a couple acquisitions. It's really interesting, plus we get a good capital partner and an investment partner really, who can help us navigate this next phase of the company.

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Michael

Yeah, I think we see the opportunity here and we just want to continue to press our lead and we want to continue to execute the vision that we have for this company and do it faster if we can. And this gives us, as you said, a bit of a war chest, a bit of a cushion to be able to accelerate a lot of what we want to do here.

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Drew

In terms of the process, we got after it in late January. I know we worked with a gentleman, I don't have to refer anybody to, to build our deck. I remember doing that like over New Year's and then, I would say the deck was finalized by the end of January. We just started, we wanted to run a really quick process because we know how it takes down CEOs.

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We floated it to people in our network, growth equity firms, a couple of VCs, a couple of private equity, but mostly growth equity firms. Probably did 40 to 50 calls over February, March. We got interest, collected interest, eventually decided to go forward with Summit. We signed their LOI, and then we were exclusive with them for 60 days, during which they go deep. I mean, they do essentially an audit on everything in the business. And a lot of calls. Really, that was the most taxing part for us and our team.

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But at the end of it, you kind of sign on the dotted line and consummate the deal. During that process, we brought Klaviyo in, or the Klaviyo founders. But pretty straightforward. And I think the question's probably like, how do we decide on Summit over anyone else? Summit really is just like the Goldman Sachs of growth equity, you know, so they've got a great brand. It's beyond that for me, it's the fact that they really understood our business. The partner at Summit and the managing director at Summit and the Vice President, Julianne, they were on us a year before we even decided to do this. They, you know, flew out to meet us in Southern California, we gave them an early look at the business, gave us some feedback on this. This is again, probably like a year before we decided to do anything. That enabled Summit to get the first pitch to come out of the gates strong to give us really essentially the first offer, the first of everything, snd kept them at the at the lead. I appreciated that.

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Michael

I really appreciated one, that they were on to us early and had a lot of belief in us, what we were doing specifically, you and I and the management team and our ability to execute. And they were consistent with that message and really played the long game. As you said, we were not particularly receptive to this type of transaction or opportunity, yet they continued to one, provide, be interested and two, provide value along the way. They were consistently making introductions to brands. They were consistently giving us feedback on the business, helping answer questions that we had about the business without at that time an expectation that we were ready to move forward. But that paid a lot of dividends and I credit them a lot for playing the long game with us. Paid dividends because as you said, it put them in the pole position to move forward with this transaction when the time came that we were ready, because they were super educated on the market. They were super educated on us and the business itself. And they didn't need to take a ton of time to build up a thesis or understand what we were doing or sort of see the vision. And as you said, Julianne and Melanie are killers. They're really sharp, really great people to work with and people that we see as being really valuable to have in our corner. So those were definitely some of the reasons, aside from their network and their pedigree.

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Drew

To me, it really mattered that Melanie was an operator previously. She was the CEO of SoulCycle, worked at Equinox. You can often tell there are these rare breed of finance people who understand operators completely and can back them like our friend Mike Niche, but I would say they're rare and few and far between. Melanie's an operator. She knows about hiring and building a culture and being a CEO. And I think I liked having that on my board now, that voice.

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Michael

It wasn't even necessarily the highest number, but we were the most confident to have them as our partners and excited about having them as our partners. So it's more than just getting the highest sort of top line or headline number too. It's who do you want to really get into a marriage with for an extended period of time? And we really appreciate that about the team.

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Drew

Are we happy to have the Klaviyo founders investing in us?

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Michael

Yeah. You got to tell the story too about, you know, working next to them, but just the high level is we've always modeled ourselves in many ways after those guys and the business that they built and the, and the way that they approach business, really owning a market the way that they did, creating this sort of escape velocity to where it didn't matter if folks were trying to come in and compete on features or price against Klaviyo. If you were an e-comm brand and you wanted to send email, you were going with Klaviyo. And their guys are just unbelievably sharp, really nice, genuine, good people. And I mean, I could not be more thrilled that they had that level of faith and belief in us and what we were doing that they would back us this way. But Drew, what do you think? And tell the story about the early days of these guys.

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Drew 

Yeah, it's like I'm honored and I feel like it's come full circle really, because I've known these guys, Andrew and Ed, since they started Klaviyo. And I mean like 10 people in an office on Boylston Street in Boston. I was running a turnaround, which was two doors down, Karmaloop, which was bankrupt and Comvest ended up with the asset. And there was another guy, Seth Haber, who was the CEO and I was the CMO. And it was like we're in Karmaloop and Karmaloop  had one of the original streetwear sellers online, millions of people on their email list on some archaic old platform. Nothing was working. Like it's such a beast to use. All we wanted to do was lifecycle marketing because we knew that was critical to the turnaround. And we weren't getting it to work. I had heard about Klaviyo. We wanted to get it over to Klaviyo and I don't know, we were hitting a roadblock internally or something. I’m  like, these guys are one block away, I left the building, you know, walk a block away, go up into Klaviyo, knock on the door, Ed answers the door, Andrew's coding or something behind him, met the whole team. I'm like, guys, I need your help getting, getting this apparel retailer onto Klaviyo. And they, you know, bent over backwards through me, like an account manager or someone who did a lot of the work. And I've just stayed in touch with them since then.

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So that was probably over 10 years ago at this point. And obviously that had tremendous success. I think they do it by putting their customers first, really leaning in on personalization and automation. And we built this company off that phrase, “Klaviyo for postcards”, which was our first product. And so it was really special to get them involved. And I met with Andrew last week in Boston, sitting down with him. And he's become a bit of a mentor, giving us advice on how to run a team and how to deal with Summit, because we both have Summit as investors, and how to use an investor like that. And it's been a good relationship.

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So Mike, are we gonna raise again?

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Michael 

Well, the nice thing is we don't have to. This isn't a VC play where it's just burn, burn, burn and just make it till your next round. I think Summit's thesis has always been to invest in good profitable growing companies. And they certainly looked at us that way as well. I think we want to certainly continue to focus on growth and we want to accelerate our growth, but we've built up a nice cushion here to where we don't expect to need that. And again, it's just put us in a really good spot. So never say never, there's scenarios where maybe as you said earlier, there's some capital needs that may become interesting under different scenarios. But the good thing is, it's not a necessity for us.

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Drew 

Yeah, I learned a lot about growth equity funds from this. It's a newer category in the world of private equity. I mean, it's probably, I don't know, 10, 20 years old, but growth equity is an interesting niche and it delivers one of the top returns. So it's investing in companies like ours that are often profitable and growing, and growth equity will, you know, they'll want something like a 3-4 X hypothetically on a deal versus the VC that needs, you know, a 1,000X needs IPO at the end and they need to invest in the first round to be a win. It's a little bit different from venture. I think they've done very well, and then they lend a lot of experience and have helped us thus far really with all sorts of things from intros to recruiting. So not for everybody, but I think if you're one of those unique businesses in our position, where VC might not be the perfect fit and you're not a turnaround certainly, like growth equity seems like a really interesting group to raise money from. So we've had a good experience.

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Michael
I got a question for you, Drew. What would you advise companies looking for capital now to be aware of based on our experience of being out in the market?

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Drew

Like you talk to these funds and you typically get on a call with them. It's not the time for a demo. It's the time for I'm going to walk you through my slide deck and the slide deck tells a story about who you are, how fast you're growing. But if you position one thing off relative to that audience. It could be a red flag that causes them to just move on. For example, like managed services is a bit of a buzzword that a lot of them use. And some of them are into managed services, meaning like, you know, at PostPilot, we do everything for you. Like you sign up for a plan. We will do your design for you and some strategy work. We do that to increase the chances that you'll succeed and you won't churn.

And we do it because the channel is kind of new, just like Attentive started doing this and just like Klaviyo started doing this back in the day when they came out. Last thing we want is somebody signing up and sending a card that has no call to action and then PostPilot sucks and direct mail. Managed services though, and some funds may not look past that word and be like, we have to be very disciplined and only investing in software. Be careful how you position to what audience are, you know, you want to mention things like managed services, or do you want to stress your gross margin? Or do you want to stress your growth rate? Because there's often a trade off. Do you want to stress your head count? Or you want to be, you know, do you want to stress your revenue per employee? All these things, you can always stress one over the other. And I found just like there's all sorts of flavors of funds that look for different things. So my piece of advice would be like, hey, create this great long deck that you can take slides out of based on the audience. And be sure you do your research on each one before you get on a call.

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Michael

Yeah, they're definitely a bunch of funds that had very specific mandates, their investors bought into a very specific mandate or set of criteria for what that fund is able to invest in. And to your point, no matter how much they love your business, no matter how much they believe in what you're doing or love you as founders or any of those things that they say, this is a unicorn. This is amazing, but we don't have the mandate to invest in it because it looks, it has this element to it. 

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Drew

It's in our charter. We only do enterprise software, 80 % gross margin and you guys are 79%. 

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Michael

Right. I think that that is, yeah, that's a great piece of advice. The other piece of advice that I would have is it's not easy out there for folks. The environment has changed. I think most people are aware of this, but I'll state it anyway, just because we just went through this. This is not the time for VC investing in major cash bleeding, you know, businesses, unless maybe you're in generative AI, in which case it sounds like they'll still throw money at you. But this is not, this is not an environment where you're a DTC consumer brand and you're burning a bunch of cash, but you're going to get profitable once you hit a hundred million dollars in scale and you just need funding to get there. Or, you know, you're a SaaS that's just burning a ton and is growing, but, but burning a ton. Times have changed. Those things are not going to get funded on the back of a napkin like they might have in 2021 or 2020. You need to have your unit economics dialed in. You got to have your, your forecast really dialed in. You got to be making money or close or have a real good plan for how you're going to be making money soon, because the plan to just take a bunch of capital again to make it to your next round is probably not the play that's being well received right now.

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Drew 

I love it. No, that's exactly right. I think if you're DTC, don't even bother with venture. That chip is sailed. The door is closed. I almost feel like if you had an idea you're better off trying to raise before you get a dollar of revenue, then you would be if you had negative cash flow and we’re a couple of years in.

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Because yeah, there was this real emphasis on profitability that even before I got on the call, it sort of enabled me to take the, for them to let me on the call in the first place, right? Which I think got a lot of people's attention. So you could see it in their eyes, Mike. You'd see it in their eyes. All these guys and women. I mean, like these funds, especially the ones that had gone long on DTC on consumer were just they did not have the appetite to take risk right now.

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Michael

No, you could you could see the pain in their eyes from maybe some of what their portfolio’s done recently.

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Drew

Right.

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Michael

So what are we gonna do with the money?

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Drew

It's a good question. I think I touched on it earlier. I think we're going to hire. We've got some hiring needs, some management team needs. We're stepping on the gas a little bit there. I think we sort of like this war chest. We want to have enough cash that we might someday, at least, it opens the option to do some interesting things like acquisitions down the road. I think spending it on the product, and we see some real opportunities on the PostPilot product, leveraging AI, leveraging data that we can accelerate. And that's going to take some cash. What are you going to do with the money?

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Michael

Vacation? No, that's exactly it. It's just doubling down, tripling down on what we're already doing so that we can go a little faster and have a little bit of breathing room and comfort to know that we've got that nice cushion. But we've got an aggressive product roadmap. We know where we want to go with this company. And we're excited about being able to continue to move faster towards that vision and stay tuned because there's some really interesting stuff coming out really soon that we're very excited about.

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Drew

You got any teaser on what the next killer feature is going to be?

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Michael 

It's going to certainly continue to help with brands who are stuck relying on Meta as their main or sole acquisition channel. So we're constantly improving our acquisition capabilities. And we're trying to put the AI in mail, Drew. It'll be a surprise.

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Drew 

Yeah, I'll stay tuned. Anything else on the raise?

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Michael 

We're just really excited, grateful to Summit, to Andrew and Ed, to everybody else who participated in the process, to our team who worked tirelessly, I mean tirelessly throughout the diligence process and the team that's just supported us while you and I were focused a lot on this for a long time. And we're just super excited about what's coming next. you and I have a vision for where we wanna take this and we wanna get after it.

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Drew 

Well, I'm excited, a little bit tired, a little bit beaten down, but excited to finish the year strong. If you have any questions about raising money, working with Summit, working with Klaviyo, please reach out. Otherwise, we'll talk to you next time. 

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Announcer

Thanks for listening to Nerd Marketing. Don't forget to check out all of the other great episodes, some of which include interviews with e-commerce marketing masters working with Mr. Beast and Joe Rogan, plus Drew and Michael's experiences in private equity, advice from VC firms on what they look for in investments, and so much more. Like, share, subscribe, and tune in every week for a new episode.

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