Bootstrapping To $1 Million, Then Growing to $40 Million: iContact CEO Ryan Allis: Chapel Hill, North Carolina (Part 5)

Sramana: What was your strategy for raising capital?

Ryan Allis: I was 20 at the time. I had lunch with a friend who was a co-founder of PinPoint, which he merged with PowerByHand to form Motricity. He had raised a couple hundred million dollars for Motricity, and they were one of the most sought-after venture-backed companies in North Carolina at that point.

He guided me through our first round of seed financing. We reached out to local firms in the Southeast. We pitched 12 firms and received our first term sheet in February 2006, which we turned down. We did not think that the valuation was right, and we did not like the board structure. At that point we had a run rate of $2 million and they put only a $5 million pre-money; we wanted $10 million. The main reason we turned down the term sheet was because that fund wanted a five-person board on which both of us co-founders would be two members. They would provide two, and then we would agree on a fifth member. We were raising only $500,000.

Effectively, for a 10% investment in the company, they would control the company. As young entrepreneurs, we felt that if anything went wrong they would replace us and we would lose our baby. They also wanted to restart our vesting. We were already three years into that as well, so I have no idea how we would have restarted the vesting.

We turned down that term sheet and two months later we received a good term sheet. We hired a CFO as our 16th employee. He was very experienced in raising venture capital in North Carolina and Atlanta. We ended up raising a $500,000 convertible debt note from a local fund, Idea Fund Partners. We agreed that we would set the valuation in the future at four times revenue from what we did the following year.

We used the money to invest in online advertising, and we grew our revenues from a 1.5 trail to a four trail in the following twelve months. They agreed to do four times the $4 million that we did, so we ended up raising the $500,000 at a $16 [million] pre-money with a three-person board. Having that CFO who could help us negotiate was very helpful, and he helped us to give up only 3.125% of the company. We closed that deal in May 2006.

Sramana: What other money did you raise after that?

Ryan Allis: We had such success deploying capital to our marketing mathematical model that a year later we closed a $5.5 million Series A from Updata Partners out of Washington, D.C. We reached out to 40 different firms for that round, and we closed on $5.35 million at a $27 million pre-money valuation. We were able to keep the three-person board, which was important to us. The best thing we ever did was make sure that we kept control of the company.

Sramana: What was your 2007 run rate?

Ryan Allis: We were probably at about $6 million to $7 million. The valuation was about four times revenue.

This segment is part 5 in the series : Bootstrapping To $1 Million, Then Growing to $40 Million: iContact CEO Ryan Allis: Chapel Hill, North Carolina
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