Ownership Matters: How To Maximize Valuation

In an earlier Unicorn series article, I profiled Tableau Software, and how the company raised its Series A financing at a pre-money valuation of $20 million. In this piece, we look at RightNow. Series A valuation? $130 million. This piece is an excerpt from my book:Entrepreneur Journeys: Bootstrapping: Weapon Of Mass Reconstruction.

Greg Gianforte does not believe in raising money from investors. “The best money comes from customers, not investors,” the former Silicon Valley software entrepreneur says.

Gianforte had to believe that. After selling his first startup to McAfee for $10 million in 1994, he moved to Bozeman, Montana, and launched another software company. But getting funding for RightNow, his new customer-service software company, proved impossible – Bozeman wasn’t the tech hotbed or venture capital magnet he’d come from.

“All my business contacts literally threw away my card,” Gianforte recalls. “They thought I was finished when I made the decision to start a company headquartered in Montana.” Thank goodness Gianforte believes in bootstrapping; there was no other way to get RightNow off the ground. He plowed $50,000 of his own money into the company and did all the work himself – from cold-calling companies to training them on how to use the software, which lets customers get answers to questions in a Web-based FAQ. Remember, this was 1997, when Web-based automated customer service was just getting started.

Once Gianforte got a sense that he could sell the product himself, he hired three sales reps who worked entirely on commission. To further slash RightNow’s burn rate he decided against paying himself a salary. Cash was being preserved at all costs, a golden rule of bootstrapping.

Before long, RightNow’s revenue was doubling every three months. Two years in, with 150 employees and $6 million in revenues, the company was valued at an astronomical $130 million. Gianforte finally raised venture capital. In two rounds – the first in 1999 and the second in 2000 – RightNow raised $32 million from Greylock and Summit.

When RightNow went public in 2004 the management team owned 70% of the company. Gianforte still owned 28% of the company when the company crossed the $100 million-mark in revenues in 2006 and boasted a market cap close to $500 million.

How was he able to keep such grip on the reins? Bootstrapping offers entrepreneurs tremendous leverage with late-stage VCs. In early-stage venture capital funding, much of the power and control lies with the investor; in later stage funding, entrepreneurs often call the shots, with VCs falling all over themselves to offer up money.

What I find even more compelling about Gianforte’s story is that it proves that distributed economic development remains possible in America. As India’s engineering and customer service workforce becomes more expensive, it is in places like Montana and Wyoming that companies can find viable alternatives to support their growth. Even though Bozeman is no Silicon Valley, Gianforte says RightNow has had no problem attracting high-quality engineers. In fact, he managed to lure many away from Silicon Valley – an advertisement in a San Francisco paper garnered some 2,500 resumes. After all, salaries may be lower in Montana, but so is the cost of living. And even an engineer will admit that fly-fishing and skiing trump traffic congestion and rumbling airplanes overhead.

Just as I think India needs to find second- and third-tier alternatives to the seven major metros – Bangalore, Mumbai, Delhi, Hyderabad, Kolkata, Chennai and Pune – America needs to do the same. Unlocking, as Gianforte has done, the still untapped potential of the American hinterlands.

Note: In October 2011, Oracle acquired RightNow for $1.5 billion.