Posted by randfish

(Intro: This post continues a series of personal growth focused entries. It doesn’t have much direct, applicable SEO value, so feel free to skip if that’s what you’re seeking)

I’ve learned more in the last 9 months than at any previous time in my life – about myself, about this company and about the worlds of venture capital, entrepreneurship and startups. And, in the spirit of transparency (one of our guiding principles and an ideal I haven’t been maintaining as well as I could of late), I want to share, to talk about where SEOmoz is today and why we’ve decided to explore additional capital opportunities. In fact, I feel compelled – because even if only 100 people, or 10 or just 1 learn something here they can apply to themselves, it will be worthwhile.

Segments in this Post:

• Brief History of SEOmoz
• How Outside Capital Helped Us
• SEOmoz’s Growth 2007-2009
• A Short Story that Led to a Decision
• What I’ve Learned About Myself
• My Top Advice for Other Entrepreneurs
• Got Questions? I’ll Try to Answer

A Brief History

Let’s start back in August of 2007. SEOmoz was tiny - 8 people growing a business out of a 1,000 sq. ft. office in Seattle’s University District (man, do I miss that place) and two people who believed it was going to be much, much bigger – Kelly from Curious Office and Michelle from Ignition. It’s only in retrospect that I can really appreciate their foresight, because when they invested $1.1 million in the company that November, I was an SEO geek who wanted to use that funding to solve an SEO problem. My dream was to better understand the web’s link graph and how the engines could use that to rank sites & pages. I should have been thinking about the problems faced by those wanting to do SEO and how a scalable, technology solution could be used to help them – like what Vanessa Fox did when she built Webmaster Tools inside Google (more on that later).

Our first round of capital raising was very unique, and for that reason, may be less applicable than other advice on the topic. Nevertheless, I’ll try to share that experience and the macro and micro-economic factors that impacted it.

Investment Data via NVCA Press Alert

You can see that not only was 2007 the most active year for venture capital investment, but that Q4 of 2007 was a particularly high spike. It’s probably not surprising that SEOmoz took its funding in this type of environment – possibly the best time to raise money from an entrepreneur’s perspective since 2000. Why? Because when deal flow is very high, terms tend to be more entrepreneur friendly. Ours certainly were.

It’s uncommon (though not unheard of) for a firm like Ignition Partners, with over a billion dollars under management, to put so little capital into a company. Between Ignition & Curious, the amount raised was $1.1 million, less than half the size of their next smallest public investment (Crunchbase has a list here, though SEOmoz’s funding amount is inaccurately reported as $1.25 million, and the participants inaccurately listed as 1 – and Ignition does do some smaller deals that aren’t listed). Quantity wasn’t the only outlier – our valuation, the terms themselves (things like vesting, board structure, preferences, etc.) were very good and the deal closed quickly. Today’s funding environment could be a very different story. As you can see from the charts above, the floor fell out in the VC markets last October, and although May 2009 may have been a step forward, entrepreneurs who seek capital today shouldn’t expect  seed or series A rounds to look the way they did in November of 2007.

SEOmoz was also helped in this deal by an important factor I think every startup should consider – WE DIDN’T NEED THE MONEY. We were already profitable and growing, already had a brand name in the industry and had attracted interest from multiple investors. I think that every entrepreneur who’s considering startup-dom should think about establishing those goals before they go for institutional capital – a profitable, growing company with a product that’s on the market and a brand name that’s well known makes you:

• A) Lower risk to investors
• B) Interesting to multiple parties and multiple kinds of investors (angels, VCs, private equity, etc.)
• C) More confident in every step of the process
• D) Able to walk away from a deal you don’t like

This psychology is so powerful that I can’t imagine doing it any other way. If I wanted to build a travel portal to take on Kayak.com, I’d start a great travel site (maybe even just a really interesting blog), build up some brand recognition, use advertising or low-cost premium features to drive revenue and only after those numbers made for a compelling story, approach investors. I’d use that same formula even for a capital intensive business – start with cool ideas, great writing and valuable resources, become a hub for your industry, show web traffic and positive interest, then go fundraise.

We started as a consulting business – in fact, SEOmoz is on a .org TLD because when I started the site, there wasn’t even a business behind it (even the name "moz" comes from the ethos of open sharing pioneered by folks like DMOZ & the Mozilla foundation). Gillian and I were running a website design & development shop and learning SEO because our customers needed it and we had no other choice. Eventually SEOmoz got so big and popular as a blog that it made sense to conduct business under that name, and a few years later, we realized consulting wasn’t the right way for us to scale this incredible community around us. Those decisions – made much more by accident than grand vision – gave us the credibility and the story that made investors excited.

And yeah, it didn’t hurt that Q4 of 2007 was probably the best time to raise money in the last 8 years.

How Outside Capital Helped

Taking the outside investment proved to be an excellent decision, and, to be honest, even in today’s market, I’d still consider raising money if I were in the same position again. Outside capital made me a better entrepreneur, focused our company more seriously on the things we needed to do and made us more accountable and metrics-driven. Some companies feel that pressure internally and can build those processes without external help. We needed that external pressure and it’s been remarkable. I’ll try to detail some of the big ways investment has helped us:

• Metrics Requirements - Any outside investor will require reporting of specific data points about the business from financial, HR, marketing and development perspectives. You’re probably doing this already inside your business, and we were as well, but experienced outside perspectives distill the list into the critical pieces, identify important missing criteria and work with you to help develop the raw numbers into actionable data.
• Accountability – A lot of CEOs and company leaders choose that job because it means they’re in charge. And while that’s certainly an enjoyable perk, bringing in outside investors makes you accountable again – not in the same way a typical boss does, but the responsibility and pressure to perform. In many small companies, very few people beyond the CEO and perhaps one or two others are fully aware of the company’s performance or lack thereof – and when things go south (or simply don’t go as well as predicted), no one’s there holding your feet to the fire. If external pressure can help you excel (as it has with me), then funding provides a great benefit. 
• Board Meetings – Rarely in small companies does leadership take a regular hard look at their priorities, strategy and direction (Will & Duncan, you’re the exception, not the rule). Board meetings provide that gut-level check on every facet of the business, and let you step back to see the forest for the trees. They’re not necessarily fun, but they will make you a better entrepreneur (and if they don’t, it means you’ve likely chosen the wrong board members).
• Thinking Long Term – Running a business is incredibly hard, and startups, doubly so. With so much time and energy devoted to turning the flywheel, it’s easy to miss an opportunity or ignore a fundamental problem that’s outside the scope of the day-to-day. Professional investment means you’ve got a partner watching out for precisely that issue.
• Adding Experience to the Team – Every new person we add to SEOmoz, that’s the biggest team I’ve ever led. Every dollar of revenue that comes in is the most money I’ve ever managed. With outside investors, they’ve seen and been through much bigger and can help guide you along the path – whether it’s filled with potholes or littered with opportunities that just need to be scooped up.
• Networking Opportunties – VCs know a lot of very important people. From strategic operators at big companies to C-level executives at startups to government, charity and press, you’ll rarely find a more connected group. This shouldn’t be surprising, as networking is one of the biggest value-adds VCs advertise. The problem is that for most entrepreneurs, myself included, the need for these networks is few and far between, so it seems less valuable than it really is – once your company is in a position to either do big enterprise partnerships or be acquired, those connections can "make or break" the firm.
• Oh Yeah, the Money  – Did you know VCs also provide capital? Yep, it’s true – and having dollars to spend when you’re a creative entrepreneur with a great plan is pretty awesome.

There are probably a dozen more ways that venture capital investment has helped SEOmoz, and I’m certain that many of them will be immeasurable and possibly even invisible. All of this isn’t to say that VC doesn’t have it’s downsides – there are a few, and it pays to be aware of them:

• Funding is a Time Suck – I’m personally feeling this right now (as I’ll explain later), and it’s important to be aware of the opportunity cost of seeking investment. For most startups, the CEO and the executive team are essential to running day-to-day operations of the business. When you take time out to build slide decks for investors, meet with VCs, network amongst your contacts and field calls, it pulls time & energy away from the company.
• Control of Your Business is Diluted – VCs build company boards. In our scenario, the board is comprised of three voting members (Gillian, Michelle & myself) and one observer (Kelly). This structure means that company management and founders have the deciding vote in any contentious issue (only one has ever arisen on SEOmoz’s board). In a future round, though, we expect that another 2 members would join the board – one individual from the investment firm and one independent member we all agree upon. Just to be clear, though – even in our scenario, there are certain types of votes which must pass with 100% of the board’s approval (mostly things like sale of stock, funding, etc.).
• You Have a Boss – OK, it’s not a typical boss and you don’t report to them on a regular basis, but you do have someone who watches your metrics and performance closely and can replace you if/when that performance is unacceptable. One of the most significant powers the board holds at any VC-backed company is the ability to fire the CEO.
• You Have Fiduciary Obligations – Legal documents bind you to operate the company with its interests, not your own, at the heart of your decisions. This impacts quite a bit of the decisions you make at a company, particularly when you switch from something like a longtime, family-run business (such as ours). It’s definitely good for the company (and good for your own internal discipline), but it can be painful at times.
• Your Exit Options are Limited – Retire, walk away, close up shop, sell for a low price because you don’t want to go out for higher bids or you particularly like the buyer – these options (and many others like them) become challenging to impossible, once you take outside investment.

As you can tell from my opinions above and my previous advice to myself, I’m a big proponent in spite of these potential detractors.

2007-2009 Growth 

This company looks very different than it did just 2 years ago, and I’ve been lax in sharing the kinds of numbers and data about the business that was once a signature of my blogging (see 2006 and 2007 financials, for example). While there’s a lot that I’m obligated not to share, I’m going to go right up to that line – not just because I think it will make this story more interesting, but because it’s part of our guiding principles.

Full-Time Employees

It’s tough to build this chart, because the number of full-time folks fluctuates even inside a single year, but I’ve done my best to approximate the annual averages.

PRO Members

PRO membership has really taken off in the last 6 months – and while we doubled membership from 2007-2008, we were able to do that in just the first 6 months in 2009.

Revenue

Sadly, while I can’t share exact numbers, this chart does give an accurate concept of where we are. 2009 is shaping up to be a very exciting year. Although I also can’t show margin numbers, I will say that from Nov. 2007 to Nov. 2008, SEOmoz burned capital (approx. 3/4 of the investment we took). Starting in Dec. 2008 and continuing each month through to June 2009, we’ve been profitable and rebuilt a respectable cash reserve (of course, if you ask Sarah, we still need to sweat every penny of it).

Visits to the SEOmoz.org Website 

 

Traffic is growing nicely as well, though what this chart doesn’t show is that 2009 has been virtually devoid of the types of "linkbait" that were a hallmark of the site in 2007 (and much of 2008). We’ve found that while those efforts can produce great traffic boosts and link growth, we need to focus on conversion rate optimization and the PRO membership product before we return to viral content generation.

A (Not-So) Short Story that Led to a Decision

Last October, just after we launched Linkscape, SEOmoz started fielding between 2-4 calls per month from venture capital firms seeking to place investment. These are exciting, flattering and fun calls to get, and in those initial conversations, the focus makes for an ego-padding chat. It’s pretty easy to see why these investors were so interested – no, not because SEOmoz itself is all that awesome (they didn’t even know much about us when they called) – it’s because of the potential market for SEO:

Via eMarketer’s Search Spending Swells Worldwide & Online Marketing Effectiveness

SEO is at or near the top for four different categories:

1. Where marketers get the most conversions
2. Where they get the most branding impact
3. Where they are planning to re-allocate budget
4. Wherethey are planning to increase spend

VCs love this stuff, and they love it even more when the market as a whole appears to be big and growing:

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Data Source: SEMPO State of the Market Surveys

A predicted spend of just over $2 billion on SEO in 2009 suggests that SEO may finally be earning some respect, just as the growth in PPC spend slows its acceleration rate. Richard Zwicky’s SEM analytics company, Enquisite, is an example of this market shift commanding respect. Enquisite’s raised over $11 million in venture capital in the last few years (including a series B round of $8 million in February) . His favorite mantra is the disconnect I wrote about last october:

PPC: 88% of all SEM spend VS. SEO: 11% of all SEM spend

PPC: 10% of all search clicks VS. SEO: 90% of all search clicks

Markets don’t stay this inefficient for long.

No wonder investors have jumped at opportunities like those Richard presented with Enquisite and others like Conductor ($10 million raised in April), Marin Software ($13 million raised in April), Optify ($2.75 million raised in Oct. ‘08) and Yield Software ($6 million raised in June ‘08). And no wonder they were calling up SEOmoz, hoping to learn more about us and see if there was an investment opportunity.

Despite these inquiries, our board meetings in October & November were very operational and tactical. We were at the tail end of turning around from cash flow negative to positive, and there were some high stress moments, capped off by a working "product" meeting in early December. At that roundtable, I presented some concepts for SEOmoz’s future product direction and got shot down. And thank goodness I did.

The problem with entrepreneurs like me is that our creativity, emotional attachments to technology and love of product "coolness" can sometimes get in the way of making things that real people find really usable & useful. When that happens, it’s even more essential to be surrounded by smart, secure people who feel up to the challenge of challenging you.

After the meeting ended, I spent a lot of time thinking strategically about where we needed to go. That thinking ended up in dozens of notepad pages, and I’ve shared a few below:

My goal was to get to the core of the "SEO Problem" with a software product, and luckily, I didn’t have to go that road alone. Adam Feldstein, a longtime friend of mine, joined SEOmoz in January and we spent an entire week together in the mozplex’s meeting room, diagramming a product evolution we’ve come to call "Turbomoz" internally (much as we did when Linkscape was called "Carhole").

Adam and I presented a walkthrough of our new plan in early April to a packed room, including the SEOmoz board and several internal folks. The feedback was terrific – they loved not only the product itself, but the simplicity, the design, the intuition behind it and the potential to reach a lot more of the market than just the intermediate-to-expert level SEOs that make up the majority of our members today. An early version of "Turbomoz" is set to release in late September.

A few weeks later, I headed to Boston, where I got to spend a lot of time with a great friend and mentor, Dharmesh Shah, the founder of Hubspot and blogger at OnStartups. Dharmesh and I talked a lot about our two companies – how they’re growing, what the economic downturn has impacted, where we see opportunities and what makes a startup successful. It was a tremendous learning experience, and something I can’t recommend enough to others. If you’re currently running a business and can find someone with a similar model who’s willing to exchange information and ideas, do it. Being a CEO can be a very lonely job – even close friends and family won’t be able to empathize in the same way another CEO can. Many cities even have startup support groups (although they’re not usually called that, exactly).

My visits with Dharmesh inspired me to be more self analytical and more self critical. If there are things in the business that aren’t working, places where opportunity isn’t being executed upon, and chances to make a difference, I owe it not only to myself, but to our investors and, most importantly, to my employees to make the change. As the late King of Pop said, "start with the man in the mirror."

Just a couple weeks later, I landed in San Francisco. If you haven’t read the back-and-forth between Silicon Valley vs. Seattle VC/entrepreneur/tech startup, check out Glenn Kelman (Redfin’s CEO) comparing the two, Michael Arrington responding & Glenn firing back. There’s a grain of truth to the staments they make:

Sure Seattle is beautiful (Kelman talks about lakes and outdoor stuff a lot in his post). And if you want to have a balanced, healthy lifestyle, that’s a great place to do it. If you don’t think you have what it takes to make it in Silicon Valley, maybe Seattle or other mini-tech hubs is the place for you. But the best of the best come to Silicon Valley to see if they’re as good as the legends that came before them. It’s a competitive advantage to be here. And if you aren’t willing to take advantage of every possible advantage to make your crazy startup idea work, perhaps you shouldn’t be an entrepreneur.

The "valley culture" of depriving oneself of everything else except work really does exist, and it’s easy to become both enamored and afraid of it very quickly. But I also agree with Glenn that:

So even though all of us in Seattle would probably concede that Silicon Valley is generally better for startups than anywhere else, that doesn’t mean that we have to agree with Michael that Silicon Valley is always better, or better in every way. For starters, people in Seattle have helped me in an open-hearted, small-town way that I might not have found in the Valley.

And where Michael and I really disagree is on whether it is good some times to be away from all the me-too Valley companies trying to make money on Internet ads, even though he complains about them every day on TechCrunch.

I was very lucky to get some of that same "open-hearted, small-town" help, even in the Valley. A few years ago, Michael Eisenberg introduced me to Nirav Tolia, a former EIR with Benchmark, and the two of us have become fast friends. Nirav’s just launched a great startup – Fanbase – and has introduced me to a number of terrific entrepreneurs, nearly all of whom have great interest in SEO. At dinner one night, a fellow CEO (Thomas Layton of Metaweb), crystalized the question that had been weighing on my mind for the last 8 months – should SEOmoz take another round of funding?

Here, word for word (to the best of my memory), is what Thomas said to me:

Let’s make this easy. I’ll give you three things, you prioritize them, and I’ll tell you whether you should take the money.

1. Do you want to be the CEO and in control of the company’s destiny?
2. Do you want to make the most possible money from an exit?
3. Do you want the company to achieve the most and become the most it can be?

I don’t actually remember which one I picked on the spot… I think I struggled a bit to be confident in my response, and that’s because honestly, I hadn’t been asking myself that question, even though it’s something every CEO/founder should inherently know. A few days later, though, the answer was clear – #3. I want SEOmoz to be all that it can be. I believe in SEO. I believe in the people here. And I believe that with the right help – and another dose of all the positive things our first round brought us – we can achieve even more remarkable things.

Thus, we’re exploring the VC path, talking to those folks who’ve been calling and thinking a bit more seriously about a series B. It’s not something we’re definitely pursuing, and plenty of circumstances could change our minds about whether it’s the right option. As the media is quick to remind us, valuations and deal terms are not great right now, and with SEOmoz in such a strong position, we can afford to be patient, be picky and choose the right partner.

What I’ve Learned About Myself

• I do well with external pressure, even when it’s critical. I think that comes from childhood, when my Dad was obsessed with my grades and it made me work harder.
• I get inspired by those who’ve achieved amazing things. I want to meet more people like that and spend time with them – it’s a remarkable experience.
• I need to do a better job of thinking long term, even when I’m mired in the day-to-day. CEOs are supposed to be visionaries, and it’s irresponsible for me to be slacking off.
• I need to find ways to outsource more of my personal workload and trust others to do as good a job or better than I could.
• My stubborness is sometimes useful, but I need to do a better job of letting go when the situation warrants.
• I’m so lucky – so much luckier than I’ve ever considered – to be where I am. Thankfully, it appears I’m not alone – if Malcolm Gladwell’s Outliers (worth reading, BTW) is right, everyone who gets to do these kinds of exciting things in their lives owes that opportunity to the people around them, and I’m no different.

My Top Advice for Other Entrepreneurs

• Don’t be too scared of taking venture capital – it gets a lot of negative press, but in the end, you and the VCs want exactly the same thing – for your company to succeed magnificiently.
• Find VCs you love to work with – people you want to be friends with and spend time with and drink beer with. Find people who care not just about your company, but about you personally. I think this has been the best part about Michelle & Kelly on our board – they don’t just care about the numbers. They care about us. Seriously consider being flexible on deal terms if it means working with the right people (though often those "right people" are the same ones who’ll give you the best deals).
• Be relentlessly self-analytical and self-critical. Work hard to identify your flaws and pad them with team members who can compensate. My relentless optimism and cavalier march to spend money to grow the company is tempered by Sarah’s risk intolerance. It’s a great balance, and every company needs it.
• Leverage the entrepreneurial community around you. If my experience is any guide, CEOs and startup founders love to help and guide others – and that culture isn’t limited to Silicon Valley or Seattle or Boston, either. I’ve had friends from New York City to Reykjavik to Shanghai, Sydney, London and Nashville lend their time, their networks and their advice. I only hope that I can do as well to help others.

Questions & Answers

In the spirit of this post, and of SEOmoz’s guiding principles, I’d like to open the comments to questions and offer to answer anything I reasonably can in a post next week. You can also feel free to email me if you have private questions. One quick thing I’ll say is that for those seeking VC, three resources have been of great help to me – OnStartups, VentureHacks and Hacker News.

I sincerely hope this blog post has brought you value and helped bring a little more transparency to a world that’s rarely seen outside of Sand Hill Road meeting rooms.

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