Part 4 – Lessons learned
- There are lots of lessons to be learned but my top lessons follow:
- Pick your partners carefully. When the chips are down you learn the nature of your partners. Hopefully, they play cleanly and fairly. Some don’t. It sucks when this happens.
- The way Brad Feld played this investment is what makes him such a great venture capitalist. He played it for the long term and was willing to invest a small amount of money even when things looked bleak because it was the right entrepreneurial thing to do. In doing so, Brad managed to retain a relatively large portion of the ongoing company and recover much of his investment.
- Entrepreneurial perseverance counts for a Lot!!
- I don’t know of many start up successes that don’t have moments where the business life is threatened in some material way.
- As an angel investor, seriously consider participating in all the rounds of a venture – especially the down rounds!
- Obviously, it's a rich history to condense into a blog post. Congrats to all the hard working folks at Kefta for a job very well done.
Part 3 - June of 2003 till now
- So after raising 250K of capital, we had to pay out a few tens of thousand of dollars to amicus to buy them out. The company had very limited capital to run operations. The company downsized to the founding team and has been running cash flow positive every since.
- It was a depressing summer of 2003, but the founders never lost hope and never stopped selling.
- Last year, the company did several millions of dollars in sales, was highly profitable and perfectly positioned to capitalize on the exploding market in online personalization.
- In early 2006, the founders were growing tired and as a board we made a decision to either sell the company or raise additional capital rather than to continue to bootstrap the company.
- In mid 2006, Acxiom initiated conversations with the company. A few weeks ago, Acxiom was the lucky buyer of Kefta. I think they got a great deal and a year from now will be thinking that they were lucky to acquire the company. Time will tell.
Part II - May of 2003
- After a lot of hard work in early 2003, the company was making some decent progress with large enterprise customers like Societe Generale, Verizon, and other large customers and had gotten some of the customers to renew their annual service contract. (FYI -- Kefta sold an annual service contract) The company needed additional investment to continue to scale sales. Kefta negotiated with its current investors and managed to structure an internal round of $2,000,000 investment. The investment was going to be led by Amicus again. Softbank agreed to participate if and only if Amicus would. Softbank didn't want to carry the financial risk of the company alone.
- There were a bunch of partner meetings at both Amicus and Softbank to get the required approvals necessary to complete the round -- and ultimately Philippe was successful. The round was schedule to close in May 2003.
- This is where the story gets really interesting.
- I remember well the call at 10:30PM from Michael Samols of Amicus -- the day before we were scheduled to close the financing. He said, "I've got cold feet and I'm not going to close tomorrow". I could tell by the tone in his voice that this wasn't negotiable. I'm not sure what exactly caused this to occur but for any entrepreneur who has been in this position -- it sucks. I called Philippe.
- On Friday, Philippe had a board call. The board consisted of Brad Feld, Michael Samols, Michael Oiknine and myself. Without the $2,000,000 the company was in a terrible position. At the time we had more than 10 employees, but the company didn't have the cash to meet payroll the following week. We decided to take the weekend to see if an alternative financing path to save the company existed -- and if not, we all agreed that on Monday morning we would start acting on behalf of creditors and start to wind the company down as gracefully as possible. Again, for context, there were lots of companies going bankrupt from the crash of the bubble. In fact, Softbank was so adept at dealing with this that they even had a consultant who specialized in liquidating the assets of failed dotcom companies named Marty the Cleaner.
- I had convinced one of my partners from abuzz, Shaun Cutts, to invest in Kefta's B round. He had put in around $100K in that round. When the company was in this aborted financing crisis, Shaun agreed to lead a group of investors in creating a cram down "save the company" investment. He ultimately invested an additional 130K into the company at a very low pre-money valuation. The founders including myself each put in approximately $20K and Softbank agreed to put in 40K. All total, Philippe and I managed to raise about $250K that would be put into the company. However, the investment was contingent on Philippe being able to get Amicus to sell their stock back to the company and approve the financing.
- You would think that after pulling out of the investment at the 11th hour, that Amicus would act contritely and would gracefully write off their investment and step off the board so that the entrepreneurs could carry on with what the VC had determined was a pointless effort. That is not what happened.
- Due to confidentiality reasons, I can't tell the whole story here....suffice it to say that it was interesting to live through and experience. Ultimately a deal was reached whereby the company would buy back Amicus preferred stock at a low cost on the dollars they invested.
- A small amount of money came into the company and the founders lived to fight another day.
In recent weeks, Kefta was acquired by Acxiom for an undisclosed amount (it was a good exit).
The story is one that is filled with good karma, good entrepreneurial lessons,
and ultimately makes a great story. The most notable part of the company
story from my perspective has been the founder perseverance in the face of
adversity to bring the company back from the brink of bankruptcy in 2003.
Philippe, Michael, and Fazal should be congratulated for an outstanding job.
The blog version of the kefta story follows:
Part I - 2000 to 2003
- Kefta was started in January of 2000 by Philippe Suchet, Michael Oiknine, and Fazal Majid. I was also given honorary co-founder status.
- The company started as an email version of All Advantage. Use our email client and get a cut of ad revenues for promoting companies (or something like that).
- I was an EIR at Softbank and managed to convince Rex Golding and Brad Feld to make the initial investment.
- The company couldn't think of a company name so used kefta as a placeholder -- the founders used to eat kefta kabobs. Obviously, the name stuck.
- In the first 6 months of the company, it became clear that keftamail as a consumer play wasn't likely to work. So the company shifted to more of an enterprise model. Remember the timing here: April of 2000 everything that was consumer internet was dead. The company retooled and started to sell a set of marketing solutions to enterprise customers which first included a refer a friend product.
- In 2002, the company raised a Series B round that was led by a small bay area VC firm called Amicus. There were two partners at Amicus Capital : Bob Zipp, the senior partner and Michael Samols the junior partner. Michael Samols ultimately was the point partner (but didn’t have total authority) and made the decision to invest in Kefta. Kefta managed to raise this Series B round on the backs of one big French customer called Societe Generale. The company had moved from just selling refer a friend solutions to selling suite of solutions that would enable marketers to significantly improve online revenues with better site conversion.
Stay tuned tomorrow for Part II of the story.
Since yesterday's post on term sheets, I've gotten a bunch of emails asking me for more information about term sheets. I will continue to write on the topic but I thought I would point people to this super useful resource created by my VC friend Brad Feld. (Be forewarned it's a list of all his term sheet posts) He does a better and more thorough job of explaining all the terms than I'll ever do. I'll be able to give some entrepreneurial perspective on the same terms.