This is part II of the "funding of Taika" war story, part I here:
Brief summary: months after the dot-com nuclear meltdown of 2000 my first startup Taika Technologies managed to secure a financing round for more than 19M EUR valuation, with no product and no revenue. How? What's the story?
Taika had just managed to get professor Reijo Luostarinen onboard as our new chairman. He was vital in approaching VCs and we had just written a business plan. Our vision was that "one day the Internet will be social, people will share, talk and network online in a massive global scale".
Even prior to Reijo joining our team we had managed to get many meetings with VCs, and he helped in opening up more doors. The first VC we had originally pitched Taika to was no other than Nokia Venture Partners, the VC behind PayPal. They passed on Taika very quickly like a pro, and as they probably should have considering that we didn't have a written business plan at that time. Besides Nokia we had already talked to Tekes, Finnvera, SFK Finance, MVI Partners, and Sonera Ventures. Some of those companies don't even exists any more, how quickly do the times change.
With a door-opener and credibility boost in the form of Reijo we set out to talk to multiple investors. We presented our holistic and nearly all-encompassing vision of the "social Internet", which extended to online gaming as much as peer-to-peer filesharing. Concepts that were barely visible in 1999 and early 2000. Reading from my old files, the kind of rhetoric we used had stuff like:
- "grand global scale" (social networking megatrend),
- "online community feel and atmosphere" (horizontals vs the verticals, the user experience as the most important thing),
- "virtual economy" (habbo-like virtual stuff, online games),
- "virtual collective" (Digg, votes and user generated content),
- "business scalability" (scales to hundreds of millions of people),
- "effects of virtual economy on revenue models" (how to sell virtual stuff and trinkets),
- "product branding, visibility and promotion" (social media advertising),
- "Taika's unique way of segmenting customers and their needs" (forgetting traditional segments and redoing them in a more relevant manner).
Actually reading it now, about 9 years later, it still seems pretty valid and actually quite impressive. Did we write that? I guess we did ;) Our plans and presentations talked about the kind of stuff www.irc.fi and www.facebook.com, www.habbo.com, www.digg.com and www.myspace.com do as their daily business today.
We did the vast majority of our investor pitches as two man team: Reijo and myself. In some meetings Atte was also present to give a technical rundown of what we are going to do. My memories of the meetings are about this same pattern repeating: me, as the over-eager young dude, going on endlessly about the vision and everything it encompasses. Pretty soon the investors must have felt like their heads were spinning and the Q&A sessions were all over the map on a range of topics. To me (and to us, the founders) it all seemed so clear: having been part of the digital online culture from the BBS days (I was a SysOP of my own BBS for many years) we thought we knew exactly how the whole Big Picture was going to evolve and progress. The investors didn't have that same insight and convincing them of our vision wasn't quite that easy after all. We ended up talking and pitching to maybe around 30 VCs and investors in Finland, not that many of them demonstrated any signs of grasping our "social Internet" vision. Which is another way of saying that we (and I as a 21 year old) were quite naïve at times.
After learning a lot of lessons the hard way we started to get some headway and had our first really truly interested investor. After a series of talks they seemed to understand the grand vision and proposed that they would invest, and even accept our high valuation for the company, if we would find another investor to co-invest with them. This was an absolutely critical moment in Taika's history, and it allowed us to build on the situation of having one supportive investor committed to the project with the condition of finding them company. Also the fact that they accepted our rather high valuation was excellent: the other investor would probably have to accept it as well.
We had a round of planning and decided that finding the co-investor would have to be in a manner that preferably creates an atmosphere of competition around "who gets to invest". So we proceeded collaterally with multiple investors. We were bold enough to call many of them into a meeting at the same time: I remember being there and watching 4 VCs in the same room glancing at each other and making tense remarks. None of them really admitted that they didn't get the vision, but they did complain about the valuation. The mood got really serious when one investor showed signs of not really considering the valuation to be so high. Remember: this was about 17M EUR post-money with an extensive stock option plan that would dilute the investor in effect making it a 19M EUR post-money proposal, for a company that had a grand vision and an eager team, but no product or revenue.
The competition between the investors started to heat up when we did a round of calls to them and tried to push them to move forward. One of them was brave enough to verbally close the deal right there on the phone: we had found our second investor! I printed out the investment papers and hopped in a taxi to meet the investor at the airport, we signed the papers in the airport arrivals lobby and suddenly the deal was done. I was 22 years old and now founder/owner of a company valued at 19M EUR by very well known and serious investors. The sky was the limit! (or so I thought).
Taika had been running up to this point on the seed money fumes the founders had put in. There was already a proper technical team working on the product and burn rate was up. The dot-com meltdown had happened some months earlier and the climate around us had started to take a turn towards the doom and gloom of nuclear winter, with zero positive news coming from anywhere.
This is a bit of a secret that I'm sure comes as a surprise to many of the Taika Team members: at the time of receiving the investment the company was in fact out of money. During 1999 and the spring of 2000 we had burned through our seed investment and there was just about nothing left. After signing the investment papers the whole gang, 17 people at the time, gathered to the Russian restaurant Saslik to celebrate and really start building up the company. After giving a very short speech-like remark I broke my wineglass to the table hurting my hand and getting a small scar as a memory of the evening. The money from the investors arrived to Taika's bank account one day before payday, and nobody (besides the founders) knew how close it was to tumbling down like a house of cards.
And that, in brief, is the war story of how Taika got funded. There are many more stories to be told on Taika: how the team got together, how we managed to get all of those big name board members to join us, and how the company eventually failed and had to shut down.
Some lessons to be learned from this:
1) On a very rare occasion there are investors who have the courage to believe in excellent visions, even when the world seems to be freezing into nuclear winter around them.
2) Execution really is everything: look at Taika's vision and how its come true today (and by what companies?). All the elements of success should have been there, but the execution didn't deliver. That's a very long war story right there.
3) Enthusiasm, energy and belief in your own vision is impressive and founders should not forget that. Let it show, you need to be more into your vision than anyone, and know why you are correct.
4) Get as much help as you can: Taika had many co-founders and an authority of a man as the chairman. That clearly helps.
5) Creating some competition between the potential investors is an excellent thing. Taika can be elaborated as an example success case of how that's possible and what results it can produce for your financing round.
6) Speed is vital. Look at Taika's vision: it seems that many companies had the same vision (or part of it) around the same time. www.irc.fi started in the year 2000, www.habbo.com started in 2000. And this is not unique: the best ideas often come from megatrends and involve realizations that are visible to an open mind. If you plan to ride such a megatrend then speed is essential: you need get yourself to be "a Facebook" faster than other companies riding the same trend will.
7) There is such a thing as being ahead of your time, by multiple years.
Taika was my kickstart to my entrepreneurial career. It was the ride of a lifetime and I still feel like doing these fast moving startups will accumulate your experience and insight so much faster than a corporate job ever would.