Duke Chung's fundraising story

Duke Chung, Co-Founder of Parature and a shining example of entrepreneurship in the DC tech scene dropped by FastTrac TechVenture (an entrepreneurship training program run by NVTC’s Entrepreneur Center) to share with us some stories about Parature and his experience with VCs.

I thought I’d recap some of the key insights, as I found them valuable.

Origins and Product

• Duke and his cofounders started really young, in his very early 20s from his college dorm. In his own words: “You couldn’t escape tech innovation at Cornell in the late 90s and early 2000s…”
• The first few years of Parature were very lean, focusing on turning fanatic users of their chat product into paying subscribers. Those early users were mostly “mom and pop” online retailers who were trying to humanize the shopping experience.
• They stumbled upon SAAS almost by accident. They were trying to be very frugal with buying licenses for servers and they found that by putting more than one customer on a server the costs were lower than the competition. He mentioned his chinese heritage as playing a role.
• Their ticketing product (which is now probably the core of their offering) came out of discussions with Michael Chasen, the CEO of Blackboard, who gave them a chance to convince him of buying a yet to be made competitor to Remedy, which was a lot more expensive. Instead of booking PS hours they focused on licensing the technology… and that’s how the product was born.
• As time went by the used a “bowling pin” approach to product development: find 2 or 3 customers that could be knocked down with a feature, then build it.

Fundraising from Angels and VCs

• From ’01 to ’06 Parature was built into a $4M run rate, 30 person, 300 customer business only on Angel funding.
• Meeting Ching Ho Fung at a conference was serendipitous and they created a great relationship and won themselves a core angel investor, a mentor and a networker.
• Ching Ho would tell Duke that VCs would come to him once the business had traction, but it took a while for Duke to internalize this information.
• Eventually, a barrage of VCs would come knocking on Duke’s door for a Series A, and they ended up raising $13.5M from Valhalla and Sierra. Duke wanted an West Coast VC (probably to help with valuation) and the West Coast VC was a lot more comfortable with the investment once they understood that there was a local VC to do the play by play.
• What finally made Duke go for a Series A was when some executives from SFDC came knocking with a (somewhat) lowball offer for the business. It then became clear to him that they were winning at least 50% of the deals vs. RightNow, but they were only seeing <20% of the deals in the market, because they had 4 sales people and RightNow had 30. They used the VC’s capital to throw money at the problem of rapidly accelerating sales (my experience observing at Angel is that there are smarter ways of doing this, see Sales Learning Curve [PDF] ).
• Another key learning was that Ching Ho made them practice board-level accountability by setting quarterly goals and then reviewing together whether they were met or not, a sort of rehearsal for the time when there would be professional VCs in the board.
• In July 08, a few months before the collapse of the financial markets, Parature raised a $16M Series B from Accel. He entertained us with the stories of how he negotiated the term sheet (he says he probably got a 10% bump on the valuation and negotiated away some of the preferences). You could tell by the passion of his narrative that he obviously enjoys negotiation quite a bit. It made me wonder how different profiles of founder would deal with this, or if it is the case that investors should only put their money in the hands of founders with a great panache for negotiation.

Some reality check

A few things to keep in mind, though, as one ponders the lessons from his talk, are:

• Entrepreneur does not equal “founder of a VC fundable startup”. There are many solid small business opportunities worth pursuing that simply don’t have the large market potential and huge return that a VC would expect in a business that they would want to fund. Very few entrepreneurs in the Mid Atlantic own businesses that will ever qualify for a $13M Series A and a $16M Series B.
• While Duke made the case that the dilution of multiple rounds of investments was worth it (as the Blackboard CEO would put it, “I’d rather own 2% but be the CEO of a publicly traded company”), I don’t think that it is that clear cut. There is something to be said for building a business to a reasonable exit that creates a solid return for the capital that is already in the business, especially for a first-time entrepreneur.
• There are probably other perspectives on Parature’s story also worth considering (the old adage about “history is written by the victors”)

My key take aways

• Get yourself a Ching Ho. Invest time in finding and developing a relationship with those who could become real angels for your business: people with a depth of experience, a breadth of connections in the institutional investment world and a true coaching spirit.
• Focus on building your business. You will only get a great deal from VCs if they are coming after you, and best kind of traction is revenue, new customers, new deals. So don’t go waste your time chasing investors, focus on customer acquisition.
• Learn to be a great story teller. Duke has done loads for his business and for himself by learning how to tell their story, and connecting with audiences. At the end of the day, customers buy from people, investors invest in people, so if you can be persuasive, genuine and passionate, you’ve won half the battle already.