March 16, 2004
Adventures on the money hunt: How a small, 15-year-old ISV attracted $5 million in new capital
by Bruce Hadley, SoftwareCEO

At the end of January, a little developer called Telco Exchange, based in Fairfax, Va., sent out a dual-purpose news release: The company changed its name to Rivermine Software, and also announced that it had received $5 million in equity financing from two VC firms: Valhalla Partners of McLean, Va., and Columbia Capital of Alexandria , Va.

True, a name change and a $5 million capital infusion aren't exactly earth-shattering revelations; they happen all the time, albeit less frequently in software of late. But when we recently spoke with Rivermine's founder and CEO, Bryant Dunetz, we found his description of his quest for capital to be the stuff of great stories.

Because Dunetz was so candid about his misses as well as his hits, there's a lot of good instruction here for anyone looking for money. Plus, Rivermine's experience is a terrific illustration of what gets VCs excited nowadays.

The bootstrap background
Rivermine's legacy goes back to a company founded by Dunetz in 1989. That company moved into software for the telecommunications industry in the mid-1990s. The current software, which provides telecom management for network-centric organizations, came out in January 2000.

Rivermine sells its enterprise app via a direct sales force and through partnerships with select carriers and integration companies. A typical transaction ranges from $500,000 to $1 million over the contract term, Dunetz says. Customers include Agere Systems, IKON, Marriott, NEC, and Starbucks.

The company now has 25 employees and 10 full-time contractors.

Rivermine was "built the old-fashioned way," Dunetz says: Bootstrapped by him and three other co-founders, one of who is Dunetz's son. Even if the rate of expansion was less than torrid, the company was profitable and growing; so why seek investors?

The need (and the wish list)
" I knew we had a good product," Dunetz says. "But what I've learned from my reading and consulting with others is that when you're bringing a new product to market, you get to a certain point where you have to have what I call the sustaining core of the software company in place: all of the services, documentation, management, expertise.

"And to do that, you typically need to spend ahead of revenue. There are certain objectives you have to meet, especially in relation to traction, and especially when you're talking about million-dollar deals. It's all about taking the step from a family lifestyle business—even though it was a profitable one—and building it into a large corporation."

At the top of the wish list, Dunetz says, was deeper, stronger, broader sales and marketing. "We had one sales person, Doug Rutherford, who was one of the co-founders. He moved to the VP of sales and marketing position, and we used the investment money to hire a very experienced 20-year sales VP we found through the network; he has lots of experience in the big-name software companies."

Rivermine also fleshed out the rest of its sales team: The new sales VP now has a team of six account reps and SEs.

On the marketing side, Dunetz knew his company needed to fix what he calls a "patchwork" organization. "Without capital, you apply your own wits to putting together materials, but you do it on the cheap," he says. "We were getting by, but what we were doing didn't necessarily give the right impression. We are hiring a marketing person, and will fill out the product management role."

The second big need behind the search for capital: infrastructure. "We needed to ramp up our infrastructure to support a growing list of customers," Dunetz says. "That means implementation engineers, Q&A, configuration management, documentation.

"We wanted to create uniformed and balanced growth, something based on metrics. For example, you might say, 'For every five engineers I need one QA person.' Whatever the formulas are for the size and complexity of the product you're selling, you're trying to get to some informed balance."

The whole point of infrastructure, Dunetz says, is creating the ability to scale. "You don't want to take that too lightly," he says. "It's really the key to success or failure. Once the marketing kicks in, you need to be able to service the business, and make for successful customers.

"Managing growth and scaling—that's where my expertise comes in, with what I refer to as the limits of human performance. You might hire a bunch of people but not get the efficiencies of productivity that you were expecting, because certain things in the infrastructure aren't in place."

The decision and the team-building
" In January 2003 we decided to get money for our strategic purposes," Dunetz says. "We discussed it with friends, neighbors, and the network we're associated with in our area—lawyers, accountants, and other professionals.

"We put together a group of four advisors, some of whom we'd been associated with for many years. I knew it was important to have a coaching group, to tell you how you're perceived by others, rather than trust your own opinions." This advisory group was co-managed by Dunetz, Rutherford, and Rivermine's director of finance.

Identifying investor prospects
" We were systematic and strategic about the whole thing," Dunetz says. "We wanted to find the right partner. We have an enterprise application, and it's associated with telecom, so we knew we needed to find funds that invest in the that space.

"Through the network and our research, going on the Internet, and going to our coaches, we came up with a list of people we should be talking to—about 50 funds nationwide.

"We looked at the companies they'd invested in, to benchmark something that might be serious. We looked at partner experience: We wanted to see people who'd worked in software or telecom."

The point of this pre-qualification process was exactly the same as any other sales process: Dunetz wanted to make sure he was pitching to people who understood Rivermine's potential. "It's all about getting the value proposition right," he says.

"To get in the door, to get past the first meeting, you want to make sure there's someone who 'gets it.' Plus, there's this whole concept of over-shopping. If you broadcast to the world that you're looking for money, that's sometimes a turnoff—you can't get out of the starting gate."

Taking the show on the road
With the prospect list narrowed to 50 funds, Dunetz and his team decided in spring 2003 it was time to test their message. "We vetted out all the funds, and our coaches advised to take a certain path: To participate in venture events—fairs where you come in and do your pitch."

On a parallel path, the Rivermine team decided to put their pitch in front of a very small segment of the 50 potential investors they'd identified.

Dunetz did not hire outside help. "We did not engage an investment banker or a third party; some people don't have the wherewithal to market their value proposition, but we felt we did. We decided to do it ourselves, with our network coaching us.

"We first targeted local funds—four in total—purely for convenience," he says. "Having gone through the process, I can now tell you, you've got to be out of your mind to go out of your geographic area. There's the convenience factor, but also because it's impossible to extract the maximum value out of the partnership with your investors if it's a long-distance relationship."

In those first four meetings with VCs, Rivermine fell on its face. "We got no traction," Dunetz says. "In retrospect, there were two factors. First, it was the right church, but the wrong pew: We thought they were interested in this particular sector because someone said so, or someone said they're nice guys and we should talk to them. We heard all the typical responses: too early, too late, too big, too small."

The first beauty pageant
Although Rivermine flunked its first meetings, the company won an invitation to participate in an event in Fairfax, Va.—an investor fair, sponsored by one of the large accounting firms.

"They assembled 12 luminaries, including two VCs, and invited two companies to do a 45-minute presentation—one in morning, one in afternoon," Dunetz says. After each presentation, the panel of luminaries offered their critique; there were no spectators.

After Rivermine did its presentation—Doug Rutherford did the whole 45 minutes—this prize opportunity didn't feel much like of a win. The beauty pageant turned ugly; the panel raked Rivermine across the coals. "It was bloody," Dunetz says. "Completely and totally."

As painful and humiliating as it was at the time, Dunetz thinks the experience is necessary. "You need to hone a very clear picture of what it is you're selling," he says.

"Through these kinds of critiques, you learn a lot about how other people see you. Some people can only see square pegs in square holes and round pegs in round holes, and you have to mold and influence their behaviors so that they think the way you want them to think. It's selling, plain and simple."

Round two: pick yourself up (with a little help from your friends)
" We went back and redid the presentation, then took it back out again to selective funds," Dunetz says. "We selected the next group of VCs based on region, and put out feelers where I knew someone in the firm." But Rivermine was still unable to find traction with any investors.

Note that Dunetz still kept his company narrowly focused: This was not a shotgun approach. "We never did the broadcast thing, where you send your 35-page business plan to everyone," Dunetz says. "In fact, interestingly enough, we never had one. We had an executive summary and what I call a teaser—a lot of sizzle to get in the door."

In round two, the value of the network began to sink in. "What we found over time—and I think you'll find this to be true anywhere —there is a very, very active underlying network of service providers: accountants, lawyers, consultants, recruiting firms, and the like.

"They're on top of every good deal in the area. Their sensors are out there looking, going to all the networking meetings, and they all are buddies—they all know each other. They want to be there in the deal flow, to provide you with the services that venture-backed companies will need.

"It's business—it's basic business. People use some derogatory names for the investment community, and there probably is some evidence of deals that have been less than stellar, but there's no escaping the fact that the network is very important—it's almost a fraternity.

"Through the network, we received a recommendation to the selection committee to participate in a major venture fair in early June in Baltimore: Capital Connection, sponsored by the Mid-Atlantic Venture Association (MAVA)."

The Capital Connection invite was a more prestigious one than Rivermine's previous public whipping, but it also created a new set of challenges. Each year, up to 300 companies apply or are nominated to participate in the two-day event; only 52 are selected.

The format is fast and furious: Each company gets the equivalent of one long elevator ride to make its case. "We went from a 45-minute pitch to a seven-minute pitch," Dunetz says.

"We did it through a 'cut and try' rehearsal process, with coaching from Dale Carnegie, whom we hired. MAVA sponsors a CEO boot camp as part of Capital Connection; you get some formatting and coaching from them."

In addition to the Dale Carnegie consultant, Rivermine had two coaches, one from the venture side, the other from the service side—someone from the real estate business, as it turns out. "We met with them probably six or eight times in advance of the fair," says Dunetz. Once again, Rutherford, the sales and marketing VP, delivered the public pitch.

The outcome: kind words and general praise, but no action. "We got lots of accolades," Dunetz says, "but nothing happened. They give you a little booth at Capital Connection where people come visit, and we expanded our network, but nothing tangible came of it. At this point it was late July or early August, and we're still beating the bushes."

Round three: the network comes through
At this point, Dunetz was getting a bit discouraged, not to mention very tired. "It is totally consuming," he says. "I personally spent 60 to 70 percent of my time from April through October on this. Doug Rutherford spent 40 to 50 percent of his time."

The net result: Invitations to two fairs and several first meetings with investors, but not a single follow-up meeting after six months of preparation and pitching.

"You work very hard to make contact with people, then you have an initial meeting, most likely at the office of the venture capital firm," Dunetz says. "Our objective was to always get a second meeting, and we always wanted them to come to our offices."

Unfortunately, that didn't happen—until early August 2003. Rivermine's network—Dunetz calls them "the fan club"—set up a meeting with a recently established venture capital fund: Valhalla Partners, in McLean, Va.

"It was a stroke of lightning, or a ray of sunshine, that came through the window," Dunetz says. "It was a brand-new fund, and they had not pulled the trigger on any deal. It was a reformulation of a very seasoned team of professionals, including a couple of luminaries."

That first meeting in August went so well that the entire Valhalla partnership appeared in Rivermine's offices the next day. After many more meetings and the process of due diligence—checking customer references, financials, and more— Valhalla elected to invest $2.5 million, and brought in Columbia Capital for the other half of Rivermine's $5 million first round.

Doing the deal, and those devilish details
Rivermine's funding closed in October 2003, near the close of a very tough year for venture capital. "If you look at the stacks that MoneyTree puts out, you know that 2002 was not a good year for raising money, and 2003 was worse," Dunetz says. "As an industry, venture funding was in the tank: There were no deals going on; everyone was in triage."

Despite the carnage and caution in the VC community overall, Rivermine managed to pique the interest of several players. About the time Valhalla got interested, so were other funds, Dunetz says. "It was heating up in multiple directions in August.

"At that time, we were actually getting traction from several funds; a buzz had started to hit the street. People got curious, people started hearing our name. People started using the term 'terms sheet,' which is the Holy Grail that everybody is looking for."

Another interesting note: From the outset, Dunetz knew that he wanted more than one investor, so he was delighted with the combination of Valhalla and Columbia Capital. "When you're looking for money, what you hear a lot is, 'If you can get a lead investor, we'll come in behind'; you hear that all that time.

"We had decided early on that we wanted a syndicate of at least two funds—for the funds, it's lower risk, and for the recipient it's better value. Not only in that it's a bigger source of money, but also a bigger source of experience.

"We were very deliberate about this. I can't say we became experts at it, but we became very educated through the process, and we were pretty firm on what we were looking for—and I think they respected us for knowing what we wanted."

Valuation, dilution, and other hang-ups
What about valuation? Was that ever a sticky point in the negotiations with the VCs? "You can get caught up in that quagmire," Dunetz says. "I chose not to, although it is certainly one of the levers in the negotiation.

"We took a more balanced approach: We wanted to negotiate on all the levers, and anyplace there was room for negotiation, we wanted a shift from onerous to less onerous to lesser onerous to friendly.

"You hear that in a lot of the deals that closed in 2002 and 2003—and to some extent in 2004—that the terms were onerous for the entrepreneur. Not so in the deal I concluded: We met all our objectives.

"I think people get hung up in the valuation. When you go into this venture capital thing, you have to buy into the package. You have to understand what you're getting into; a lot of entrepreneurs don't.

"That's why you need these coaches around you, people who know where the bumps in the road are, and how you can navigate them. It does take a mind shift, from 'these people are your enemies' to 'these people are your friends.' You have to adopt the view that they're going to help you reach your goal, your vision.

"In my experience, when you start getting hung up on control, board seats, participation, all of that, you take your eye off the ball. My lead attorney always metaphorically presented this concept of the package: 'Do you want a slice of a grape, or a slice of a watermelon?'

"Their first offer was close to what we had in mind. In your pre-negotiation phase, there needs to be some conversation about what it will take to get you to the table—but that's when the negotiation starts.

"Going into this, we had a product, we were profitable, we had the beginnings of a management team, we had referenceable customers, we had evidence of our value proposition—we could feel good about it.

"I certainly expected that I was going to walk away with a better deal that someone who walks in with just an idea on a piece of paper—which is very a different situation from the investment environment three years ago."

Why this software company and not yours?
We spoke to Gene Riechers, a founder and general partner at Valhalla Partners, and put it to him bluntly: Of all the zillions of software companies out there, why did you choose to invest in Rivermine? What was it about them that turned you on?

"They had surrounded themselves with very good advisors," Riechers says, "and several of those people had contacted me and said, 'You really, really have to go look at this company.' One of the many things they did right was surround themselves with advisors—most of whom were unpaid—who knew me.

"That led to a meeting. They had presented at local venture fair, but so had 50 other companies. The personal phone calls raised them above the others."

OK, so there's the foolproof, low-tech, best-bet way to get in front of a VC: Make friends with the VC's friends.

But a meeting doesn't always mean money; in fact, it usually doesn't. Since its inception in early 2002, Valhalla has looked seriously at more than 1,000 companies, Riechers says, "and God knows how many we've seen that are too far outside what we focus on."

So, what did Dunetz and Rutherford do in that first meeting with Valhalla ? Did their well-honed presentation blow the VCs over?

"It was a very comfortable conversation," Riechers says. "They brought along a presentation, but they only used bits and pieces of it. Most companies come in with a structured show, and that works best in most cases. But with Rivermine, we asked them enough questions, and we developed enough rapport, that it didn't seem appropriate.

"What became obvious to us in the first meeting was that this very small company—10 people at the time, entirely bootstrapped—had closed some huge sales to marquee customers. That got our attention. The fact they had bootstrapped themselves to this level was really quite remarkable.

"What the company had built was something that offered real, measurable value to the customer, and provided real ROI in very short order. A customer could invest several hundred thousand dollars in Rivermine's software and get a return on that in a matter of months."

Of course, Valhalla verified Rivermine's claims in the due diligence process. "We talked to three of their major customers," Riechers says. "All of them told us the same thing."

It also helped that Rivermine didn't need the money, Riechers says. "They could have continued in a bootstrap manner; this funding was for expansion."

Valahalla's three general partners created a $172 million investment fund, and had been actively looking for portfolio companies since June 2003. The total invested to date is about $10 million in three different companies; Rivermine was their first. "We are really picky," Riechers says.

In addition to the nebulous "comfort" that Riechers felt in the first meeting with Dunetz and Rutherford, he also saw passion. "We saw people who are very passionate about their business, and who had succeeded in selling to major companies.

"It's hard when you're a small company to sell to a big company, and they had done it a number of times. They were persistent about it and knowledgeable about it. We thought, gee, if they had some capital and some help from us, they should be able to do a lot more."

The question we can't help asking: What's the planned outcome, and when? Does Valhalla see an IPO, an acquisition, or...?

"We believe that this company will create a lot of value," Riechers says. "How many years and what will it take? I don't know, but I'm not hung up on that. I don't care what the form of the exit is. These things develop over time, and I think it's unwise to assume ahead of time you'll go one way or another."