Case Study: Should This Startup Take VC Money or Try to Turn a Profit?


Unable to solve their impossible problem, VV and Reza went out for a ride. Miles down the California coast, they parked their bikes under the eucalyptus outside a winery conference center. It wasn’t a random stop. They knew that FundersPlatform, a rival to their start-up, AndFound, was holding a networking event there, and they were curious about what sort of crowd it had drawn.

They soon found out.

“VV! Reza! What are you guys doing here?” It was their old friend Cynthia Finlay, a well-known angel investor in Silicon Valley.

“What are you doing here?” asked VV. He’d assumed that FundersPlatform wouldn’t be able to attract high rollers like Cynthia. Reza seemed taken aback, too. He looked down and busied himself with his bike.

“Just because I love you and your site doesn’t mean I ignore what else is going on,” she replied. “These guys do a good

of matching us angels with promising start-ups. It’s like speed-dating. I must have talked to 20 entrepreneurs today. But don’t worry,” she added. “They’re no threat to you. Their fees are killer — thousands for the companies, $500 per deal for the investors. They’ll never be able to compete with free!”

Free. That was the towering advantage of AndFound, an online platform that connected investors with a curated selection of start-ups. It’s why the service, launched in 2012, had grown so popular with users. But it was also potentially a business model weakness — it was the impossible problem that had prompted the contentious discussion at the office and then driven VV and Reza onto their bikes.

VV put his helmet back on. “You’re right,” he said. “You can’t beat a free service — as long as it survives.”

Editor’s note: This fictionalized case study will appear in a forthcoming issue of Harvard Business Review, along with commentary from experts and readers. If you’d like your comment to be considered for publication, please be sure to include your full name, company or university affiliation, and e-mail address.


A Hard Slap at VCs

Friends since their engineering days at Stanford, VV Tikekar and Reza Rastegar had each been involved in several start-ups before joining forces on AndFound. At first it was just something to do between jobs — a way of “giving back” to the entrepreneurial and angel communities, while also giving a good hard slap to Silicon Valley’s competitive, exclusive, information-hoarding venture-capital culture. Reza, especially, relished that, having experienced firsthand — and hated — the VC world as an associate and partner at a couple of firms.

It was an ugly business, they believed. VC firms knew so much more about funding than entrepreneurs did, but they rarely offered any guidance and tended to back only people they already knew. Where was the objective, helpful advice and merit-based access to money?

AndFound had started as a blog on topics such as how to find funding, pick a team, and make a capitalization table. When VV and Reza began to get queries from entrepreneurs asking for referrals to angel investors, they decided to build a comprehensive database of funder profiles, using information collected from the investors themselves — what they were interested in funding, past levels of investments, and so on. Soon VV and Reza were playing middlemen, putting founders in touch with people in their database. The next step was to hire engineers to develop technology that would enable start-ups to create online profiles, like Facebook pages, and investors to filter results — for example, allowing them to search only for founders who’d previously worked at Google or graduated from Harvard or MIT.

In fact, they deliberately chose not to charge fees because they sensed that doing so would drive away the best entrepreneurs and investors, and that once they lost the top-caliber participants, the whole thing might very well unravel. They assumed that, eventually, as the site became more and more valuable to the start-up community, some way to monetize the business would emerge.

Before long AndFound carried information on 10,000 investors and 100,000 companies, ranging from hair salons to tech start-ups. Screening algorithms highlighted the best new entrants so that they could be individually reviewed and featured. It was a full-blown social-networking hub, with participants “following” people and companies, commenting on posts, and “liking” other users’ updates. As a result, everyone in the start-up community was using it — even VCs.

VV and Reza weren’t the only players in the space, however. Numerous accelerators in the Valley and elsewhere provided coaching for entrepreneurs and opportunities to pitch ideas to investors. One was AndFound’s competitor FundersPlatform. In one sense, it was well behind AndFound — it had only a few thousand investors on its site — but in another it was way ahead: It had raised $10 million in funding since its seed stage. AndFound had opted not to raise a penny beyond its first round.


Never Say Never

Cycling back toward Mountain View, Reza yelled something over his shoulder that got lost in the wind. VV pedaled hard, caught up, and shouted, “What?”

“I said we’re never going to charge our users for meeting each other!” Reza shouted back.

VV pumped his legs harder to get out in front of his partner and stayed there for the rest of the ride. Reza’s categorical opposition to charging fees was what had stalled the business-model conversation earlier in the day. VV knew they needed to continue that discussion, but they weren’t going to do it on their bikes.

He thought back to a meeting the previous month with Hap Berger, an investor even wealthier and more connected than Cynthia. He’d flown VV and Reza to Los Angeles on his private jet, sent a car to drive them to a Newport Beach marina, and taken them out on his boat, which was so big VV actually got lost on it. The purported goal was to look for the huge, weird-looking ocean sunfish that sometimes lolled just below the surface of the water, but VV and Reza knew Hap’s real intention was to kick the tires of AndFound and decide whether to invest.

He was talking very informally, but it was about real money — at least $10 million, maybe as much as $25 million — which VV thought the company desperately needed in order to hire staff, improve its technology infrastructure, and sustain the kind of growth it had seen so far. The problem was that Hap was looking for explosive revenue growth. VV explained why he and Reza cared so much about “best” and “free,” and why AndFound wasn’t chasing revenue yet. Then Reza used the “never” word — and that was that. Hap, his mood suddenly sour, said it was probably too late in the day for sunfish and turned back toward shore.

VV understood why Reza was so adamant about not charging user fees. He too saw AndFound as a vital service to all the extremely talented but unconnected entrepreneurs and investors who were suffering through a badly broken funding system. But, in VV’s opinion, the site couldn’t survive for much longer — much less keep pace with its competitors — without an influx of cash.

There were alternatives to charging user fees, and VV and Reza had discussed them on the way home from their visit with Hap.

First, there was the company’s new Talent portal. Aware of how difficult it could be to find entrepreneurial talent, VV and Reza had set up a section of the AndFound site to connect start-ups with job seekers in technology hubs around the country, allowing them to apply filters, just as investors could with companies. They were now making 2,000 introductions per week on behalf of 30,000 candidates, and estimated that the service could save a typical company $25,000 or more in recruitment fees per candidate. The service was currently free, but it was certainly a potential source of cash that wouldn’t conflict with AndFound’s primary mission of linking the best investors with the best start-ups.

The tools and documents that VV and Reza had developed to help facilitate the funding process were another potential source of revenue. Many had already been made available for free, in the form of blog posts, but perhaps AndFound could set up a paid membership or subscription play for access to them.

But none of these revenue model options seemed to be a silver bullet; so, as had happened so often before, VV and Reza put the decision off.


Point of Contention

It was so late when they returned to AndFound’s offices after their bicycle ride that everyone else had gone home. Physically spent, VV and Reza sat down in chairs and simply looked at each other.

“We need to do a funding round,” VV said.

Reza didn’t answer.

“We need twice the staff we’ve got now,” VV continued. “And we’re way beyond tapping angels or foundations.”

“Personally, I think we can manage for quite a while as we are,” Reza finally said. “But OK, I’m game for a funding round.”

“For that, we need a revenue model. If our aim is to raise $10 million to $25 million at a pre-money valuation of $100 million to $150 million, high-quality investors will need to see how, exactly, we’re going to get to a billion-dollar valuation in a few years so they can get their required return.”

“All those things we’ve been talking about — the Talent portal, the tools, the shared brokerage fee, the carried interest,” Reza said. “Let’s get serious about investigating them as monetization strategies.”

“But are they really going to take us where we need to go?” VV asked. “They’re probably capable of generating some decent money, but even in combination, they’re probably not going to generate anything like the growth we need.”

“I think you’re wrong there. We won’t know until we try. But even if you’re right, we’ll just have to come up with other options — something else that taps into third parties’ interest in what we’re doing,” Reza said.

“But we can’t rely on just tiny slivers of our offerings and community. We need a revenue stream that comes out of our core business and strength: connecting good start-ups with good funders.”

“OK, so let’s postpone the funding round,” Reza said, sounding frustrated. “In our business, six months is a century. Our traffic could be up by 200% in that time, which could drastically improve the potential value of all the revenue streams we’ve talked about. It would change our valuation and leave us less vulnerable to dilution from any Series A funding. I’ve said this before, but I’ll say it again: If we commit to a model now, we risk hamstringing our business.”

Now VV was frustrated. “Six months? We’re barely able to handle everything we already need to do.” Improving algorithms, maintaining the site infrastructure, continuing to review all the start-ups and select the ones to feature to investors — the list went on and on. “As the site degrades, we’ll lose business,” VV continued. “FundersPlatform may not look like much of a competitor now, but wait until it starts to pump its new capital into its operations — while we get weaker.”

“We’re never going to lose business, because we’re the best thing that ever happened to the start-up community,” Reza said. “And we’re free.”


Should AndFound commit to a revenue model right now?