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DECEMBER 17, 1999

NET JOURNAL
By Scott Kucirek

Little Us! Courted Madly at Our Second Financing Round
The hard work starts to pay off as our national push finds the right funding


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We just closed our second round of financing — and the results were beyond my wildest dreams. We landed $16 million. A top venture firm, Benchmark Capital, was the lead investor, and Bob Kagle, a Benchmark founder and general partner, joined our board of directors. People keep asking us: "How did it happen?" Here's the condensed version of the story, which evolved over two months. I'm certain the lessons we learned could apply to entrepreneurs everywhere.

On the advice of our current venture capitalist, Don Wood, we decided to approach a handful of top-tier VC firms in Silicon Valley to raise our second round of financing in mid-September. My partner, Juan Mini, and I were looking for $15 million to expand the service of our online real estate brokerage, zipRealty.com, across the U.S. We felt we needed heavyweight backers. So we dug into our Rolodexes and tapped every contact we could for personal introductions to key partners at the firms we targeted.

The presentations went well — all the firms asked for follow-up interviews. That was unbelievable in itself. Our first interview with Bob Kagle went especially well. Juan and I gave the presentation of our lives, and Bob appeared genuinely interested.

Then — nothing happened. Weeks went by. No one sent us a term sheet detailing a real investment. If you've been following the pace of venture investment these days, you can imagine how busy Bob, Benchmark, and all the other firms in Menlo Park, Calif., the epicenter of venture capital, were. Still, it was unnerving. By late October, our cash situation looked grimmer every day. Juan and I started to doubt the wisdom of targeting only top-tier VCs. Finally, one Tuesday we concluded it was time to widen our net.

CHECK THE MATH. That same day, another big-name firm (code-named Top Tier) called us for an interview. They were interested in online real estate, and a friend from our MBA class at the University of California at Berkeley's Haas School of Business, introduced us. On Friday, we put on our show for the Top Tier partner, who liked it so much that he put us on the Monday partners' meeting agenda. Then they asked to come to our office on Wednesday.

The plot had begun to thicken. Bob Kagle asked us to present our company to some other Benchmark partners. That went well. Now it was Top Tier's turn. We did another presentation there. Benchmark also requested one last meeting with us. We were starting to feel pretty good about ourselves.

Top Tier came back first. Cold shower. Their offer was so far away from what we considered acceptable that we double-checked the math to make sure we weren't missing something. Not only was the share price low but Top Tier wanted two board seats, which gave investors control of the board, and a host of other concessions. But payroll was looming.

Luckily, we had an inkling that this might happen. We had lined up $2 million in bridge financing from current investors when we saw that Round Two was dragging. We didn't want to accept a bad deal just to keep the company alive. After reflecting on the offer for one day, we called Top Tier and turned them down. They were a little surprised and inquired what we would want to close the deal. We gave them a counteroffer and told them that if they could match that and get us a term sheet the next day, we would close — even though we were talking to another firm in their league. We wanted Benchmark, but the process was dragging, and we needed to move on.

I guess Top Tier didn't think we meant it. They told us to take it or leave it. An hour later, we got word that Bob Kagle wanted to see us on Friday. It's a little like college acceptance — the business with the thin envelopes and the fat envelopes. There was no one left for us to meet at Benchmark and VCs usually reject you by phone, so we felt that we were in line for an offer. That Friday, Benchmark made us an offer that exceeded most of our expectations, and Bob Kagle said he'd join the board.

So that was that, right? No. Monday, Top Tier came back with an offer that was strangely similar to Benchmark's. We told them we were signing a final term sheet with another firm by Thursday. They insisted we keep them in mind.

"INCREDIBLE OFFER." On Thursday, Top Tier pulled out all the stops. Two partners came to our office to try to turn our decision in their favor. Then, another partner, a nationally known strategist, came over for an extended session. Next, some CEOs from Top Tier's stable of companies called to sing the firm's praises. Finally, Top Tier scheduled us for a call with a major figure in the Internet industry whose successful ventures have drawn investment from almost every top VC firm in the Valley. (Sorry, I can't say who it is.) That completely floored us. One minute, I was chatting with an advertising manager at a local paper and the next to a giant of the New Economy.

Meanwhile, nothing had arrived from Benchmark. We were sweating. Finally, about 6:30 p.m., our fax machine spat out Benchmark's term sheet, with everything we expected. We clarified some points on the phone and signed. At 7:30 p.m., we received one last call from the indefatigable folks at Top Tier, who invited us to a partners' dinner where we would receive an "incredible offer." We told them we had closed with the other firm and thanked them for their efforts. Despite Top Tier's push, we decided it was better to go with Benchmark because the team had been very straightforward all along and came through with exactly what we had discussed. What an adventure.

Note to readers. Thanks for your feedback to the quiz in my last column, "The Mysterious Candidate," about someone who kept asking for more time to weigh a job offer. Seventy percent agreed with our decision to stick with the second deadline; 29% would have withdrawn the offer; and one person said grant an extension. See you in two weeks.


Scott Kucirek is president and co-founder of zipRealty.com, an online real estate brokerage. The company's Internet site and online real estate agents let people complete the entire purchase or sale of a house via the Web. The company's Web site is www.zipRealty.com, and you can E-mail Scott at Scott@zipRealty.com.
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