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- "People talk about an employee-friendly culture as perks and food," he says. "What's often ignored is how you run the company as it related to its shareholders. Are you appropriately protecting employees?"
- "The shareholders will usually protect the founders; they need them to keep running the company," says De Datta. "And they'll protect themselves. So the people who get screwed are the employees."
Raj De Datta has done the whole billion-dollar startup raise before. It didn't go so well.
One of the founding employees of FirstMark Communications in the dotcom bubble, De Datta was there for what was then the largest European private equity financing in telecom ever in 2000: $1 billion raised in equity and debt at an even higher valuation. A year later, FirstMark was bankrupt.
Everything went wrong after the banner payday. "It created a cascading series of problems," says De Datta. The market corrected from the exuberance of 1999 and 2000, with companies disappearing overnight. Investor expected a 50% return they'd never get. But employees fared the worst. Their stakes in the company, on paper once worth millions, because worthless, and likely worth negative values after taxes. With investors upset, internal decision-making froze.
De Datta's had more success with his new company, BloomReach. The six-year-old startup uses data science and machine learning to optimize the web presences for big customers, running their retail website from the pages to the search box and their mobile experiences from their sites' look on a smartphone to their native apps. 250 employees answer to De Datta now, bringing in revenue north of $20 million on 70% annual bookings growth from customers like Neiman Marcus,
But the ghosts of FirstMark have stayed with De Datta over the years. He sold his first startup after the flame-out quickly to Cisco, opting for the stability and lower upside of building it within a long-time public company instead. And over eight fund-raises in his career, De Datta says he's learned to resist taking the highest-possible valuation.
So when BloomReach recently raised $56 million in a Series D funding from Battery Ventures, Salesforce Ventures, existing investors NEA, Lightspeed Venture Partners and Bain Capital Ventures, as well as an unnamed sovereign wealth fund, De Datta vowed to do right by his employees. "People talk about an employee-friendly culture as perks and food," he says. "What's often ignored is how you run the company as it related to its shareholders. Are you appropriately protecting employees?"
BloomReach's CEO has five ways he hopes to bury the FirstMark ghosts and do just that.
1. Deserve your valuation
Does a startup really deserve the price tag an investor is offering, or is it the by-product of an overheated market? De Datta believes a good founder knows that answer in their heart. "I'm not saying you should sell yourself short, but when things go bad, you may wish you'd made different decisions," he says. In the event of a down round, existing investors are protected, while early employees suffer as their strike prices prove higher than the market value and their paper earnings evaporate. It's a painful lesson recently felt at Gilt Groupe and Fab.com, Clinkle. Homejoy and more.
Asked if BloomReach chose to decline a billion-dollar valuation and "unicorn" status given the now more negative sentiment around joining those ranks, De Datta demurred, simply noting that BloomReach has always raised at higher valuations each go. It raised in 2012 at an estimated post-money valuation of $368 million, according to data from Pitchbook, and likely passed the half-billion mark in this most recent raise. "Big valuations do well in the press and employees feel good in the short-term," he says. "But they don't help in the long run."
2. Don't get excited and over-hire
Startups that experience high growth face the lure of staffing up quickly to meet seemingly insatiable demand. If the only thing slowing you down is qualified sales people, just hire more people, the thinking would go. But De Datta says that BloomReach staffing up to just 250 employees over six years was deliberate. "Over-hiring introduces risk,"he says. "If you do layoffs, it's probably at the worst time for an employee to find a new opportunity." That's a lesson felt recently at Zomato, VarageSale and hot startup Mixpanel.
3. Don't raise too much
In April 2015,
Most companies aren't Slack, which has now started an investment fund for its own emerging ecosystem with some of its hoard. "You want cash in the bank, but if you raise gobs of capital, you're more likely to put it to fairly bad use," says De Datta. Even companies with good intentions to save for a rainy day end up tempted by the amounts in their accounts, he argues, like filling a rented mansion with furniture, then not knowing where to put it in your next house.
4. Don't accept investors' wonky terms
While "structure," provisions in typically later-stage investments that can promise investors more shares and preferences if the conditions of their bet aren't met, are nothing new to Silicon Valley, they remain a confusing provision for members of the group they can hurt the most, a startup's employees. When a company with such ratchets goes public and prices below an agreed-upon price, the company has to make up the difference with additional shares of its stock, diluting everyone else. And when startups with billion-plus valuations stumble, the provisions in a round at a flat or lower valuation can have a similar effect. "The shareholders will usually protect the founders; they need them to keep running the company," says De Datta. "And they'll protect themselves. So the people who get screwed are the employees."
At FirstMark in 2000, such protections helped doom the company to bankruptcy. De Datta vows that BloomReach will never accept such terms into a fundraise. "I challenge every company to disclose if they have those provisions to their staff."
5. Tell employees all
When BloomReach set out to raise its last round, De Datta and his board told all the company's staff. Employees at the company know the total number of shares outstanding in the company and how much the new investors bought at what prices, giving them a fuller picture of what their own stakes are really worth. If employees can identify a legitimate buyer and need to sell some of their stakes in a secondary sale, BloomReach says it won't try to prevent them from doing so. "Your people may not be super sophisticated about this, but they believe in your startup," he says. "You have a responsibility to explain it."
De Datta's policy he challenges other founders to try: anything he would tell investors and his board, he has to be comfortable telling his own employees.
"Every startup has the founders, the shareholders and the team, and everyone is in it together," De Datta says. "So every decision should benefit all three."
