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The No-Exit Strategy

Sure, Duke Chung was tempted by a buyout offer. But he knew that he was worth much more. (He was right.)

Duke Chung
Duke Chung
Photo© David Lang

Duke Chung was facing a defining decision: Accept a lucrative buyout offer for Parature, the customer-support software company he started as a student at Cornell University, or stay the course and continue to grow Parature with his four co-founders.

Plenty of college entrepreneurs would jump at a big payout. But Chung and his co-founders decided the offer amounted to a huge pat on the back--and they turned it down.

"When a potential buyer comes to you and shares your same vision for the business, it suddenly gives you a lot more confidence about your plan," says Chung, now 32. "Plus, we figured there would be more offers like this one down the road if we continued building a great business."

At the time--2006--Parature was 5 years old. Boosted by the purchase offer, Chung and his team reevaluated their plan for the future: essentially, growth and expansion. At that point, Parature had about 300 customers using its software-as-a-service customer support portal, which provides hosted tools that can be integrated into corporate websites, such as live chat, an online community, surveys, self-service knowledge base and trouble ticketing system.

Six Lessons from Duke Chung:

1. Don't even try until you fully understand your product or proposition. You'll end up using a lot of the money to figure it out instead of focusing on growth.

2. Wait until you can show some results. Bootstrap your business until you can prove you have traction.

3. Go after money before you really need it. When you need it, VCs can sense it and you won't have as much leverage.

4. Build relationships with VCs before you need them. Then, when you are ready to raise capital, you won't be cold calling--which almost never works.

5. Raise as much as you can. You want to have a little money left over to experiment.

6. Be prepared to give up equity. Most venture firms aim for about 20 percent in each round of funding.

Chung knew his product was solid, but he also realized that growth would bottleneck without money to build a sales team. So he turned to the venture capital community, raising $13.5 million from Valhalla Partners and Sierra Ventures. In addition to sales growth, the money also gave Parature a new level of credibility.

While it took the Vienna, Va., company five years to get its first 300 customers, it took only 18 months to get its next 300. In fact, by 2008, growth was bottlenecking again. So Chung looked anew for VC, this time raising $16 million from Accel Partners. Today, Parature has about 900 customers, including Rosetta Stone, NASCAR and Travelodge, passing more than 1 million support tickets through its system each month. The company expects revenue of $20 million for 2010.

Chung says part of his success in attracting venture capital is timing: raising money before it's badly needed (VCs can sense desperation) and raising as much as possible, so you also can afford to experiment.

"Invest it into a new market opportunity, invest it into a new product or find other expansion distribution models," he says. "These experiments can really pay off in the long run."

Indeed, the latest experiment was building a product to help companies turn their Facebook pages into customer support centers. It launched in the summer, and 30 of Parature's larger customers have already started using the app to monitor and engage comments and questions.

Joel Holland, 25, is the founder and CEO of Footage Firm in Reston, Va.

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This article was originally published in the December 2010 print edition of Entrepreneur with the headline: The No-Exit Strategy.

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