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When to Say No to Venture Capital

When to Say No to Venture Capital
Hurry up and wait: Ryan Smith of Qualtrics.

Ryan Smith knew he wanted to build a company he could grow over the long haul. So rather than race to find financiers in 2002, the co-founder and CEO of Qualtrics spent four years bootstrapping his enterprise survey provider from his dad's basement.

That low overhead helped the Provo, Utah, startup reach profitability almost immediately. As the company grew year by year, venture capitalists started circling, reaching a critical mass during year five. Smith says he fielded roughly 100 calls from venture capitalists and investment groups before he finally agreed to a deal in 2012.

What drew them to Qualtrics? A sound and profitable business model, according to Bryan Schreier, a partner at Sequoia Capital, who eventually succeeded, along with Accel Partners, in funding Smith to the tune of $70 million. "[Bootstrapping longer] focuses the company on creating a healthy business model at a very early stage," Schreier says. "It's hard to create a viable business model five years down the road. It's much easier if you're focused on making money from the start."

Qualtrics has enjoyed triple-digit growth over the past several years, reaching $48 million in revenue in 2012, with customers using its survey software to process more than 1 billion responses. Among the company's 5,000 worldwide customers: half the Fortune 100; 1,300 colleges and universities; and 96 of the top 100 business schools.

We spoke with Smith about the many ways Qualtrics benefited from waiting to raise VC and what other 'treps can learn from his experience.

How did waiting help?
We really wanted to nail it before we scaled it, which we did. There are some companies, like an app, where they need to go full speed on the scaling up as fast as possible. But for most companies that have a pretty big opportunity like us, I think nailing the product and business model is critical. I think if a company doesn't have its core figured out, it could be really difficult to find it when there's $20 million sitting in the bank that has to be spent now.

How did you decide which VCs to partner with?
Our philosophy has been that one and one needs to equal five. Just because someone called us and said that they wanted to invest in us didn't mean we had to stop everything and say yes. We wanted partners who were as excited about the opportunity as we were, who were excited about us, who were even excited about Utah.

We were in a position to pick the firm, and we had time to build the relationship before signing an agreement. I think that many early funding scenarios are akin to getting married after a first date. Not knowing what they're getting into is where people struggle.

What advice can you offer startups thinking about VC?
Ask yourself why. If you're in a "scale it" phase, I think funding can do a ton of good. If you're in a "nail it" phase, I think that's where you see companies thrash around and a lot of them fail. If you're thinking about taking money, talk to portfolio companies. Talk to companies who have taken funding from [VCs].

I believe that people need to bet on themselves more. What I've seen is that if you're a great company, and you've got what it takes to take it the distance, then you're going to have more and more opportunities the farther you go along. Trust me, they aren't going to go away.

Michelle Goodman is a Seattle-based freelance journalist and author of The Anti 9-to-5 Guide.

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This article was originally published in the December 2013 print edition of Entrepreneur with the headline: Fools Rush In.

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