Article | January 4, 2016

ISV IQ Podcast: Best Practices For Software Developers Raising Capital

Bernadette Wilson

By Bernadette Wilson

ISV IQ

Following is an edited transcript of Business Solutions president Jim Roddy’s interview with HomeZada cofounder John Bodrozic.

Listen to the podcast here.

Roddy:  Hello and welcome to this Business Solutions podcast. I’m Jim Roddy the president of Business Solutions. Thank you for joining us.

As always, we’re here to provide actionable information on how VARs and ISVs can sell more products, penetrate thriving vertical markets, and improve their business operations.

Our guest today is John Bodrozic. He’s the cofounder of software developer HomeZada and, prior to that, was the president of software company Meridian Systems. HomeZada is a homeowner information management solution for the real estate, home builder, insurance, and service provider industries.

John will be one of the featured panelists at the ISV IQ Live! conference, Feb. 24, in Santa Ana, CA. Both today and at the ISV IQ Live! conference, John will discuss best practices for software developer companies raising capital.  

My first question is, let’s start with HomeZada. They raised $2.1 million in October 2014, through several sources including venture capitalists [VCs] and angel investors. Up until that point, you’ve bootstrapped everything. If you had to do it all over again, would you follow the same path or what would you change?

Bodrozic: I think we would definitely follow the same path, and there are probably two reasons. One is, when we think about what HomeZada is trying to do, we put it in the new and innovative category, almost a new market category around digital home management that helps homeowners manage the lifecycle of their houses.

From a bootstrapping perspective, oftentimes I could create PowerPoints and share the vision, but a lot of times people want to see a working product to actually understand the vision. I think, in that initial bootstrapping phase, we wanted to build out enough of the product platform and acquire enough customers, so that then we could show people and they could understand the innovation that we’re trying to go after.

I think the other reason for keeping the same path in terms of bootstrapping is trying to size up the opportunity over what we’re trying to accomplish. When we think about HomeZada, it’s a really huge opportunity because there are two sides to this business. One is trying to go after 120 million homeowners in the U.S., but then also trying to partner with the real estate, homebuilder, insurance, and mortgage industries who are also trying to provide solutions to those same sets of customers.

That in and of itself is a huge opportunity. My analogy is like LinkedIn for your house. As a result, we wanted to bootstrap as much as we could, to prove out key validation points before we started to raise capital.

Roddy:  Got it, and can you share with me — because I picture bootstrapping as almost like the money you stuff into an old shoe at home and then you use that, and I have no money in my boots at home — where do you get the bootstrap money from? Where did you pull it in for HomeZada?

Bodrozic: We were, I suppose, a bit fortunate because prior to HomeZada, the three founders, we worked at a previous software company that I co-founded, called Meridian Systems. That journey went through a process where we ended up selling to a public company. The founders did reasonably well, so we probably had slightly more in terms of our own personal capital that we could put into the business.

But it was also a bootstrapping mentality beyond just the dollars that we put into the business. It was keeping us as a lean, mean team with the three co-founders essentially doing the bulk of the work ourselves, and we’re very complementary in our skillsets between software development, product strategy, and marketing and sales.

Keeping a lean, mean, bootstrap mentality, knowing that our vision is big, is also a combination of the bootstrapping mentality beyond just the real cash that gets put into the business.

Roddy: Got it, so it’s not just a process, it’s also a mindset in terms of bootstrap and lean and mean. That’s what my first boss told me, when I started my company, be lean and mean.

Bodrozic: That’s correct. Even though we had perhaps more real dollars to put in and it was my first company, we knew that those dollars would only go so far as well, meaning, again, benchmark it with the size of the opportunity over the amount of money that HomeZada is going to need to raise. Our own capital was still only going to go so far, so we had to maximize how far our own capital goes.

Roddy: My guess is you’ve talked with other ISVs who have done their own bootstrapping. You’re fortunate that you sold Meridian and got the money from that. What are some other ways that ISVs bootstrap in order to fund the growth of their organization?

Bodrozic: A lot of it, candidly, comes from personal savings in terms of if they’re really committed to starting a business, that’s how we did it with Meridian, back when I had a little bit of personal savings. I relied on family and friends to cover living expenses. You reduce your living expenses anyway you can, so that you minimize your personal cash outflow, so that you can maximize whatever little dollars you have to put into the business.

I suppose that’s the joy and the risk of being that early stage company, trying to start a business. Oftentimes, sometimes people will take out, I’ve heard, second loans or mortgages, equity loans on their home, use that as a way to get into startup capital. There are lots of different ways that you could do it.

Roddy: I just got done reading the book Getting to Plan B. I don’t know if you’re familiar with that book at all, by John Mullins and Randy Komisar. It talks about launching a business and they talk about the three F’s of investors: family, friends, and fools. I thought you named two out of the three. Let’s talk about Meridian a little bit.

You helped grow that software company into a 30- or 40-person organization, about $10 million in sales. Then you went and raised $13 million in VC funding a year later, and then another $5 million from an international company who wanted to take their product global. They’re way different experiences than what you talked about at HomeZada. What learnings from that experience with Meridian can you share with the ISVs listening to us today?

Bodrozic: There are probably so many. I could probably go on a long time, but one is just being a founder in a company where essentially you could argue it’s a successful business. We had to come to this mentality; that we had to understand and be okay with the tradeoffs of basically raising outside funding at that stage of the business, which means the founders — we basically wanted to grow our business bigger and faster.

As a result, we knew we needed capital to grow bigger and faster. But the tradeoff is, when you need that outside capital, you’re basically trying to get VC investors, and you’re essentially going to dilute some of your ownership equity, and you’re going to lose some measures of control, because you’re going to have VCs on your board and perhaps some decision-makings that they have veto power over.

You have to, as an entrepreneur, be acceptable with that tradeoff, which is, “Okay, I want to grow, and I want to grow faster, but I can’t do it based on my current cash position and our profitability.” As a result, you’re going to have to give up some equity and lose some control. I think that’s probably one of the biggest lessons.

I think the other lesson is also you have to come to the realization that, when you do take on VC funding, you’re essentially signing up to provide those investors a return. Most VC investors, if not all, they’re not investing in you for a lifestyle business for you to continue your business for the next 20 years.

I’m sure there are some that could do that, but I think most of them are going to look for a return on that initial money that they put in, and that return is primarily going to come in two ways. One is maybe your business is growing big enough and fast enough in a market that it’s an opportunity to go public, but more often than not, a lot of those returns come through the form of an acquisition.

You have to be mentally ready and say, “Okay, we’re going to take $13 million. At some point down the road, we’re going to have to set ourselves up to sell the business.”

Roddy: Right, and it seems that it comes down to a lot of folks who founded their business. They say, “This is fun, this is cool, look at this neat thing we’re doing. I’m super passionate about it.” But investors are like, “All that’s blah, blah, blah. Are we making money? When am I going to be able to sell this and get my investment back?”

With that as a backdrop, I guess if you can rate your experience with Meridian and outside investors — on a scale of the lowest being a pain in the neck and something you have to tolerate to the worst being an absolute nightmare —  where did it fall on that scale?

Bodrozic: Hang on, can you repeat the scale?

Roddy: The scale is, on the far left, a pain in the neck. That’s the least that it could be, just a minor inconvenience. Then on the far right would be an absolute nightmare.

Bodrozic: Definitely more on the pain in the neck. I wouldn’t even classify it as a pain in the neck. Candidly, it’s a growth curve that you go through, just to — it actually makes you better and stronger, so to speak, meaning when we took on the investors, they forced us to do things that was better for the company in growing the business by helping us institute HR pay scales and policies.

We had to set up our accounting books in such a way that, if we went public, we were recognizing revenue in the way a public company would. It created a lot of rigor in the business that was good for the business, regardless of whether we sold or not or whether we had capital or not.

But yes, oftentimes there may have been some different points of view over some form of strategy or whatnot, but our investors were pretty good. I would do it the same way, because Meridian would not have gotten to the place that it wanted to get to, had we not taken on those investors.

Roddy: That’s great. I’m learning on this journey as well, as we get closer to ISVs and learning about how they raise capital. A lot of acquisitions that I hear about are a merging of companies.

Like I said, I just figured we’d start off at pain in the neck, but that’s great. It made the foundation of the business better, the rigor that you talked about, and they brought in systems to make sure that the organization ran more efficiently, am I understanding that?

Bodrozic: Yes. They brought in — I wouldn’t say systems, but they brought in, oftentimes, a former ISV CEOs that were like their consultants. They would come to our office, and we’d meet with them on a quarterly basis, and it would be just literally, “How is your salesforce set up? If you’ve got a salesforce of five people, but you want to grow to 20, what kind of sales structure do you need?” or “Your development organization has 20 developers, but you’re going to grow to 50 and you’re going to be managing multiple products.” Oftentimes, they would have people in their networks that had skills that were operational skills that actually provided us guidance over what systems to put in place and how to put them in place, and avoid those missteps if we were trying to do those things on our own.

Roddy: Great. Thank you for sharing that, and sorry that my question boxed you into how negative this experience was without asking first. Maybe it was a good thing.

Bodrozic: No worries. Like I said, I think it was absolutely a positive experience, but in that journey, as a young entrepreneur at the time, I probably didn’t realize completely what I was signing up for. But looking back, people definitely have to realize that you’re signing up for those kinds of things.

Roddy: Yes, I just had the pleasure of doing a webinar, a one-on-one conversation with Michael Gerber, the author of The E-Myth. He’s in his late 70s, he’s been counseling small businesses for 40 years, and he’s all about making sure that you have rigor inside your organization, so you can move into bigger and better things. I’m glad you lived through that.

John, my last question for you is, with both these organizations, how did you determine when it was time to start raising capital beyond bootstrapping and go out and reach to outside investors? Did either company have an aha moment, or was it more of a gradual decision and a path that you knew you were eventually going to get into?

Bodrozic: Yes, it was different with each business. With HomeZada, I think it started from day one, even when we started the business, meaning when the three founders got around and said our vision is to provide a digital home management platform for a consumer and bring in all these partnerships with real estate, we knew that it was a big opportunity.

We said, “Okay, what company would be similar?” We basically said a company like LinkedIn is very similar to what we’re trying to do. Granted, LinkedIn has all of our resumes online, but we’re trying to basically manage data about your house.

You go back to LinkedIn and you look at how much money they had to raise over multiple rounds in order to scale that size of business. I think day one, with HomeZada, we knew that we needed to raise money, and we knew that we needed to do it multiple times.

We just said the first money is going to come from bootstrapping money. The second set of money is going to come from friends and family and angel investors. Future rounds are going to come from VCs. That was baked into our business from day one.

I think with Meridian, it was a little bit different, because we had already had a successful software company because we were fortunate that we bootstrapped it and got it to cash flow positive and even profitable. But it was more the aha moment, because we started that company in 1994, and then 1999, 2000 hit, and it was dotcom and the Internet.

Four forces came to play as the aha moment. One is the Internet was a new technological transformation. People no longer wanted desktop software, they wanted Internet, Web-based software. The second thing is we had a nice little business, but we had probably 200 competitors, new competitors, that raised money from VCs in that time frame.

The third thing was our customers were asking us to do more. They wanted us to host the data for them. Today, we call that a cloud-based model. Back then, we called it an ASP model. Then the fourth thing is we were selling, at that time, primarily to engineering and construction companies, but we realized we had an opportunity to sell to Fortune 500 companies who were managing large construction projects.

I think it was those four market forces that gave us, as founders, the aha moment when we realized, “You know what? If we’re going to stay in business and/or capture this opportunity, we’re going to need to raise funding.”

Roddy: It really seems like once you had that vision of how this can scale, that’s when you realized that you need outside money and how much you’re going to need. Am I understanding that correctly? You saw the vision right away with HomeZada.

Bodrozic: Yes, absolutely. With vision, with HomeZada, there are 120 million consumers. In order to establish a consumer brand, that’s a significant marketing challenge to get in front of 120 million homeowners. It’s equally a significant challenge to deal with the opportunities that come with strategic partnerships and different vertical industries like real estate, insurance, mortgage, home builders.

Just the scale of how many people we can try to go after and, essentially, we have a high-volume, low-price point product. You need lots of users paying us small dollars in order to scale this thing out. You can quickly do some financial modeling to realize you need capital to grow that business.

Roddy: Yes, because you’ve got to get the word out. That’s going to take some engines.

Bodrozic: Exactly. With Meridian, it was different because it was more of a high value transaction. Our typical sales were, on the low end, maybe $10,000, and on the high end, it grew to maybe $2 to $3 million deals. You need less of those, in order to grow to a bigger business versus selling a product for $60. It’s a different dynamic between B2B versus B2C.