The startup that filed for an IPO with just $6M in funding is a masterclass in capital efficiency with Scott Dorsey (High Alpha)

ExactTarget may not look like the prototypical unicorn, but the Indianapolis-based company that got to the IPO stage with only $6M in funding...


ExactTarget may not look like the prototypical unicorn, but the Indianapolis-based company that got to the IPO stage with only $6M in funding, then went on to be acquired for $2.5B by Salesforce, is a masterclass in what can & cannot be done with proper capital efficiency.
We chat with the delightful Scott Dorsey now (Managing Partner at High Alpha) to discuss his company’s path, and what it tells us about today’s Unicorns.

Building a $2.5B Tech Company in Indianapolis

Tim Anglade, Executive in Residence at Scale Venture Partners: You’re flying back to Indianapolis after this? Still based there after so many years?

Scott Dorsey, former CEO of ExactTarget, and Managing Partner at High Alpha: Still based in Indy. And proud we’ve got a non-stop flight between Indy and San Francisco. That was really key. I actually had an opportunity to play a role in putting that flight together. And silly as it might sound, connectivity and non-stop flights from Indy to San Francisco are super important. Actually poor Rory [Scale Partner and investor in ExactTarget], he had to spend years taking red-eyes and tough connections. Sleeping in O’Hare Airport and then literally after we sold the Salesforce’s right when we got the non-stop flight in place. So he really never got to enjoy the benefits of it.

Tim: No but that makes sense it is pretty early to build such a big company, a tech company in particular outside of Silicon Valley. And ExactTarget ended up being like 2.5 billion, or something is that right?

Scott: Yeah. That was a great exit for us. It was incredible.

Tim: That’s insane. How many did you have at that time?

Scott: We had about two thousand employees at the time of the acquisition. All around the world. About 15 hundred were Indianapolis based. So it felt really good, actually to be kinda of a big fish in a small tech pond and feel like you made a difference. You know we really made a difference in the trajectory of our city, and in downtown in the urban core, and then the overall tech community. So that’s been really fun to see and actually very rewarding that Salesforce continues to invest in Indianapolis. And in fact, the largest building in downtown Indy is called the Chase Tower. It’s gonna be rebranded the Salesforce Tower. So I thought it’d be a neat legacy and really good for the tech community.

Tim: Mark is building towers in every city

Scott: Yes, Salesforce is all about the towers so we’re gonna have our own in Indianapolis which is pretty neat.

Filing for an IPO with only $6M in Funding

Tim: But before you sold to Salesforce you actually went public and before you went public actually a ton of stuff happened that we’re way off scale because we were close to ExactTarget, but that I really want to talk to you about, ‘cause I think a lot of entrepreneurs they get into doing a particular company for passion or for whatever reason and don’t really think about the later stages and people don’t talk about it as much. But I think ExactTarget, you had a pretty unique kind of last few years, last few quarters. And I kinda of really wanted to dig into that ‘cause so much stuff happened that’s interesting from equity markets, to the IPO window, to how valuation works, to growing. And one other thing that people always tell me about you and ExactTarget is that you’re so capital efficient. And so what does that mean and how do you kind of think about that?

"We filed on the NASDAQ December of 2007. And at that point we’d only raised 6 million dollars in capital and we still had 4–4.5 on the balance sheet."

Scott: Sure, so we started ExactTarget in early 2001. Three first time software entrepreneurs. Really none of us had a technical background and we raised a small round of capital from friends and family and then later in angel round. And we just had to be remarkably resourceful. So we built a simple product, we sold very aggressively, we partnered with customers and in many ways customers ended up funding the business for us. What was really quite interesting is that our first IPO window that we felt we could take advantage of was late 2007 and we actually filed on the NASDAQ December of 2007. And at that point we’d only raised six million dollars in capital and we still had like four, four-and-a-half on the balance sheet, it was extraordinary. And in ‘07, we were finishing the year at 48 million GAAP revenue. And then we rolled into ‘08 and we grew 50% and finished ‘08 at about 72 million in GAAP revenue, and we’d only raised six million in capital. So we were remarkably capital efficient up to that point.

Tim: Right so it’s completely unheard of in today’s kind of market where people raise hundreds of million dollars all those unicorns have like tons of debt and this is kind of very unique.

"We attracted a lot of talent, built the business on a much lower cost structure than our competitors. Our competitors were largely East Coast and West Coast based, so we had a cost advantage."

Scott: We were very frugal. We also took advantage of our region, Indianapolis is a very affordable market to grow a business, to live. We recruited very aggressively across all these amazing universities that were within an hour-and-a-half of downtown Indy, IU, Purdue, Notre Dame, Butler. So we attracted a lot of talent, built the business on a much lower cost structure than our competitors. Our competitors were largely East Coast and West Coast based, so we had a cost advantage. And then we were very frugal. One of core values was, spend money like it’s your own. And we really instilled this idea that we were gonna be frugal and smart with where we made investments.

Tim: Right, do you think that was the right thing to do? It seems like you kind of had to do it because the history of the company, but if you had to do it again even at that time, in that era, do you feel like we should have raised a lot more money, be much more aggressive about growth, even move the company if necessary to be able to do that? Or you know what’s the advice you would give on that?

"There’s nothing like building really strong unit economics and then raising money not when you need to, but when you want to and when you know you can go a lot faster."

Scott: Well I think for us it worked out great. And part of the reason it worked our great is we really had so much to learn. We were really first time entrepreneurs, so we had a lot to learn and I think if we had raised too much capital too soon we probably wouldn’t have spent it in the right places. So that forced resourcefulness, it forced prioritization, and as we became more mature as leaders in the company we got a lot smarter about how to double down and make big investments, but for us starting in a very capital efficient way and starting small was the right thing to do. I think it’s different for every entrepreneur. I think it’s based on the market opportunity, your experience set, maybe even the region in which you’re coming from, but there’s nothing like building really strong unit economics and then raising money not when you need to, but when you want to and when you know you can go a lot faster. Like you have product market fit, you have unit economics style, then you got a degree of confidence that you can pour a lot more capital on the business and good things are gonna happen. And that’s really what happened to us. That was our next chapter and, our great lesson for us in just resilience and determination.

IPO vs. Late Round

"We stayed on file all of ‘08 and it was so difficult. I like to describe it that we had all the burden of a public company with none of the benefits."

Scott: So we stayed on file all of ‘08 and it was so difficult. I like to describe it that we had all the burden of a public company with none of the benefits. We had really hoped that going public would not only give us an infusion of capital, but it would create more of a brand that was enterprise oriented. ‘Cause up ‘til that point, we’d really been selling just small and medium sized businesses we were starting to get a taste of how our product could apply to the enterprise, but we were little known company, thinly capitalized in Indianapolis. So we really felt like going public would be meaningful and the window had been open for small to mid-sized SAS companies to go public. Well all of a sudden, the window closed very dramatically in ‘08. Yet we had to act and behave like a public company and this was before the Jobs Act. So every quarter we had to meet with the analysts that were gonna be covering our stock, we had to set expectations, we had to report financials. So we had a lot of that burden through all of 2008 and then it just became apparent, wasn’t gonna happen. No software companies were going public and certainly little tiny ExactTarget from Indianapolis wasn’t gonna be the first to crack the market back open. In early ‘09 we started being approached by late-stage tech investors and we’re so fortunate to bring Scale, and Battery, and later TCV into the business. And that was a time when it became a lot more evident that it was time to put our foot on the gas and really go for growth.

Tim: That makes sense, but maybe a couple of things to unpack here right. Right now especially as you said, with the Jobs Act the process of doing IPO seems instantaneous from the outside. You just all of a sudden, people go public and the S1 is there, but that’s because you can file the S1 in advance, kind of do it secretly. And work with bankers to get everything lined up correctly, but once you start to do that you have to think very carefully through the filing period. You can’t really talk too much bout financials and you have all this reporting to do.

"All of ‘08 we were actually in the quiet period. So imagine our poor head of marketing, we hired this fabulous guy and his first 12 to 15 months, he was all stuck in quiet period. That’s challenging."

Scott: That’s a good point ‘cause all of ‘08 we were actually in the quiet period. So imagine our poor head of marketing, we hired this fabulous guy Tim Kopp to be CMO in his first 12 to 15 months, he was all stuck in quiet period. That’s challenging.

Tim: Yeah ‘cause that’s considered market manipulation.

What does the IPO Window Really Mean?

Tim: And then the other thing, of course, is the IPO window. And people say that quite a bit, but what does that mean to you, like the IPO window being open or being closed?

Scott: Sure, I think two things come to mind. One, you have to pick timing where the market is really receptive to software IPOs. And some of that’s just kind of good luck and fortune. You want to build the business that you’re ready to go when the window and the opportunity presents itself. So in our case, we thought the window was there in late ‘07, it wasn’t, and thankfully it was kind of the best thing that ever happened. Best thing that ever happened to us. One of the benefits we really gained by getting a taste of what it was like to be a public company without having gone public and then also bringing great investors on board in early ‘09 is we started refine our thinking about what we wanted the characteristics of our business to look like when we went public. And we later went public in March of 2012. So we actually gave ourselves another three years to make the right investments to roll in to the public market with a ton of momentum. Now I’ll give you a couple of examples. What we really learned from being on file in ‘08 is that almost regardless of where your margin is, the street wants to see margin improvement. So you really have to be thoughtful about when you go public what’s your path to margin improvement. And we were actually profitable in ‘07, ‘08. It would’ve been remarkably difficult for us to improve the margin without starving the business. So as we start to think about that three year horizon that we planned for, in ‘09 we started turbo investing the business. We got a lot more aggressive with R&D, We started expanding internationally, we built a lot more sales distribution. And sales distribution in particular often takes 12, 18, 24 months to really pay off. So we made sure we front loaded our investment so we rolled into the public markets. We had accelerating growth rates, and we built the sales team large enough to really become the dominate market leader. I find a lot of companies that go public without that forethought, maybe they haven’t been making the investments over the prior 12, 18, 24 months, they get public and then they get handcuffed. They can’t be aggressive with investments and as a result they kind of stymied their growth. And then, as we all know, once a SAS company stops growing you get put in the penalty box in the public market, it’s almost impossible to work your way out of it.

IPO Math for Unicorns

Tim: Right that makes sense, and IPO is not the end, right. You have to really think of it

Scott: Oh absolutely.

Tim: It’s just a spring board funding in other ways.

Scott: That’s right.

Tim: And so you have to think about, not just the quarters before the IPO so you can IPO, but also the quarter after and keep the growth going. That seems to be something that is really critical in this day and age.

Scott: We actually had great advice from our bankers and from our board that we really needed tremendous clarity into the first six quarters after we went public ‘cause certainly the benefit of SAS is reoccurring, predictable revenue. So you have to have that dialed in, but you also want to have a sense that you’ve made the right investments in product and sales that you gotta pretty high degree of confidence that your growth rate is still gonna be humming along at a really attractive rate.

Tim: That makes sense, and then what would you say now is a difference between doing an IPO and raising an equity round or one of those later stages of rounds of some sort, what’s the difference?

Scott: Well certainly if you raise money privately you give yourself a lot more degree to freedom to invest and figure things out. The public benefits are tremendous. For us, we ended up going public on the New York Stock Exchange. It was a huge spring board for us as we moved up into the enterprise space. We loved it, but you really only want to do it, I think when you really feel like you have the business dialed in, you understand your metrics, and you really do have that very good visibility in the business. If there’s still a lot that’s not working, you’re trying to figure it out, you’re far better to do that as a private company. And the nice thing is there’s a lot of late stage capital sources today so you don’t have to go public to raise meaningful capital in this market.

Tim: And we see that with quite a few of the unicorns, so to speak.

Scott: Absolutely I feel like in many cases they’re staying private a lot longer than what we may have seen in the past.

Tim: Yeah, that makes a lot of sense. Thanks a lot.

Scott: Okay, super thank you.

Originally published December 8, 2016.