Tuesday Oct 23, 2012 by Susan Johnston - Contributor, VentureFizz
Last night, in the ninth installment of the Founder Dialogues series, Dharmesh Shah, co-founder and CTO of Cambridge-based SaaS company HubSpot, recounted his entrepreneurial journey including choosing a cofounder, raising $65 million in venture capital for HubSpot, and becoming an angel investor. Eric Paley, a managing partner at Founder Collective, led the discussion before a standing-room-only crowd of entrepreneurs, would-be entrepreneurs, business students, and media.
Shah said he discovered his love for computer science later than many, because having grown up in India, he’d never touched a computer until starting as a freshman at Purdue University. While working as a software developer at SunGard Employee Benefit Systems, Shah thought up the idea for a data conversion app that would complement SunGard’s existing software. Management didn’t want to develop the app because the price point was too low, so Shah suggested they let him leave so he could build the app and they’d split the revenue 50/50.
Shah’s younger brother was then working as a developer at SunGard, so Shah took his brother with him to start Pyramid Digital Solutions, which SunGard bought in 2005. “Anytime you’re in a partnership with a really big company, it almost invariably converges into some sort of conflict,” Shah admitted candidly. “If it’s going well, they’re going to be looking for growth and control. We had some tension, so I made the decision to sell and negotiated best possible deal.”
Shah used the proceeds from the sale of Pyramid to fund a second startup: a personal information management app that he later sold to the first company. In retrospect, Shah admitted that the trouble with self-funding is “you don’t hold yourself up to the same scrutiny if you had outside investors.”
Trying to do two startups at once (which Paley compared to “fighting a war on two fronts”) took its toll, so Shah started his Master’s at MIT in the hopes of becoming a professor (or at least that’s what he assured his wife).
While at MIT, the self-described “startup addict” met Brian Halligan, who would later become his cofounder and CEO of HubSpot. “I’m a big believer in having a cofounder,” Shah announced. “The issue with single cofounders is that, psychologically, startups are a lonely game. You need someone to share the journey with and prove to the world you’re not completely crazy, that you can convince one person on the planet to join this thing.”
Shah suggested attendees look for a cofounder with a different background by going to business events if they’re a techie and vice versa. “Look at the hashtag, look up their backgrounds, find them, and reach out,” he says. “Hang out with people that are different.”
Halligan shared Shah’s passion for small business, and after looking at the traffic stats for Shah’s blog, OnStartups.com, the pair realized how confusing marketing can be for small businesses. “No one had built a marketing platform or solution,” said Shah. “We built a blogging application, then a website management tool, and it kept creeping out.” Now, HubSpot has about 15 apps within the platform, plus a marketplace, and 400 employees. August of this year was HubSpot’s best month ever.
But raising funding wasn’t easy. Shah and Halligan met with VCs but told them “we’re not raising money.” Shah said that was a way to “force us to go through the story and get smart feedback.” They raised a $5 million Series A in July 2007, followed by a $12 million Series B in May 2008. “What we learned with B is that it’s much easier to sell a vision than it is reality,” said Shah, adding that a company isn’t necessarily worth more after releasing an actual product. “Once you’ve launched your product out there, now there’s data, there’s something for investors to poke at.” A $16 million Series C came in October 2009, followed by $32 million in Series D financing in March 2011.
Shah’s wife, who works at a nonprofit, was the company’s first customer, and Shah is quick to point out that she paid for it. “The first thing was did was charge our customers early, and we charged often,” he explained. Knowing customers could leave each month helps give HubSpot feedback on whether they’re meeting a need.
When asked about finding sales channels, Shah advised one attendee, “you need to know whether your product is bought or sold. If the category already exists and your price is low enough they’ll just buy it. We knew we had a product that needed to be sold, because nobody knows what inbound marketing is, so we did inside sales.”
Shah has also invested in other startups including Shareaholic, Contently, and Backupify, but he’s quick to point in a self-effacing manner that he’s not a “time-added investor.” As he described it, “I loved startups, didn’t think I’d do another startup, so investing let me live the thrill of startups without doing the hard work. I angel invest for future ego value.”