Zach Sims of Codecademy on Lessons in Raising $12.5 Million for the First Time

From starting his first company at Y Combinator to raising $12.5 million in two rounds of financing in just six months, Zach Sims, Co-Founder and CEO of Codecademy, shares his early lessons learned in raising capital.

 


Raising Money Is a Full-Time Job

Fundraising requires complete focus. When you’re in the process of raising money, even when prompted by pure inbound interest, it takes over your life. Product, team, sales, marketing, everything takes a backseat. This means that you should run your fundraising process like you do your business  super efficiently with clear goals in mind. When Sims first went out into the market post YC Demo Day, he ran a process like most first time fundraisers that was completely ad hoc and reactive. This meant it was even more time consuming, drawn out and simply inefficient.

Codecademy had launched in August of 2011 after Sims and his co-founder, Ryan Bubinski, had worked on building the initial product over the summer. Shortly after launching, more than 200,000 people used Codecademy, giving them the traction numbers necessary to raise a Series A. Sims and Bubinski had thought it would be completely possible to keep product momentum and fundraise at the same time, but ultimately found it nearly impossible to do both. Fundraising is emotionally all-consuming for everyone at a small company.

It’s Not Called a “Fundraising Process” For Nothing

Sims' second round of funding was prompted by inbound interest from a number of investors that had been tracking the company since the close of their seed round – which was led by Union Square Ventures. At the time, he had no interest in raising any more money. However, during one coffee meeting a potential partner asked Sims, “What would you do with another $10 million?”

At the time, his company had barely begun to spend their original capital and was only three people. That one question planted enough of a seed in Sims' head that he began to think through a large preemptive raise, “We figured if we had a chance to work with the people we’d always wanted to work with and who shared our vision and desire to build a big and long-term business we might as well, at least, consider it.” 

Once Sims came to terms with raising a large round, he ran it as a tight process and optimized for the best partner in the shortest amount of time. He now understood the potential impact of fundraising on company building. He resisted the temptation to put a “toe in the water” and take a bunch of meetings to feel out the market. He realized he either wanted to raise or remove himself from the siutation entirely.

If he didn’t want to proceed, then he should cut off the “would love to learn more about what you’re doing” VC meetings and get back to building Codecademy. However, if he did, then he should go into full-on fundraising mode. Waffling is dangerous.

Sims summarizes this thinking and process by saying, “It’s super easy to get distracted by all the interest and it's really flattering to see people come out of nowhere and offer you money, but the most important thing at the end of the day is that your product is working. When you're thinking about the money, you're not thinking about the product. External validation by people who want to give you money does not necessarily mean that you built a product that's working.” 

How Do You Know If He or She is The One?

In addition to running his second fundraising process intentionally and efficiently, Sims also went into it with a clear sense of what he was looking for in an investment partner. He ran a transparent process letting his potential partners know how he felt about them, and ultimately the price that was going to close the deal. Granted, some of this freedom was enabled by the incredible interest in the round, but the core philosophy of transparency can still be applied to a process that is a bit more uphill.

Sims and Bubinski outlined the key goals they were looking to achieve in a fundraising process and set a clear timetable for how long they would be focused on talking to investors, doing diligence and closing a round. Clearly delineating this timeline and sharing it with potential investors enabled them to further underline their belief that product was key  spending too much time fundraising would only hurt the company’s future. Sims spent a lot of time up front getting specific on what he was looking for in a partner, which came down to:

  • A West Coast partner to expand the company’s presence in the Valley
  • Experts in building and scaling consumer businesses with network effects
  • Someone who could eventually help them go international
  • Someone who stands by their companies when they’re down just as much as when they’re up 

Through the process of raising capital, entrepreneurs get a lot of questions and feedback. Sims noted that it’s often difficult to tell whether the feedback is valuable or just a reason to make an easy pass down the road. However, generally speaking, the low-quality feedback came in the form of high-level business model questions in the very beginning of the first meeting or general market questions.

At the end of the day, it’s the entrepreneur’s job to figure out what advice to take to heart and what to ignore. Sims quickly noticed in his process that it was the VCs that dove into the product and asked tough questions about the way the experience was built who ultimately provide the most thoughtful and valuable feedback.

He also found that sometimes questions during the fundraising process surface things that you don’t want to ask yourself as an entrepreneur. Those are the tough questions that can really benefit a business. Sims likened the process to an audit, but in a good way. It gave him a chance to look at the business from a higher altitude and see what was working and where the opportunities for improvement were.

If you’re willing to sift through a lot of the useless VC feedback, you can often surface nuggets that will really push your business forward. Sims found that the process often forced him to look at Codecademy from the perspective of a potential investor  what would he be curious about if looking at the company? Removing himself from the founder's perspective shed light on things that the team and investors would have to think about and formulate strategy around in the future.

In his second time around, Sims was sure to not only field the tough questions from potential investors, but also ask them lots of questions himself to get a sense of whether the person was someone he would like to work with for years to come. So many founders advise fellow entrepreneurs to “diligence their potential investors,” but so few actually do it, or do it well. Sims asked numerous questions, including:

  • Where specifically as an investor do you think that you add the most value?
  • What outcome are you expecting for the business?
  • What do you consider a success?
  • Are you here for a quick win or for a long term business?
  • If we’re able to close this and you wire the money, what’s the relationship going to be like? When are we going to hear from you? How often? What do you expect from us?
  • When and how do you ask the tough questions?
  • What happens when things aren’t working? Do you stand by your companies? Do you support them in follow-on financing/inside rounds/bridges? Give me some examples of that.

Focusing on downside is so critical. As Sims says, “It’s important to think about what happens when stuff isn’t working. In great times I know this board member will be able to (1) introduce me to BD partners, (2) provide great management advice and (3) help us hire senior executives…but when things are not going so well are they going to freak out and try to sell the company? Or are they going to stick it out and spend Sunday night with you brainstorming in the office about how to turn things around?”

Always dig into the companies that didn’t work in a VC’s portfolio  it’s even more valuable than the time you’ll spend with their homeruns. Those reference calls often end up being the most illuminating.