3 months, 50 emails, 36 investors, 1.3 million bucks. It is no secret that SaaS debt funding is a tough nut to crack, but Rand Fishkin just proved otherwise in such a short amount of time.
After 17 years as co-founder and CEO of Moz, Rand Fishkin continues to bring his brilliance to this world through his new venture, SparkToro. For this project, he hustled his way through SaaS debt funding without taking on the traditional venture path. He has just proven that a funding structure can be more sustainable and profitable for long-term business, aiming more to be a zebra than a unicorn.
In this episode, Rand shares how he conquered SaaS debt funding for SparkToro. Through this, he wants to promote a healthy economy where small to medium businesses can thrive. It may not follow the common venture path, but it does not mean it is less ideal and profitable. His funding method could just be the brightest new idea for aspiring startup founders who are still finding their groove.
Tune in to this episode to learn more about SaaS debt funding, the Rand Fishkin way.
Click here to read transcript
[00:10] So a lot has changed over the years, as for both of us. You’re off to a new and exciting project. So why don’t you very quickly introduce you know, what your company is and what it does in as short a period of time as you can.
- Sure, yeah. So I left Moz two years ago, and started a new company called SparkToro that just launched two months and three days ago, April 22nd, called SparkToro. And SparkToro helps with audience intelligence and market research.
[00:39] I’d like to add that as I had my wife use it for some of the market research that we’re doing, and she said, “Hey, this is a pretty darn cool tool.” Because part of our business, as I’m sure is for many, we want to find other people that have the same audience as us so that we can form relationships with them and do joint ventures and do all sorts of great things. And she was like, “Man, this thing’s really awesome because I was able to find a bunch of other podcasts and content creators that have an audience that has overlap with our audience.” And now we have a target list of people to reach out to. So your background, obviously, a lot with SEO. And with Moz, I mean, you’re kind of famous as the “Whiteboard Friday Guy,” but for anyone who maybe hasn’t heard of you, what’s your background?
- Yeah, I dropped out of college and started working with my mom, Jillian, who was my co-founder at the company that would become Moz and was there for 17 years. So I’ve a very easy to explain background. Just a single, you know, single venture before this. And I do a lot of you know, I do a lot of other stuff, right. I’ve done some small amounts of investing here and there into startups. I don’t really believe in the public stock markets, but I have done a lot of traveling and speaking around the world. And yeah, a lot of folks know me from conferences and events, and those kinds of things in web marketing and entrepreneurship. And yeah, the Whiteboard Friday video series was very popular, and the Moz blog that I wrote for a long time was popular as well.
[02:16] Yeah, popular is an understatement. You’re being far too humble. It was ridiculously popular.
- And I need to get back to work on SparkToro’s blog, man.
[02:26] You got to put those skills back into action. It’s tough when you’re on a small team, it’s really hard to carve out the time.
- There’s only two of us, right? So I get through my email and my task list, and it’s, you know, 6pm, 7pm, I’m like, “Oh, man. What am I going to do?”
[02:43] Yeah, I feel your pain. It’s almost exactly the same thing for me where Flowster is a team of, excluding the developers, there’s just three of us right now. And it’s, yeah, it’s a huge challenge.
So with that in mind, because I’ve been thinking about maybe raising some money at some point in time, I know that you did do that. And you created a really interesting method called the SparkToro funding method that you use to raise money. And it’s very non-traditional. I don’t know much about it yet, but that’s what we’re doing this podcast for, at least the first portion of it. So tell me about it, what is this SparkToro funding method?
- Yeah, sure. So it is basically an alternative to the classic path that most folks take, in technology, for venture or accelerators that put you on the path to venture or angel funding via something like an angel list that puts you again on the path to venture funding. The SparkToro funding structure is designed to let you maintain complete control of your company and raise money in such a way that incentivizes you and your team and your investors to maximize the odds that the business will get to profitability and stay there for a long period of time. And maybe sell someday, which is fine as well. But the goal is really to build long-term, sustainable, profitable businesses rather than basically, you know, the classic angel and venture model is 100 companies aim for the stars and, you know, two, maybe one of them get to those multi-hundred million or billion dollar outcomes and the rest die trying.
And this is the opposite of that, right? This is trying to make sure that 75, 80, 90 out of 100 companies get to sustainable profitability. I can give you the details on it as well, but the basic idea is that you raise an amount of money from angel investors or a group of angel investors, hopefully. And then with your profits from the company, you pay that money back. Until you do, your salaries and compensation is fixed to a certain level, which tends to be lower than most, you know, executive comp or founder comp. And then once you do, everybody gets to participate in profit-sharing pro rata to the amount of shares that they hold.
[05:31] On an indefinite basis?
- On an indefinite basis, right. And in any given year, you know, the executives can choose, “Hey, we think we should reinvest in growth. Let’s not pay our dividends.” In which case, you know, your salary is still at a semi-fixed level. Or you can say, “Hey, I think this is a good year for us to distribute some of these profits. Let’s pay our investors some more, pay ourselves some more.” And everybody wins that way.
[05:57] So let’s say that it takes you three years to pay everybody back. So now you’ve got shareholders that are entitled to a share of profits. Obviously, you could negotiate with each of them to buy them out if that was your goal. But do you have the right or do you have an option to buy them out that isn’t a part of the original agreement? Or I guess you could really just structure that into the original agreement?
- You certainly could. We didn’t. I don’t have any particular interest in doing that, right. My goal is to have my investors say, “10 years from now, this is the best investment I ever made. Why in the world did I go put money into 50 companies that were trying to get venture, that model’s crazy unless you’re an institutional investor.”
And I hope that also in addition to that, right, my investors look for more opportunities like SparkToro, encourage more companies that might be wonderful long-term profitable successes and are not high likelihood of becoming a billion dollar unicorns. I hope they look at them and say, “Hey, you should use this other SparkToro model. We would love to have you. We would love to fund you if you do.” And honestly, Trent, it’s not just for us. Although it is, you know, absolutely, I think a really good fit for what we want to build. But I hope, I think that it is also a good thing to exist in the world. Right? I think the venture model is really, really unhealthy for the economy, for our sort of sociopolitical environment. It naturally does exactly the opposite of what you want in a healthy economy, which is it biases to have a few winners at the very top and everyone else fails.
[07:52] And dies trying because they were trying hours a week for three years before they flamed out.
- Yeah, and those individual experiences are awful. And the end result—even when you get, you know, a few Facebooks and Microsofts and Googles and Palantirs—is what? It’s wealth concentration, political power concentration.
[08:10] Yeah, we don’t need any more of that.
- And monopoly power, right? And that makes for a very unhealthy economy, what you want is a bunch of small and medium businesses, not a few big, powerful ones. So, you know, it’s what I want to see in the world. And it’s also what I think is really good for entrepreneurs and, frankly, investors.
[08:30] Yeah, I agree with you. With Flowster, my biggest reservation with going down the traditional fundraising route is I think to myself, well, I don’t need to build a billion dollar business. I mean, if I built a business that sold in five years for $20, $30, $40, $50 million, I consider that to be a pretty huge win. But more importantly, I started the business because there’s a certain lifestyle that I want to have, and being required to work 80 hours a week to hit some insane growth targets and having all of my staff doing the same thing so that we can keep our board happy does not align with my lifestyle that I’ve got into this whole being an entrepreneur gig for. And so I don’t want to raise that kind of money.
And at the same time, I’d sure love to have, as I mentioned, we are three people, and fortunately for me, maybe unlike many founders, I do have other businesses that produce cash, and so I use that cash to fund Flowster. But at the same time, you know, there’s a risk mitigation strategy, I’d still like to take some of that cash and maybe further my real estate holdings. So I’m not all completely… You know, if Flowster fails and my whole life fails, and I go back to zero, you know, there’s a line in there somewhere that is comfortable for both areas. And so the method of being able to raise some money without expectation of having to build a unicorn is extremely appealing to me. And so I definitely want to learn more about the mechanics of I’m sure appealing to many people who are, you know, hopefully listening to this episode.
So let’s unpack the process. So I’m guessing, did it start with a pitch deck? How do you get in front of people? And when you’re in front of them, what are you saying?
- Yeah, yeah. So I think that, you know, obviously I have a significant network. And for anyone who is fundraising or thinking about fundraising, my best advice is, first, build your expertise, then help a lot of people. And through that, you build your network, and then go do your fundraising. And that is a multi-year process. But I think that’s also a really healthy way to sort of prove to yourself and to others that you are someone that people should invest hundreds of thousands or millions of dollars in.
And so for us, yeah, I was… I’m telling you, Trent, it was deeply, deeply uncomfortable. I don’t know if you have this, but I had just butterflies in my stomach sort of, “Oh god, I don’t want to send this email.” Right? Because I’m emailing like, you know, friends and colleagues from the worlds of digital marketing and entrepreneurship and saying like, “Hey, I’m starting this new company, raising some money for it. It’s a very unusual structure. Would you be interested in chatting about that?” And the couple of times there were a few rejections that I really loved, just loved so much. And then there were a few rejections that were really heart wrenching.
In particular, I think the one that embarrassed me and made me feel the worst was when someone wrote back and said, “Rand, I know we’ve never talked finances, but I’m not an accredited investor. I don’t have that kind of money.” And I had this like, “Oh god, I’m so sorry, I didn’t, I just made an assumption because your car, or your house, or whatever it is.” Right, like I just, I made a dumb assumption. And that felt terrible. And then after the fundraising, there were a number of people who reached out to me who are pissed that I didn’t ask them, they felt insulted. They were like, “How could you raise money and not talk to me first?”
[12:28] Didn’t you put it on your LinkedIn profile? So like, “Hey, network, if you’re…” So you didn’t, so why not? Because?
- Because it violates fundraising laws. Basically, you’re not allowed to publicly say that you are seeking investment in a private raise. So some people violate it. Absolutely, right. I think you’ll see plenty of folks who take that risk, but we were not willing to. We knew we were, you know, to your point earlier, it’s not that I’m famous, but I have a big enough reach that we were concerned if I said anything publicly, that it could be perceived as potentially violating those financial raise laws. And, you know, the Trump administration, DOJ, the process, we don’t know who they might pick on or why and those kinds of things. And I’m a fairly outspoken critic of the administration.
[13:28] I mean, they don’t know either.
- So for lots of reasons I just keep quiet. So I’m just emailing people privately. The rejections I really loved were the ones… The only two people I pitched in Silicon Valley, right. Folks who are in the Bay Area, the only two folks I pitched down there both said no. And they both told me not only no but, “No one will fund this. Your structure is stupid. You need to go the venture path. This is just a dumb idea.” I had this like, “Oh my god, it’s true. You’re all brainwashed, like you’re geographically brainwashed.” It’s incredible. Plus, you know, it’s really good motivation. I don’t know if this motivation works for you, but if somebody tells me I can’t do something or something won’t work, just know I’m coming for you.
[14:23] Yeah, yeah. I love proving people wrong.
- Our pitch deck was literally a Google Doc, just a shared Google Doc that had a bunch of information about the structure of the company. I shared a version of it, so if you or your listeners do a search for SparkToro funding, you’ll find we’re decent at SEO so it’s the first result. And an open source version of that Google Doc that I use to raise money, which is essentially just here’s the company, here’s a little bit of the research behind it, here’s the ask, here’s a little bit about the team, here’s what we’re planning to build, here’s what we’re doing with the money. Extremely simple.
We did not put a ton of polish into it. And frankly, I think that is totally okay, right. I think that what we should be doing with our time, what startups should be doing with their time is working on their polish for customers, and product market fit, and building marketing flywheel, and those kinds of things. And not, “Let me get really polished for my investors.” I think investors generally you know, either they’re going to get it or not. And a fancier deck or, you know, more detail is going to push very, very few people over the line. And now, that was my experience with venture too, actually.
[15:48] So, how much did you raise?
- $1.3 million. Although we have… The SparkToro funding structure has been used by, I think three other startups and they all raised…
[16:02] Since you, you mean?
- Yeah, yeah. Since we’ve built it and open sourced the docs, which was almost exactly two years ago. Three other companies that I know of, right, have reached out and basically said, “Hey, this is awesome. We use your funding structure…” and yada, yada. A few of them wrote about it. And their raises were, I think, between $200,000 and $700,000. So you know, less, considerably less. You could raise as little as 50K or 100K with it, right?
[16:32] Sure you can. You can raise any amount of money you want to do, really, whatever you can get people to agree to. So how did you determine valuations?
- We set a structured valuation. We basically said, “Hey, we’re going to pick a number that is pretty standard for the early stage. We’re going to do a price round. We’re not going to try and play the, you know, next round sets the valuation, in retrospect.” Our number was basically… I think we talked to three or four of our what I would call lead investors, our earliest supporters, people who, you know, wanted to put money in, wanted to help us with the funding structure, or wanted to see it succeed. We had conversations with them, and basically, they told us, you know, what ranges they thought would be comfortable, and we picked something right in the middle, which I think was 4 million pre-, 5.3 [million] post-[money].
[17:35] Okay, and is all that explained in the documentation?
- Yes, it is.
[17:39] Okay, so we don’t need to go down that rabbit hole super deep.
- Yeah, it’s actually… I think it’s not in the documentation. I mean, it is in there technically, but it’s in the blog post, right. Because the documents that we open-sourced are designed to be used by anyone. So the numbers are blank, right. You fill in the blank about your valuation and how much each investor is getting and that kind of thing. We ended up using Carta for managing the equity side of it and distribution side of it, which is, to be honest, it’s overkill, and it’s kind of expensive. I think Carta is 2,500 bucks a year. And for us, whether it’s worth it or not, I would say it’s probably not. But a lot of our investors already use Carta to manage all their other investments. And so it was a request from our investors like, “Hey, if you use this it’s really easy for me to manage all my investments through it, could you do that?” I use it for my… Moz used it as well. So all my stock in Moz is managed through Carta.
[18:45] Okay, so if I understand, not having raised money before, I’m no expert on the pre-, post-money thing. 1.3 divided by your post money valuation of 5.3 means that investors own 25% of the company or 24.5?
- Yep, exactly.
[19:01] Yeah, okay. So you and your founders will retain 75. So you still have—if somebody is worried about giving up control—you’ve been able to raise money, and you still have complete and total control of the company.
- So this is an interesting thing, because we’re an LLC, and they own units of distribution in the LLC—not voting shares, not voting rights, not board seeds, those kinds of things—even if we gave away 75% and retained 25%, we would still have complete control of a company, right. So the funding is disconnected from the control. It’s not you own units of ownership. It’s that you own units of distribution. So basically, financial distribution.
[19:50] Which is very different than the investor model, because the investor model you get to the point where your investors can fire you as the founder, and you’re out on your ass, and you’ve got nothing basically.
- Interestingly, interestingly enough, right, I raised, what was the first round of Moz, 1.1 on a 6 million pre-, so they owned, you know, 14%, something like that post. That was in 2007. And I was made CEO at that time, right. I was, you know, technically sort of running the SEO side of the business when they made the investment, but my mom was president of that company. And when I became CEO, even then, right, my board could technically fire me. So I’ve given away much less of the company. But I could be let go, right. Leadership can change.
[20:53] Which is obviously, if you have short sighted investors, and you have a vision that they don’t necessarily believe in or what have you, because you know, you raise the money, you iterate your idea, you pivot slightly, and you’re super convinced that where you’re going the right direction, they’re not convinced. And they say, “Bye, bye.” And you’re screwed.
- And I think that it’s getting to be more unusual, because investors slowly, on the venture side, are realizing and seeing the stats that essentially, the most successful companies in everyone’s portfolio are those that remain founder-led for a long period of time, right, usually to exit or IPO. And so, most investors are coming around to this idea that maybe firing founders…
[21:43] Not such a good idea.
- Not such a great idea. That being said, right, there’s a lot of shitty, unethical behavior. There’s a ton of sexist behavior. There’s a ton of racist behavior in those worlds. And so, there’s a lot of founders who should be fired. There’s a lot of venture investors who should not be investing. I mean, it’s pretty ridiculous to me. I think the stat that always, you know, clutches my heart is there was more money raised in venture over the last 20 years by men named John than all women combined.
- I think, there’s less than 1.5% percent of all venture capital has gone to Black founders, right. And Black men and women are 17% of the US population. So that is, that representation is…
- Worse than the police. That’s how horrible it is, right. So I think that field, that entire world has a lot of reckoning to do, right. Boards of directors are… They look like you and me, right? Almost exclusively. And that’s a serious problem too, right. And obviously, the venture world, especially the last 10, 15 years, has really been serving a lot of edges of the economic market and not solving a lot of the big problems that we desperately need in health care. I mean, I’m saying, right, we obviously had a huge, huge holes to fill there, in finance, in regulation, and government, and yeah, a ton of underserved sectors. I think green energy has been completely underserved by the venture business, but web advertising. That’s where all the dollars and all the brains are going.
[24:00] So when you raise the money, the deal structure, and I think you alluded to it, and I just want to go down that a little bit further. So you’ve got an LLC, the investors are getting basically shares of the LLC that entitle them to a certain percentage of the distributions that the management team decides to make. Is that essentially it?
- So any year, in any given year, the management team can choose whether to distribute profits or whether to reinvest those profits in the business. Management’s salary is fixed, right. So basically, Casey and I can’t make any more money than the Seattle software engineer average, which I think right now is 130-ish thousand dollars a year. We can’t make any more than that until we pay back our investors the 1.3 million that they put in. After that, we can’t make any more than $270,000, right? Double the Seattle software engineer average. We can’t make any more than that ever on salary. And so any more money that we would like to make out of business, we have to distribute profits. And so we basically have the choice to grow the business or distribute profits.
The interesting part is we could grow the business indefinitely, right, choose to reinvest profits. And if one day, it sells, say 10 to 15 years from now, right? It sells. Our investors who already got their 1.3 million back would also get, pro rata, their percentage of ownership or their percentage of distribution in that sale price. So they get what investors in the venture world would call… Sorry, what is that called… Not the carry. It’s called the… There’s a name for it.
[25:54] I’m trying to think of it too because I’m sure I have heard the term before but I’m blanking just like you are.
- So, you know, a preference. They get an investor preference, right? So the preference is 1x built in. If you wanted to, conceivably right, if you were having trouble raising, if you thought you were a riskier investment, or your investors did, you could use the SparkToro docs and have a 1.5x preference, right? Or 2x preference where you have to pay them back twice their money before you get your salary raised or whatever. And everybody participates pro rata. So, you know, we were in a very lucky position in that we were relatively in demand. And, you know, I think a lot of people expected SparkToro to do well. But if you’re in a different situation, you could do that differently.
[26:47] So how many individuals ended up becoming investors, headcount. 10, 5, 9?
- 36 of us. 35 or 36.
[26:57] Okay. How many people did you have to email to get 36?
- Oh, I think I have it in the blog post. It was something around 50, 51.
- They’re not bad. Yeah.
[27:10] No kidding. Holy smokes. Okay.
- We didn’t get very many no’s.
[27:16] And how long did it take from sending the first email until the last of the 1.3 million bucks is in the bank?
- I will say our investors were exceptionally responsible with wiring the money once we sent out the funding, but I think it was March 1 to June 8 or 9, somewhere. Yeah, they were fast.
[27:45] Really? That’s fast. Now obviously, the speed is a byproduct of who you are and your network, and so forth and so on.
- I would say what realistically happened right is that I essentially… It was not much of a pitch process, right. It was basically, I emailed folks, and I said, “Hey, I’m starting this new company.” Well, folks knew I started the new company because, I think, one of the smart marketing things I did, Trent, was the day I left Moz, I put up, you know, the SparkToro website went live. And I put up a blog post on SparkToro’s website called “My Last Day at Moz. My First Day at SparkToro.”
[28:27] I remember seeing it.
- And I knew that many, many thousands of people in the web marketing and technology fields would sort of see the, “Oh, Rand’s leaving Moz after 17 years,” right? And, “He’s the founder,” and “He’s sort of well known.” And either that would be a one-time, “Oh, he’s not there anymore,” or it would be a, “Is he doing something new?” Right? And so I decided I would combine those messages so that there wouldn’t be any kind of, “What’s going on next?” And no surprise, probably, I would say a dozen or so people, maybe 10 folks who became investors, emailed me within the first two weeks after that blog post went live and said, “Hey, I saw this new thing you’re doing, are you by chance raising money or taking investors?” So I got proactive outreach, and then from there that kicked off the process. And I don’t want to say I knew that would happen, but I certainly hoped it would happen.
[29:32] When you were, because of the accredited investor rules, was there a process that you followed to vet your investors to make sure that you didn’t get yourself in hot water by taking money from someone who wasn’t actually accredited?
- Very simple process wherein I basically just, in the email request asking if they’d be interested, mentioned that we could only take money from accredited investors, and link to the US rules for accredited investors, which I think got lessened or got relaxed last year. So it’s even easier now than it was when we did it.
[30:07] So does that mean that you would take their word if they said they were accredited? Or did you actually look at their tax returns?
- No, we took their word for it.
[30:15] Okay. All right. So the onus isn’t on you to prove, the onus is on the investor to tell the truth.
- That’s right, right. They’re the ones who can get in trouble for it. So…
[30:25] Okay, good to know. All right. Before we move off the topic of funding, because obviously the blog post and associated documents are going to, you know, fill in the blanks for anyone who’s interested in going deeper down this, self included. Anything else? Any other takeaways? Aha’s? Lessons, mistakes you want to share?
- I mean, I think that one thing I would certainly recommend for other folks who are, you know, considering this process is to think really hard about what you want to build long-term. To me is a little less about the lifestyle aspect of it because they, you know, Trent, you mentioned earlier like I don’t want to work the 80 hours a week and try and kill myself to get [there]. But my experience has been that startup founders—whether you are building a food truck business, or a technology business that is designed to be sort of more lifestyle focused, or one that is high growth—you’re going to be, you know, you’re gonna have some intense hours and some relaxed hours.
[31:39] And I do now. I do now. I just don’t want to be having investors browbeating me saying, “Hey, did you work here 80 hours this week?” Or if I took Friday off to take a long weekend to go camping with my family, I don’t need somebody to give me heat for it.
- And my experience has been, to be fair to the ventures, right, because I think I have crapped on them a little bit, but to be fair to them, I’ve never experienced that. Brad and Michelle, and all of my friends in the venture world, I don’t think any of them would say, “Oh, my investors breathe down my neck about taking a Friday off.” Or taking two weeks off. Or having a more European-style working hour set. They don’t really give you a hard time about that type of stuff. What’s tough, and what I think that many folks don’t realize is, and my story at Moz is relatively illuminating of this, which is you can get to what almost everyone would consider an extraordinary level of financial success and not have a successful outcome.
Moz, when I left, was doing 55-ish million dollars in revenue a year. It was growing slowly, but it was profitable to the tune of about 10% of that was net profit every year. But that doesn’t mean that Geraldine and I, my wife and I, have money. We don’t have anything like a million dollars. We are technically accredited investors by virtue of the stock that we hold in Moz, which has a valuation. Transparently, we have $400,000 in savings. And I have my $135,000 a year salary. So we’re comfortable. And Geraldine has sold a book to her publisher and is working on another one.
[33:39] Yeah. You didn’t get a huge payday as a result of being in-laws because it didn’t get to 550 million in revenue. And so your tiny little share that you owned didn’t end up…
- Oh, we own 18% of the company. So it’s not by any means tiny. It’s very significant. It’s just that until or unless Moz mass sells, which, who knows? I don’t know how likely that is, I think it’s very possible that Moz might die before it ever, you know…
[34:09] You might never get paid for your 18%.
- I might never get paid. Right, exactly.
[34:13] Whereas the investors in your model, because they’re entitled to a share of the profits, they don’t have to wait. They get all their money back, and they get profits. And if you just flame out 10 years from now, they’re still made whole because they got paid along the way.
- And so technically are we, right? So they get paid along the way. And then hopefully we get paid some along the way and folks are happy, right? So the business does not have to be built to sell. It can be built to serve its customers, its employees, and its investors without being built to sell. And I think that is one of the beautiful things that very few founders realize how unlikely those exits are because, you know, TechCrunch and Hacker News and all the other sources are always writing about exits when, in fact, 95 out of 100 of us never get there.
[35:04] Yeah. And there’s nothing you know, I’m thinking of just founders I’ve talked to in the last month of SaaS companies, and I can think of a couple that are at 10 to 12, 13 million a year with 30–40% net profit margins. They’re not unicorns, but there isn’t anything wrong with those businesses, man. Like if I was an investor in one of those, and I’m getting paid my hundred grand a year for doing nothing, because I invested early on, so I’m pretty happy.
- And realistically, if we were designing an economy, that’s the kind of business we would want to exist, right. We don’t really want a lot of Googles and Facebooks.
[35:42] I agree with you 100%, and I always keep politics off my show, so we’re not gonna go down that route.
- I don’t know that this is, yeah. It depends on the right politics, but yeah, certainly if you want lots of competition in the technology sector or in any sector.
[36:02] More smaller companies, healthier for everybody. Big, dominant companies are not so good.
[36:08] Yeah, I agree. 100% agree. Okay. So let’s transition to talking about building the business. Now you got some money in the bank? Oh, by the way, when you raised the money, did you already have a prototype? Or was it just an idea?
- We had, I would not say a prototype, we had a technology side proof of concept. So some stuff that Casey had been working on for a while where we could manually run a limited version of what the tool would eventually do, right. So today the idea behind SparkToro is you go in and you say, “Oh, I want to reach Chief Product Officers in the United States.” Right, that’s my target market. And so you put in “My Audience,” there’s a few drop down [menus], “My audience uses these words in their profile…” And you put in CPO or Chief Product Officer, search. It doesn’t actually give you the list of people, but it tells you the sources of influence that they share. They follow these people. They watch these YouTube videos. They listen to these podcasts. They visit these websites. They use these words and phrases in their content. They describe themselves this way, they use these hashtags, whatever, blah, blah, blah, blah, blah.
Some of that information was what we could basically run a manual version of, where Casey would query against a limited version, a small version of the database. And we could produce some results in a one off type of thing. So we had this inkling that the idea, that the concept behind it, right, if you crawl enough social and web profiles, you merge them together, aggregate them, you make them searchable, that you can produce really useful, interesting data for marketing. That being said, I would say the first year of development, we were still pretty nervous about whether the product could produce high-quality, consistently useful results for enough search queries that it would be a truly game changing kind of thing. So we had a proof of concept-ish, but it was still pretty, pretty nascent.
[38:34] Yeah. Okay. So, when did you start to think about product/market fit? Who your target customer was going to be? I mean, did you know all that stuff in advance? And, or if you didn’t, how did you figure it out?
- We had theories. We ran a medium scale survey. So about, I think, 700-ish respondents in the web marketing field telling us that…
[39:03] How on earth did you get 700 responses to a survey? Because that is not easy to do.
- Oh, man. Now the answer is going to be really embarrassing. I sent a tweet.
[39:16] Get out of here.
- So I’m followed by almost half a million marketers, right?
[39:21] Oh, yeah. Yeah. Okay.
- You’re right. For most people that would be a challenging, frustrating process. And you’d have to do some serious legwork. For me, it was much easier, I will say this, we also cheated because we have the SparkToro data set. For example, if I want a few thousand people in a given field to respond to something, I can do a SparkToro search, and then see, “Oh, these are the five accounts that are most followed by that group of people. Let’s reach out to them, and see if we can convince them to send this survey.” Yeah, SparkToro makes that easier for us than for most. But the reality was when we got that data back, we used that to inform a series of interviews that I did over the next six months.
[40:23] One-on-one calls?
- One-on-one calls, well, at the time there was no pandemic, so I was traveling a ton. And so when I go to a city, you know, whenever I’m flying into Raleigh, speaking at this conference, I’m gonna ask these couple of agencies in Raleigh, if I can swing by their office and talk to their team about what SparkToro’s building and see if they’re, you know, how they’re doing this today and what we might be able to do for them. And so I had a ton of those interviews and turned that into what I’d call, here’s who we think our customer is going to be. Here’s what we think they’ll need and want. You know, here’s what we’re going to be working on. And that process was challenging and complex and, you know, trying to turn all that into actionable information is hard, but it was very worthwhile, right? I think it gave us a good deal of confidence that when we launch, we’re going to have a market.
[41:24] Mm hmm. And so, obviously, you know, COVID happened. I’m guessing you’re thinking, “Hey, agencies are probably going to make up a good chunk of our initial base of customers. Agencies’ cash flow all depends on all their customers continuing to use the agency and pay the bills.” COVID came along, and there was probably a huge recoiling of everybody saying I’m not spending any more money or something to that effect. And that’s the pickle, that’s not the pickle, that is the situation that we are all in at this point.
- Yeah, yeah. So we could feel that really, really strongly because we sent out our first early access group of emails at the end of February. On February 24, something like that. That first group of a couple thousand emails, we had a 20,000-ish email list that we built over the last 18 months, mostly from me speaking and blogging, webinars and podcasts, right, talking about SparkToro. Lots of people signed up to be notified when we launched. We started emailing that group of early access folks. At the end of February we had a shockingly high conversion rate. It was like 4.5% of those people signed up. Almost, I think, 60 or 70% of them opened the email. And a good portion clicked through and created accounts, right. So we were like, “Oh, man, we are really onto something.” I think I emailed my investors at the end of February. I was like, “Wow, I think you made a really good investment here because look what happened with our very first group.”
And then through March, that conversion rate fell off a cliff, literally down 90% by the beginning of April. So when we sent our last group of early access emails, it was way, way down. And during the course of that, my email address was the reply to on that. So I was getting bounces and automated replies. And when you get those, it’s often like, “Oh, well, Trent is out of the office on vacation.” But that’s not what they said.
[43:39] Trent doesn’t work here anymore.
- And so it’s just brutal, right? Because every week my inbox was filled with hundreds and hundreds of marketers who’d been laid off from their jobs.
- And it was just this incredibly stark example, right? And we saw the bounce rate on the emails just rising, rising, rising as those addresses were turned off at the companies where they work. This is agencies and in-house, right, because marketing is a place where businesses try to save money when there’s a recession, because their demand is lower.
[44:17] Yep, so, but we’ve gone a good distance in this interview already. We’re running out of time. Before we wrap up, you’re obviously trying to, as many other businesses are, deal with the situation that has been created by COVID. Is there anything that you’ve done since that bounce rate started to go through the roof that is starting to work and maybe a strategy you can share with anybody else?
- Yeah, I mean, one of the biggest things that we changed our minds about was just making our free account much more generous and promoting that more than trying to convert people right away. Our philosophy and our thinking on that is essentially, there will be future demand for this product. In the future, people will once again want to invest in marketing, some of them won’t just want to throw dollars at Google and Facebook. They’ll want to find a competitive advantage by going direct and doing more creative forms of marketing, like you mentioned, for our call.
And that will mean that lots of people will eventually, we think, sign up for the paid version of SparkToro, and some already have. We’ve got like 170-ish paying customers, something like that. And so we basically changed our free product to be, I think it was going to be like free searches, we made it 10. It was going to show you know a very limited number of results. We made it show a much more robust number. We made some portions of the app completely free to use and check out. And so, in this fashion, our goal was, we think that by being more generous with the free version, and by building up future demand, we can have a more successful business long-term. And we’ll see how that goes, right?
[46:22] If you can get enough people using it who aren’t generating immediate revenue, at least you’re getting some brand awareness. And at some point in time with that free user base, you know, you can come up with marketing campaigns and offers and whatever. And attempt to convert them to revenue paying customers.
- So I think, you know, our big tactic right now is to invest in building up future demand. And be as generous as we can. You know, we have enough money to sort of last us through another 18 months at our current run rate, and maybe more than that. And so we can afford to be generous with our free users. And I think that’s the right thing to do.
[47:03] Yeah, absolutely. And we didn’t talk about this before, so I might be putting you on the spot. But if you have any kind of special offer that you would like to extend to the audience, you can email it to me afterwards, and I can include it in the show notes or whatever. And if anyone is listening and they want to get in touch with you to talk about a joint venture or business deal of some kind, is just your LinkedIn profile probably the easiest way for them to do that or is there another way?
- Email is great for me. I try to run everything through them email@example.com. And in fact, if you search Google for Rand Fishkin email, they give a little one box with my email address. Very convenient.
Rand Fishkin’s Bright Ideas
- Disconnect Funding from Control
- Go Beyond Your Comfort Zone
- Research Before Building the Business
- Think Small but Sustainable
- Invest in Future Demand
Disconnect Funding from Control
In this episode, Rand shares his take on SaaS debt funding and how he successfully acquired a $1.3-million funding. He did not take on the ordinary path to venture funding.
Rand gave a brief breakdown of his funding method:
- Raise money from investors.
- Pay that money back using the company’s profit and have fixed salaries until then.
- After paying the debt, decide whether to grow the business or do profit-sharing.
In this funding method, Rand emphasizes that investors do not get full control—no voting rights, no board seats. He wants the company to remain founder-led.
“The goal is to build long-term, sustainable, and profitable businesses rather than the classic angel and venture model where 100 companies aim for the stars and two, maybe one, of them get to multi-hundred million or billion-dollar outcomes and the rest die trying,” he says.
Rand views the venture model as unhealthy. For him, a healthy economy should promote a long-term, profitable system where more companies, especially the small and medium ones, can survive.
Go Beyond Your Comfort Zone
Getting started can be the hardest part, especially when you’re talking about asking for money.
It can get deeply uncomfortable and embarrassing, but that’s how you prove you are worth investing in.
Rand shares some critical points on fundraising:
- You have to step out of your comfort zone.
- Build your network first before reaching out to people for SaaS debt funding.
- Help out other people to build your expertise and network.
- Emailing is a convenient tool.
- Expect rejection. It is part of the process.
- Prepare a pitch deck. Check out SparkToro’s open-source document of their pitch deck.
Rejection is part of the process, and this serves as motivation for Rand. This quote from Rand reminds us never to give up:
“If somebody tells me I can’t do something or it’s not going to work, just know I’m coming for you.”
You have to muster up all the courage and perseverance when you are in the stage of pushing for SaaS debt funding deals. It is not easy, but it is doable.
Research Before Building the Business
While they had a proof of concept, Rand still conducted market research before building the business. You must identify your target market and consider product/market fit first.
Rand gathered information from two things:
- He ran a medium-scale survey by sending it as a tweet and got 700 respondents.
- He conducted one-to-one interviews with people he met through travels for about six months.
On researching data for marketing, Rand shares:
“Trying to turn all that into actionable information is hard, but it was very worthwhile. I think it gave us a good deal of confidence that when we launch, we’re going to have a market.”
Think Small but Sustainable
We all want to be the next big thing in the industry. Dream as big as you want, but think small but sustainable if you’re just starting.
Only a few founders realize how unlikely startup exits are. “TechCrunch and Hacker News and all the other sources are always writing about exits when, in fact, 95 out of 100 of us never get there,” says Rand.
Rand wants to support an economy with small to medium businesses, rather than one with “a lot of Googles and Facebooks.”
In starting a company, this quote from Rand is something you should think about:
“The business does not have to be built to sell. It can be built to serve its customers, its employees, and its investors without being built to sell.”
Invest in Future Demand
The pandemic is a call for startup businesses to keep exploring opportunities and strategies.
Like any other company, SparkToro is also affected by the pandemic. They had just started sending emails last February and already experienced a high bounce rate a month after.
Rand shares business strategies that help them navigate through the pandemic:
- The company made the free account more generous with more offerings.
- They focus on promoting the free account rather than converting people to subscribe.
- They also focus on building future demand to have a more successful business in the long term.
The pandemic is indeed a challenging time for many businesses. The key here is to invest in building up future demand.
What Did We Learn from This Episode?
- We learned Rand Fishkin’s funding process for SparkToro.
- Fundraising entails stepping out of your comfort zone and talking to people.
- Think small but sustainable.
- Just keep on raising money without expecting to be a rare, billion-dollar success.
- Remember that you are giving units of distribution to your investors, not units of ownership.
- Invest in building up future demand.
[00:23] — Rand introduces SparkToro and gives a brief background about himself
- Rand started a new SaaS company called SparkToro that helps with audience intelligence and market research.
- He co-founded a company with his mom called Moz. He worked there for 17 years before putting up SparkToro with his long-time friend Casey Henry.
[03:28] — How Rand views SaaS debt funding
- The SparkToro funding method does not follow the usual path to venture funding.
- He wants to raise funds without the expectation of becoming a unicorn startup and without giving full control to investors.
- He thinks the venture model is unhealthy and detrimental to the survival of many small and medium businesses.
[10:19] — Tips before looking for SaaS debt funding
- Build your expertise.
- Help a lot of people and build your network through that.
- Once you’ve established a good network, start your SaaS debt funding.
- Prepare a pitch deck with the necessary information.
[16:41] — Rand shares how they determined valuation
- Before SaaS debt funding, they set a structured valuation and picked a number that is standard for a company at its early stage.
- They had conversations with their lead investors to determine a comfortable price range for both parties.
[24:22] — Rand explains the LLC as his chosen business structure.
- As an LLC, the investors own units of distribution, not units of ownership.
- This gives founders more control over decision-making in the company’s operations and growth.
- The management team can choose whether to distribute profits or reinvest those profits.
- They get a fixed salary until they pay back their SaaS debt funding.
[29:43] — How did Rand make sure his investors are accredited?
- He mentioned in his email request that he could only take money from accredited investors.
- He also sent a link to the US rules for accredited
[30:47] — Rand shares some takeaways on SaaS debt funding
- Think really hard about what you want to build in the long term.
- There are intense hours and relaxed hours as a startup founder.
- You can achieve what everyone would consider a financial success and not have a successful outcome.
- Think small and sustainable.
- Only a few founders realize how unlikely exits are.
[36:25] — How did you build the business after fundraising?
- There was no real prototype, but they had a proof of concept and some information that could produce some results.
- The first year of development involved a lot of market research through a medium-scale survey and face-to-face interviews.
[42:01] — How the pandemic has affected SparkToro’s survival and growth
- They had to come up with new strategies to make up for the setbacks brought by the pandemic.
- They saw fewer subscriptions, and the bounce rate was high.
- However, they continue to find new ways to thrive.
[44:51] — What are your business strategies during this pandemic?
- Make the free account more generous and promote it
- Build future demand to have a more successful business in the long term.
- Believe that there will be future demand for the product.
Rand Fishkin is the cofounder and CEO of SparkToro. He’s dedicated his professional life to helping people do better marketing through his blogging, videos, speaking, and his book, Lost and Founder. When Rand’s not working, he’s most likely to be in the company of his partner in marriage and (mostly petty) crime, author Geraldine DeRuiter. If you feed him great pasta or great whisky, he’ll give you the cheat code to rank #1 on Google.