This Week In Startups: Funding a Lesson Learned with Sprout Social

I recently contacted Justyn Howard, Founder and CEO of Sprout Social a social media platform that allows businesses to efficiently and effectively manage & grow their social presence across channels and turn social connections into loyal customers. Justyn originally called in during TWiST #7 to ask about angel investors becoming an adviser. Since then Sprout Social recently complete a Series A round of funding and I thought Justyn might share his experience.

Here’s the Q&A:

Catch me up-to-date the last we talked was in Feb. 2010, what has been happening?

We’ve been primarily focused on the product. Lot’s of new developments, some secret sauce stuff that we’ll be introducing soon. Aside from that, we’ve moved into a new office, grown the staff, taken seed funding from Lightbank (the investment vehicle from the duo behind Groupon, Echo Global Logistics, Mediabank and others), and spent a lot of time with our customers. Growth is a necessity, but product development and working with our users is where most of our time has been spent in the last few months.

Can you tell me a bit about yourself? Do you code, biz dev, education, past jobs that helped you get to where you are?

I haven’t touched much code since I was 12, but I’m a software geek at heart. My background is in sales/marketing, in the enterprise software space. Tying technology to improved sales processes has always been a passion of mine, and that’s how Sprout Social was born. Social Media is the single most powerful marketing medium ever conceived for businesses, and we wanted to put the power of those tools in a package that was efficient and intuitive, even for those new to the social web.

Are you still in closed beta? if so, do you have a timeframe for public release?

We are. We currently have about 1,000 private beta users that we’re working with to test and improve the product. We expect to launch publically in early July.

You recently obtained funding from Lightbank, can you take me through the steps of I think I need funding to signing the papers? How did you meet folks from Lightbank?

As a team, we knew that when we had proven the need and market fit, we would need capital to properly execute against our strategy. We spent a lot of time working with some great investors, primarily in Silicon Valley/SF. Late in the process, we got to know the guys at Lightbank. We really liked their approach and interest in the SMB space. They had just closed a monster round with Groupon and the team had a long history of scaling software companies. They are also Chicago-based, which was a plus for us.

There were a few other investors in particular that I would highly recommend and hope to work with in the future. It’s amazing the knowledge and insight that the right investors bring to the equation.

Now that the funding process is over and looking back, do you have any advice?

A few things;

Build your network before you need it. Nearly all of the investor meetings we had started as introductions from people I had built relationships with over the past year. If I had contacted them for the first time asking for help, it never would have happened. By being human, helping and creating these relationships in advance, the meetings came easily.

Nothing happens until someone commits. As good as the investor meetings might go, chances are there won’t be any definitive next steps until someone steps up to the plate ready to write you a check. Mark Suster likes to relate it to a high-school prom: Once people get word that someone else is interested, everyone wants to be your date. It’s human nature, and it’s definitely a reality in raising capital.

Create a great pitch deck and be prepared not to use it. Like everyone else I spent a lot of time creating a pitch deck, that never got pitched. It’s passed around before or after a meeting, but the meetings themselves were mostly conversations, and that’s a good thing. This might not be common, but that was my experience.

Are their specific questions in common one can expect?

Be prepared to talk about how your business can get huge. $100M business might sound awesome to you, but investors want to know how you can hit $1B. Also, be ready to explain, in depth how you expect to get distribution/customer acquisition. Investors will recognize a great product pretty quickly, but you need to be prepared to talk about how your team will deliver a great business.

What do you plan to do with the money?

Earn interest. Seriously though, nothing fancy. We haven’t changed our strategy at all, the capital will just allow us to execute against it faster and be more efficient. We’re adding to the team slowly, and hiring specialists to work with us in a few areas, but more than anything the cash gives us the ability to focus on product and execution. External pressures of the bootstrap days don’t get in the way, which is nice.

What method did you use for valuation, can you explain this method?

Valuing at the seed stage is pretty simple. It’s more about the capital you need and the amount of the business you’re comfortable giving up than the final number. I think $3-$5 million is pretty common for seed stage companies like ours. I think it’s much more important to focus on the alignment of vision and value that your early investors bring to the table than the valuation. If you work with the right people, the valuation on subsequent rounds or acquisition make the seed valuation pretty inconsequential.

Can you tell me about your team, I think you just added someone to support correct?

Yes, we just hired one of our first users to help support our new users – It was a natural fit. We’re also working to hire 2 engineers in the short term. At that point we’ll be 5 engineers, 2 on product development and 1 support. We started with 2 engineers, 1 product, 1 product/design which I think is a great mix for an early stage team.

How can the TWiST community help?

Exposure is always good! If any of the readers are active in the social media space, we’d love you to check out and spread the word. Anyone looking to grow their business through social channels should check us out. If anyone wants to blog about us, people will look back and remember how smart you were for recognizing a great company

If anyone else has a similar experience with the funding process or advice they’d like to pass along please add it to the comments.

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