What VC Money Buys

After tech start-up Pingup successfully completed its Series A funding round, its CFO reflects on the changes $3.5 million can bring.
David RosenbaumDecember 10, 2012

BOSTON — When I dropped in last summer on Pingup, a technology start-up that lets people text rather than call businesses (and lets businesses reply in kind), the company’s name was not on the directory mounted in its building’s lobby. Consequently, I spent a while riding up and down the elevator and wandering the halls trying to find Pingup’s office.

Last week I visited again, and this time Pingup’s name — and its second-floor office — had found a place on the lobby wall, courtesy of the building’s landlord. When I mentioned this to Pingup CFO Bethe Palmer, she said, “See. When you get your Series A funding, people start taking you seriously. They start thinking you might be around for a while.”

Last month Pingup had about $3.5 million in Series A funding wired into its account by Avalon Ventures, a venture-capital fund focused on early-stage life science and technology companies. Avalon had supplied Pingup with a portion of its seed money and now, in combination with the new $3.5 million, the company has about $4 million in the bank.

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What I wanted to find out is how this new money has affected Pingup’s business and Palmer’s job.

“We had a day of celebration,” she says. “Then it was back to work.”

New money, says Palmer, increases work for everybody. Pingup is more than doubling its number of full-time employees (from last summer’s 5 to 12 by the end of December), and that requires enlarging its offices (the company is taking over the office next door, expanding its footprint by two-thirds). It also means buying furniture and computers for those new employees. That has instantly become easier as vendors, knowing Pingup has money in the bank, are more willing to extend credit and favorable terms. (Not banks, however. “We can’t get a bank loan yet,” Palmer says. “Having venture capital at the table will make that easier eventually, but we’re still prerevenue. We’ll get revenue in 2013, but I have no idea yet how much.”)

Having money in the bank also makes it easier to attract talent, especially experienced people. “They have responsibilities to families,” she notes. “They have to be in a stable situation. When you’re in a seed situation, it’s pretty unstable. But after you’ve gone through a level of diligence with a serious venture-capital firm, you can say to them there’s a business here. You’ve derisked the situation for those folks.”

The skill sets Pingup is looking for change, too. Now it needs people with more operational experience as it’s more focused on deploying rather than developing its product.

The pressure on finance, and on the business, increases with the money, says Palmer, because “you feel responsibility to use that asset to increase the value of the business.”

But her job doesn’t change a lot, says Palmer, who has helped shepherd a flock of start-ups through multiple funding rounds, most notably Zipcar and hip clothier Karmaloop. “We’re still in a rapid growth phase. We’re still looking to continue on investment rounds. Now we’re preparing for the B round.”

What has changed for Palmer is creating “normalized financial, metric reporting against goals.” When a company is in the seed stage, she says, it’s still trying to articulate its value proposition and, in the tech space, it’s going through multiple iterations of its product, tweaking it as it gets feedback from customers. In that environment, experimentation makes forecasting difficult, and the product itself, the technology, is all-important.

Now, according to Palmer, as Pingup enters its B round, “you’re looking to bring on new customers and businesses efficiently, and produce a profitable business venture. We still got wild oscillations going on, but the amplitude decreases as you go from round A to B to C.”

For Pingup, those oscillations largely involve the cost to acquire customers. “There are so many variables in the cost-to-acquire,” Palmer says, “that the formula can be quite complicated. You have a lifetime value of a customer formula, you identify variables that you think will impact that, you test the inputs to see what’s valid, and then you refine that number.”

As a start-up, it was important for Pingup to introduce its product to customers and to teach them how to use it. “There was a lot of hand-holding,” she says, “and you can waste a lot of resources trying to figure out marketing. As you get farther down the line, you figure out what message works. You hone it. You weed out what doesn’t work and you double-down on what does.” And that reduces the amplitude of those aforementioned cost oscillations.

Nailing down the value of a customer “becomes more important as you acquire more customers.” The danger, Palmer says, is that the enthusiastic pursuit of new customers characteristic of growth companies can result in customer support costs that are too high.

“Salespeople,” she says, “are top-line revenue driven; the rest of the team is bottom-line driven. There can be a potential for conflict.” Furthermore, if you collect customers that aren’t producing enough revenue, “you can pop volume at a loss of margin and drown your business.”

That’s just one of the potential pitfalls in a rapid growth environment. Another is implementing the controls a larger business needs.

“Founding teams are very good at getting something up and going,” says Palmer, “but they can’t always make the transition to a more structured, metrics-driven business. It’s not what they’re good at. That can be a hiccough for a number of start-ups.

“You have to add more accountability, more delineated responsibilities, and report-back mechanisms. People are given goals, they report back on their progress, they’re rewarded accordingly. That becomes the model for the business as a whole, and for each individual.”

But, she cautions, as the business transitions to that “more structured” model, one doesn’t want to “lose energy and initiative”: the qualities that attracted people to the business in the first place. Pingup’s team, Palmer believes, is up to the challenge, as it has “gray hairs and understands what the transition looks like. They’ve been through it a couple of times.”

As has Palmer. And when Pingup gets to the C round, it will be time for her to move on. At that point, she says, “everything gets far more routine. The [CFO] job becomes more about the audit, the valuation, paper pushing. But that’s not for a long time here. If it happens sooner, that’s a good thing. It’s graduating. Then they’ll be looking for someone to acquire them or take them public, and that’s not my thing.”

She adds, “You hit the C round, the whole business model has been locked down. The C round is go-go juice to accelerate the businesses. You know what you’re selling: the price point and the lifetime value of the customer. Your senior team is in place; middle management is in place. You’re just going for it. That’s a specialty. And it’s not mine.”