How Udemy raised $1,000,000

Lessons learned about pitching investors from a first-time entrepreneur

Udemy recently closed a $1 million financing from a syndicate of angel investors. I couldn’t be prouder of the Udemy team. We’re thrilled to have the support of angels who invested in (or started) companies like YouTube, Yelp, LinkedIn, Twitter, Playdom and Zynga.

For those of you unfamiliar with us, Udemy is a website that enables anyone to build their own online course. You can create a course about anything – photoshop, Ruby on Rails, texas hold ‘em poker or english language learning. It’s fast, easy, and free.

Some background – One year ago, when I first joined Udemy, we were nothing. My two co-founders were new to the US. I spent the previous 6 months in Washington, DC working in the government – far away from startup land. We then went out to pitch our startup and got rejected by 30 of the best investors you ever heard of. It was brutal, but we were fortunate enough to bounce back.

This is the story of how it happened and what we learned from our experience.

The Short(er) Version
Udemy went out to raise money in February-March 2010. We received more than 30 no’s largely because investors weren’t confident enough in the business to pull the trigger.

Udemy focused hard on traction and launched the product in May 2010. By July, we had some promising numbers and decided to pitch again. We leveraged Adeo Ressi of the Founder Institute heavily before and during the fundraising.

I connected with a lot of friends and great CEO’s before fundraising to get intros. One of the most helpful was Darian Shirazi (CEO of Fwix), who intro’ed us to 3 of our investors. Afterwards, we made him advisor to thank him and because we wanted to keep an ongoing relationship with him.

Keith Rabois, one of the first people we re-met with, agreed to lead the round. In this meeting, we told Keith we wanted to raise $300K-$500K.

We leveraged AngelList to get additional momentum and investors for the round. It was critical to our success.

Within 2 weeks, we had more than $500K committed.

One more week later, we had more than $1M committed. We closed the round at $1M.

The Full Version
Raising a round is a combination of luck, momentum/timing, and wise decision-making. Keep that in mind as you read this and raise your own round

Our round was split into a few key phases: The First Pass, The Marathon, The Lead, The Sprint, The Close.

Part I: The First Attempt
We first went out to raise money in February 2010. We were on Open Angel Forum, pitched at the Founder Showcase, and had more than two dozen meetings with VC’s and angel investors. We even had a term sheet from an international investor (which was eventually pulled). Here are the lessons from that experience and why we didn’t raise money:

• Money (users) talk, and we had neither. For a consumer internet product, users are like currency. Without real users, you are running straight into a wall.
• We didn’t have great answers to every question. When pitching (especially as a first-time entrepreneur), you need to be extremely polished. You need to have a great (not good) answer to every question. On occasion, the answer will be “I don’t know” but even when you say that you don’t know, you ought to have a great reason and the confidence to back it up.
• Udemy was too risky an investment. Investors are naturally risk-averse. It’s funny because you wouldn’t think it if your only knowledge about investors was through TechCrunch. We used to look at other funded companies on CrunchBase and wonder, “hey – what’s so different between them and me?” I think most entrepreneurs do this. The reality is – there are many things we don’t know about a financing based on the TechCrunch post. The entrepreneurs could be friends with the VC, they could have a pedigree from Google, a great reference, a patent or well-protected IP. If you don’t have anything “special,” then you’re a risky investment. Investors like to hang their hat on an investment and say, “how could I know they were gonna fail?” Udemy, when we first went out to raise money, was too risky an idea with nothing that investors could hang their hat on.

Part II: The Marathon
I like to call this next phase “tee-ing up the fundraising.” When we went out in February, we were virtually unknown. I decided to fix that.

We focused hard on being as public as possible. I went to every conference I could and literally killed myself while there. I attended tons of networking events and met as many entrepreneurs and investors as I could. While at events/conferences, I rarely ate dinner because I was too busy schmoozing and grabbing business cards. During the weekdays, I’d spend hours e-mailing potential instructors to start using Udemy and during the weekends.

Though nobody could tell, this was one of the hardest times in my life. We had just failed at raising money and I had barely 6 months until I’d be out of cash. Nobody in the tech community knew who we were and we were getting little traction with users. I never went out; rarely saw my friends or family and sat in front of a computer all day and night. It was tough.

A few highlights about the marathon part of our fundraising:

• Find a Fundraising Mentor. There is nothing more valuable than a great advisor while fundraising. For us, we were lucky to be enrolled in the Founder Institute and have Adeo Ressi as our fundraising mentor. Read VentureBeat’s article about our fundraising if you want to see how highly we thought of Adeo’s advice.
• Conference Wins. I applied to dozens of events, relentlessly trying to get a chance to speak. There are SO MANY of these it’s awesome. I highly recommend speaking everywhere you can. Tell everyone about your company; don’t be shy. You never know who will help you out. We eventually won awards at VatorSplash and ASU’s Education Innovation Summit. These acted as minor social proof and helped us gain momentum.
• Launch. We definitely had launch anxiety for awhile. This was our baby and we were worried about pushing the big red button. If you’re in that situation, recognize it quickly and get over it. Launching was one of the best things we did as it raised awareness and got us users. Our daily uniques tripled after launching.
• Hustle, hustle, hustle, and be nice while doing it. When you go to events and conferences, the worst thing you can do is only talk to the VC’s in the room. I found the most valuable people I met were the people whose names I’d never heard of and whose company I didn’t know. They intro’ed me to prospective investors, they intro’ed me to customers, they visited my site. They said nice things about me to the Venture Hacks guys so when I applied to AngelList, I was paid attention to. I also try my best to be helpful and nice to people when they come up to me. The Valley has an amazing pay-it-forward mentality. Leverage it!
• Create an e-mail list. I religiously logged the cards of any investor or entrepreneur who I met into a Google spreadsheet. Three times during this 6 months, I sent out an e-mail update to them about the business. I modeled it after an e-mail update I received from Retailigence, a Founder Institute company with an extremely savvy founder. If you want an example, please ask for it in the comments and I’ll add it to the post.
• Watch and learn. I learned a lot about investors by watching videos of them talking online (and of entrepreneurs talking about building companies). I would watch them during lunch or while getting ready in the morning. There are tons of great resources. A few include venturehacks.tv and Udemy Academic. Also check out TheFunded.com before you meet any VC’s.

The marathon stage was critical in Udemy going from a risky investment to a lower risk investment. Aspects like traction and social proof are a great way to make investors feel more comfortable. Furthermore, the more they get to know you and your team, the better.

Part III: The Lead
Finally, one day in July, we decided it was time to raise money. I was pretty much out of cash – and we had good-enough traction to share with investors. So we went about finding a lead investor to set the terms for the deal and act as a reference point for anyone else interested in investing.

In an AngelList world, I would focus pretty hard on finding a lead who is already on the list. Angel.co is a full directory of angels that you can sort and parse. Furthermore, it is much easier to be successful when you go out on AngelList if you have an AngelList investor in the deal.

Here’s some thoughts on finding and convincing the lead:

• Start with warm leads. No pun intended. We basically reached back out to investors we really respected and who we thought expressed significant interest in Udemy. Given that we had been updating them regularly, most investors we e-mailed knew whether they were interested in us. We were lucky enough to have a few who were willing to take the meeting.
• Advice for the pitch. As I said earlier, make sure you have answers to every question (even if the answer is “I don’t know”). Be confident about your own business – investors can smell fear. At the end of the meeting, if you think it went well, ask explicitly about next steps. If it went really well, the investor will ask about terms and the status of your fundraising. If they don’t ask about terms at the end of the meeting, don’t ask them.
• Closing the Lead. We were fortunate enough that 45 min into meeting with Keith Rabois, he asked about the financing. He said how much he’d be interested in putting in and kind of led this part of the discussion. Honestly, we got kind of lucky here because Keith is an experienced investor and extremely up-front about his thoughts. I’m sure someone else can give you better advice on how to deal with more complex lead situations.
• The Little Stuff. We were told to get the deal “papered” before we went out other investors, and I think this was great advice. Papered means you have a signed term sheet or a signed note document for the round. Our gut on this was that once Keith said he was in, he was in. That was actually true – he never wavered on his interest in Udemy (nor will any other good investor). However, the fact that we cemented the terms before trying to circle more investors was extremely critical to the success of the round. More on that in the next section.

One last comment: fight the urge to tell your friends/family/fellow-entrepreneurs and anyone else you meet that you are “fundraising” or “far along in negotiations” or any other vague update. Be patient and wait until things are signed, sealed and delivered. Being shy about sharing your own progress until you have real progress is a great way of keeping yourself honest.

Part IV: The Sprint
Once we had papered documents with terms we were happy with, it was time to start raising the rest of the round.

When we pitched Keith, we said we were raising $300K-$500K. We were fortunate enough to be over-committed for $500K and then again at $1M. There were a couple of major factors that lead to this:

• AngelList. We can’t speak higher of AngelList and the value it provided to Udemy’s fundraising process. We received over 25 intro’s to top-tier investors. What other way can you get 25 investors to ask for intros to YOU! AngelList led to investments from Jeremy Stoppelman (CEO of Yelp), Dave McClure (500 Startups), Josh Stylman (Angel Investor, co-founder at Rotomedia and Reprise Media), and Ben Ling (executive roles at Google, Facebook, YouTube). But what was even more important was that AngelList got our round over-subscribed, so we had momentum which helped convince our other investors to make their decisions faster and in our favor.
• Stick to your guns. The hardest part of fundraising was knowing when to say “no.” We’re still far from perfect at this, but we learned a lot during this process about when to say no. Some investors we really wanted to be involved with Udemy but did not like our terms, or wanted us to meet one more guy before they made a decision, or wanted to put less money than our minimum. It was hard, because I liked many of those investors, but we forced them to make decisions and did not budge significantly. Because of the momentum from AngelList, we had a very “in or out” approach. This was critical to our success – it allowed us to convince people to conform to our timelines, terms and expectations. This was also much easier to do because we had papered the docs with Keith, and so we were able to tell investors that they were “too late” to be negotiating on the terms or timelines.
• Close early and close often. We had 3 closing dates (meaning: investors wire the money dates) during our round. I would’ve done 10 if we needed to. Essentially, as soon as we had 3 investors in, we set a “first closing.” Then, we told any investor who we thought was ready to make a decision that they had to come in by the first closing. We didn’t even tell them we’d have a second closing. As soon as an investor for more than $100K came in, we set another closing. Then, we forced any investor who was ready to make a decision to come in for the second closing. This was great because it prevented anyone from getting cold feet and it allowed us to continue to keep our momentum.
• Be persistent but not annoying or desperate. We never e-mailed an investor simply asking them to make a decision. We e-mailed them saying “hey, we’d love to hear back from you. X guy just agreed to invest and we now have $300K circled.” There would be times where we would e-mail someone on Friday saying we had $225K circled and they wouldn’t get back to us. Then, on Tuesday, we e-mailed saying we had $525K circled and they immediately responded and said they were in. This was a great tactic and really helped us build momentum around the round. By the way, if an investor says they are in, make sure you ask if you can use their name with other investors – if they say yes, then go for it.
• Don’t ask your investors for introductions. Instead, ask friends and other CEO’s. If investors want to make them, they will make them. For example, Russ Fradin, one of our early commitments, intro’ed us to nearly half of our committed capital. However, we never once asked him for anything until after the round was nearly done. I think this helped because he didn’t feel like we needed him, but he still wanted to be helpful. It’s also worth noting that we found Russ through the Founder Institute, which is full of mentors who also angel invest.
• Don’t rock the boat. One of the biggest mistakes we made during the fundraising process was bringing up to one of our investors we were considering changing the round type (preferred equity vs debt). That investor told another investor and all-of-a-sudden, we had to explain ourselves to a bunch of people. Minimize your e-mails to only those about closing the round. Go elsewhere for advice, go elsewhere for introductions, etc. The exception is when an investor clearly wants to be involved. For example, both Russ and Keith wanted to be involved. So we kept them up-to-date on who we met with, who was interested, etc. This enabled them to reach out privately and encourage some of our other prospects to pull the trigger.

Ultimately, investors start falling like domino’s if you keep the momentum going and act fast. Just focus hard on both of those things and you’ll be solid!

Also, if you found this helpful, please let me know in the comments. I would really appreciate it.

(Image source: thevarguy)