AdDuplex Post-Mortem. Part 4: VC Money

This is part 4 of the AdDuplex (2011 — 2023) story. AdDuplex was the widest ad network for Windows apps. You can read this part in isolation or start at the beginning.

In this part I want to switch from the purely chronological narrative driven format of the earlier parts. I’ll cover the story of how we raised our seed round but then try to analyze why it wasn’t the best idea. Kind of one longform “lesson learned.”

Raising the €400,000 seed round

While we were improving our startup game in Finland and Silicon Valley, Donatas and Mantas (from part 2) with partners were hard at work founding Practica Capital. By fall 2012 they’ve started investing and reached out to check if I’m interested in restarting our conversations.

We had just launched Windows 8 support and were heads down into churning out new features and improvements. We had a clear to-do list and enough money to sustain the two of us for the near future. Additionally, I remembered how unnecessarily long our previous attempt at cooperation was simply because both sides were new to the VC world in a market that had no history in such thing at all. With the extra-small team and having a lot on our plate I realized that it would be very tough for half of the team (me) to switch to something unrelated to working on our backlog for 3 months. I made a wise decision to let some other startups be the guinea pigs this time, and wait until they figure out the legal and other quirks without me😊

We continued working on our features and implemented a major commercial campaign subsystem overhaul. We’ve launched a substantial update in January 2013, and I decided that starting from February 1st I will concentrate on figuring out ways to continue expanding the business.

It was clear that we were overwhelmed with all the functions just the two of us performed. In a way, seeing reactions from people when they learned that one of the biggest ad networks on Windows was built and maintained by two people was amusing. But they were surprised for a good reason — it was unrealistic to continue like that.

Realistically, we needed to have at least one person for each of the functions: building the ad serving logic and infrastructure, working on the self-service system, building and maintaining ad SDKs (we already had multiple at the time), selling ads, and attracting new apps to the network. Based on that thinking, I wanted to hire at least three new employees. While we made enough money to sustain the two of us and a little more, we didn’t make enough to comfortably expand the team to five.

I imagined two possible scenarios: 1) hire a salesperson to beef up our sales and then hire the other ones one-by-one as revenue increased; 2) raise a seed round and hire all at once.

This was somewhere on the backburner in the back of my head, and I planned to bring it to the forefront in February and concentrate on exploring the options. Then on January 30th the email arrived:

Remembering this still feels like it was from some cheap Hollywood movie. Except in the movie, they would obviously move this email to 10:41PM on January 31st.

I don’t think Donatas would mind if I posted the whole email but a) it’s in Lithuanian; and b) I didn’t ask for permission, so I won’t do it. Anyway, the content of the email was along the lines of “How’s it going? Do you need money?” 😊

I don’t believe in signs. Like at all. But this clearly felt like a sign. So, we started talking.

By that time, they’d already made 5 or so investments from the fund and it felt like the process and local specifics were more or less clear and established. Being a developer at heart who wanted this money business to be over ASAP I didn’t shop around. We already knew each other (remember investing in lines, not dots?) and I decided that if we can get reasonable terms we will just go with Practica. And if not, we will go with plan B — growing from our own revenues at a slower pace.

Due to the structure of their seed fund all their seed checks were up to €200k. The amount made sense to me in terms of what I wanted to do with it (remember it was 2013 and developer salaries in Lithuania were literally 2–3x lower than they are now). But we were notably further along than most of their seed investments to date, so instead of taking a lower stake in AdDuplex (my preference) they offered two times more money for a larger stake at the same valuation. As a first-time venture-backed startup founder to be the 2x more money part clouded my judgement, and I said yes. That was one of my business mistakes. More on this in the next part.

Lesson learned: Don’t raise the money you have no use for.

I think the rule of thumb in early-stage startups is to raise enough money to sustain you for 18 months. I think a more important rule is not to raise the money without having a more-or-less defined plan on how you are going to spend it. I had a very clear vision for the 200k but for the other 200k I decided that we will figure it out as we go. We were building a billion-dollar company after all! /s

In addition to raising more than we needed at that moment, this also meant that due to the fund structure the money would come from two entities. Which, ironically, brought us back to the unexplored legal territory. All my strategizing about letting other startups be the subjects of experiments figuring out the legal quirks went out the window — we were the first ones to do this kind of deal.

It didn’t take us long to agree on the high-level conditions and sign a term-sheet. Reading Venture Deals (ref link) and Startup Sauna training helped. But then came time for the actual contracts and it became fairly messy. We needed to sign two contracts at once and, while each one of them was quite straight-forward, when put together a lot of circular dependencies and cascading clauses started to manifest themselves. Solving them, in a way, was like fixing bugs in code. Except you couldn’t compile or run an automated test to see if it’s fixed now.

It took us about three months to finally agree on the legalities and by June 2013 AdDuplex became a VC-backed startup.

Lesson learned: The legal stuff will take longer than expected.

I guess this applies to everything in life. From doing home repairs to adding a new feature in an app, usually, it would take longer than you thought it would. Luckily, we were in a position where we were making enough money to sustain us day-to-day without the funding. Not all startups are that lucky.

Overall, I’m very happy with how our partnership with Practica Capital turned out. They provided the money, the much-needed accountability without going overboard, and were always there when I needed some sane financial or business advice. And when all of us realized that we were going nowhere we split amicably. If I ever decide to raise venture capital again, I will definitely talk to them. And I’m sure they will at least take the meeting 😉

Having said that, in retrospect, I think raising VC money was a mistake for AdDuplex. I’ll try to explain why…

Why raising VC money didn’t make sense for AdDuplex.

Obviously, I need to prefix this with “hindsight is 20/20” and all that. But even looking from the 2013 perspective the signs were there.

All those “this is a 50-million-dollar company not a billion-dollar company” excuses from Silicon Valley were conceptually true. AdDuplex was a good business idea but there weren’t any “world domination” plans built in. The “trillion-dollar addressable market” slides from startup pitch decks are funny but this is what VC model is about — unbound growth potential. In an alternative universe, where Microsoft didn’t stumble and give up, Windows Phone could have been a prominent player in the mobile OS space but even then AdDuplex would most likely be a “50-million-dollar” company. And that would be totally fine with me, but not with the VC model. Sure, if we only raised that 400k round and ended up selling for 50 million a few years later, everyone would be happy. But it rarely happens that way in the startup world. In the most likely scenario startups continue raising A, B, etc. rounds and by that time a 50-million exit is “meh” at best.

I knew what I needed the 200k for. It helped us jumpstart a few things. But in a year, we had more than that in our bank account. For a normal person this sounds like a great success. Not in a VC world, though. In that world it means lack of ambition and not enough risk-taking. The fund’s goal is not to receive dividends from 185k in profit. This won’t return the fund with a 10-year lifespan. They want you to grow or die. Either way is fine. You either bring a solid return in or open the bandwidth for focusing on the “winners” and other bets. AdDuplex was the worst-case scenario in this paradigm — neither going to the moon nor dying.

That’s from the VC perspective. From my perspective, we made a profit in one year after the investment. I could’ve made my angel investor whole and even compensated myself a bit for living on a below market salary for several years. But it’s not how it works in a VC-backed economy. Instead, we made multiple attempts at “forced” growth and ended up burning all those profits.

In retrospect, the best way to fund AdDuplex would’ve been with a bank loan. Obviously, this wasn’t a realistic scenario back then and I doubt it would be now. And even if a bank were willing to risk it I would most likely chicken out. A realistic best option would be some investor looking to invest for dividends. The great achievement of the venture capital industry is that they totally dominate the startup investment space. They are the most visible, the most active, the most approachable investment community. And they are great for massive vision, capital intensive, delayed revenue startups. But for the rest of us there are very few approachable alternatives.

If you are building something down-to-earth and not willing to “fake it till you make it” ala WeWork, the only reasonable approach to going through the VC model, in my humble opinion, is selling as soon as reasonably possible after you raise an early round.

Here are some of my pros and cons for raising venture capital.

Pros

• Accelerated development.
• Steady salary (also a con).
• Accountability (for those lacking discipline).
• Partners, competitors, media, and potential employees take you more seriously.

Cons

• Growth über alles.
• You get a boss (even if hands off).
• Fixed, often below market, income (for some future potential payoff).
• Almost impossible to get off the hamster wheel (unless dying).

OK, with that off my chest we can move on to other stories. In the next part I talk about us trying to accelerate that growth trajectory. Read here.

—

P.S.: with the announcement of AdDuplex shutting down and this blog post series I keep getting asked about what I’m up to these days. Check out marker.js if you need image annotation in your web app, and the upcoming JavaScript diagramming library.