Practical Ecommerce

SEOmoz CEO on Raising Venture Capital

There’s no more prominent search-engine-optimization company than SEOmoz. It offers tools for managing search engine rankings that many companies consider essential.

The founder of SEOmoz, Rand Fishkin, is notable for his transparency on matters related to running the company. This was surely the case when he recently wrote an insightful blog post that described his aborted attempt to raise venture capital financing. Readers of that post have described it as the most public and honest account of the venture-capital-raising process ever.

We spoke with Fishkin about raising venture capital, about the search engine optimization business, and about his company — SEOmoz — among other topics.

Practical eCommerce: When we read your post describing the venture capital process, we asked ourselves, “Why does SEOmoz need to raise venture capital money?” That’s our first question.

Rand Fishkin

Rand Fishkin

Rand Fishkin: “As I mentioned in the post, this was not something that we intentionally sought. The investors in this case came to us, which I typically like as a better model. If you’re running an exciting company, you’re growing, you’re in a market that has lots of growth opportunity and potential, investors will often seek you out. We had received a lot of inbound interest from investors and one firm in particular in New York contacted us at the beginning of spring [2011]. I met with them a couple of times.

“I think meeting with investors who reach out — and chatting on the phone with folks — is always interesting. It’s interesting to see how they perceive the market. It’s interesting to hear who else they’ve been talking to. It’s sometimes useful to hear how they view your business and what they think the strengths and weaknesses are, what they think about opportunities, that kind of stuff. In this case, these guys were adamant that they just love this company and really wanted to put some money to work in a company.

“We had been talking internally about whether raising money would make sense, but we felt in the spring that it didn’t make sense because our primary limitation was engineering talent, and we were profitable. We were adding cash into the bank every month and didn’t have the engineering talent to be able to ramp up our data expenditures, our hosting expenditures. Our product essentially hadn’t gotten to the point where we could turn up the jets with funding. That changed over the next three months as we were able to recruit a lot of talent and then we found ourselves constrained by capital. We essentially realized that we had to scale back our hiring growth. We had to restrict some of our expenditures in the growth of our web index and data acquisition. While revenue was growing, it wasn’t growing fast enough to do all the things that we wanted to do. So, at that point, we said, ‘Hey, you know what? It could make sense to raise some financing. Let’s talk more seriously to these guys.’ To be fair, we were probably influenced by the fact that lots of people were coming to us saying, ‘Hey, would you like to raise money? We’d love to help fund you.'”

PEC: Let’s talk briefly about your company, SEOmoz. What does it do? When was it founded? Who owns it?

Fishkin: “The company that became SEOmoz was started in 1981 by my mom, Gillian. In the late 1990s, I started working with her and doing some web design and development on a consulting basis. In 2003 I registered the SEOmoz website and put up a blog there, essentially just detailing my experiences in the SEO field. We transformed that into an SEO consulting company as the blog became bigger and better known, then in 2007 we launched the software side of the site. It was 2007 that we really established more formal ownership — with stock — and formal structure for the company, those kinds of things. Before that, it had just been a sole proprietorship, jointly owned by my mom and me. The owners these days are the folks from our first round of investment, the founders, and the employees.”

PEC: What was your mom up to back in 1981?

Fishkin: “She was making people’s business cards and brochures and logos, working with old printing presses, that kind of stuff. She had gone to design school and worked at an ad agency in New York and then moved back to Seattle.”

PEC: So in 2007, you shifted to a software-as-a-service model?

Fishkin: “That’s correct, yes. I don’t think we even knew to call it SaaS at the time, but it was software that we delivered over the web for a subscription fee. That product was the foundation of what we’ve become today. It launched as a loose collection of tools that we as consultants used to do SEO, and then it emerged to the platform for campaigns and tracking and link data that we have today.”

PEC: Describe the tools that you offer, how they would benefit ecommerce merchants, and how much they cost, please.

Fishkin: “Most of our customers tend to be website marketers. Many of them do work in ecommerce firms of small to medium size, and they tend to be folks who focus on the organic side of search traffic, trying to earn the SEO traffic from Google and Bing. The tools that we offer are things that crawl your website and help surface errors and warnings and potential problems, missed opportunities, help you optimize for keyword placement on pages, help you find keyword opportunities, show you why your competitors might be beating you in the search results — whether that’s a function of things that they’re doing on their site or a function of the links that they’re getting, a function of their social data or possibly something else. We designed this to be a platform where you can plug in a website and have a campaign that you monitor over time, compare against competitors, those types of things.”

PEC: How much does it cost?

Fishkin: “The base package is $99 a month.”

PEC: Getting back to the venture capital process. You’ve got this terrific business, you’re growing and you’re making money. Bringing in outside investors would seem to complicate your life. Thoughts on that?

Fishkin: “Well, whenever you are considering raising a round of institutional capital, whether it’s private equity or growth equity or venture capital or even an angel investment, you have to consider very strongly what it’s going to do to the company structure and how it’s going to position the company. For us, when we agreed to take that first round of capital in 2007, that put us on a path that is growth-based and exit-focused. That means that the founders cannot take money out of the company and pay themselves with the profits, for example, or take dividends from the profitability of the company. The goal is to take all of the money that the company makes, any profits, any growth, and put that towards growing the team, growing the products, reaching more customers, growing revenue, improving all those types of things. Thus, the founders’ salaries are going to be fixed.

“If you’re a private company without outside investors, that focus shifts. You can decide, ‘Yeah, we’d like to reinvest money in the company this year and grow,’ or, ‘Boy, you know, I’d really like to buy a boat. I’m going to take $150,000 from the profit and pay myself a dividend or increase my salary,’ those types of things, but that’s something that we agreed not to do in 2007 when we did that first round. The exciting thing about that is it focuses you on building something at scale and targeting something to be the biggest that it can be. That being said, it means that I don’t own a car or a house, I rent an apartment and I walk to work. So, my lifestyle is probably very different from many private business owners who have a $10-plus million-a-year company. But at the same time, I’m very excited about the future and very hopeful that we can build something great.”

PEC: How much did you raise in 2007?

Fishkin: “We raised $1.1 million, but it was — luckily — for a small percent ownership of the company.”

PEC: And you mentioned, that changed you to be exit-focused. The goal now is to sell the company?

Fishkin: “Sell the company, go public, do a successful merger, any of those, or potentially be sold in some part. There’s also the possibility, it’s very rare, but there’s a possibility of having someone else buy out the equity stake from the investors, private equity firms would sometimes do that.”

PEC: It sounds like you enjoy running your company.

Fishkin: “I do, I do. I mean, it’s stressful, it’s incredibly challenging, but it’s also a fantastic learning process. I feel like I’ve grown as a person quite a bit and certainly learned a ton and become more empathetic to others who have these types of roles and responsibilities.”

PEC: What would you do, then, if you sold your company?

Fishkin: “I think it depends on the size of the exit and what the exit looks like. It seemed extremely likely that I would need to spend between two and four years at whatever company acquired us, assuming it was a strategic acquisition, and devoting those years would probably be a new and interesting challenge, hopefully a good one. But from there I suspect I would do something in the startup world again. It’s also possible that I might, depending on the size of that exit, become primarily an investor and advisor to other companies. A third possibility, depending on my age and focus and the size of that outcome, would be to get into more philanthropic ventures.”

PEC: How old are you now, speaking of age?

Fishkin: “I am 32 years old.”

PEC: A very successful entrepreneur.

Fishkin: “We’ll see, we’ll see. My bank account says there’s been no success so far, so we’ll find out.”

PEC: Shifting gears to search engine optimization generally. There are pundits out there who say that the importance of SEO is lessening with the rise of Facebook and other social media channels, and the need for highly ranked organic listings is not the same as it used to be. Is that true?

Fishkin: “I think a good analogy might be someone who said the automobile has eliminated the importance of walking. Essentially, what you would have to suggest is that the use of Facebook or Twitter or LinkedIn or Google+ has somehow cannibalized the time that we spend or the effort or energy or value that we get out of searching and I think all the statistics to date would show that is entirely wrong-headed.

“During Facebook’s rise from 2007 through today, Google has more than quadrupled the query volume that it handles each day. It’s now at three billion queries a day. They’ve increased their market share both in the U.S. and abroad. They are 95+ percent in most of the countries around the world, with the notable exception of China, Korea and Russia. They have increased their market share in the U.S. Obviously, they’ve increased their number of searches per searcher and number of searches per session. They have successfully increased their revenue. You can see that last quarter was their most successful revenue quarter ever — by good margin.

“So, I think that the death of SEO or the death of search is a phenomenon that we haven’t yet seen and it feels hard to imagine that someone would be able to replace the activity of typing words into Google and finding the answer that they need by using a social network. I think that they’re for fundamentally different activities. The rise of search did not kill the use of email. The rise of email did not kill the use of web pages. It’s not a replacement activity and, therefore, I think it’s probably a false prediction.”

PEC: Anything else on your mind for our readers?

Fishkin: “Yes, on the fundraising issue, it’s a tough decision to make. I think that you need to keep a few things in mind. One would be that investors are primarily interested in businesses that have very high profit margins and a lot of key performance metrics that will show how they can scale easily. They’re extremely mathematically focused and also vision-focused. So, if you have a way that you can say, this is why the product that I’m building, the service that I’m building, the company that I’m building is going to either (a) reach tens of millions of people and be ubiquitous for accomplishing this particular task, or (b) that this product service will attract many, many customers paying certain dollar amounts and will keep on track for revenue and have margins. If you’re trying to raise money, you’re really looking at the bare minimum of 60 percent margins and hopefully something over 75 or 80 percent.

“For ecommerce shops, it’s often a big challenge and that’s why you tend not to see ecommerce shops raising money. But remember that venture and institutional financing is not your only option. There are plenty of others. There are obviously banks, there’s angel investment, which is getting substantially easier and there’s a lot of people in the angel investment world who like to put money to work, and of course there are alternative forms of financing like revenue-based financing, which entrepreneur Andy Sack wrote about on the blog of venture capitalist Fred Wilson. There are lots of options open to you. I guess it’s a question of what do you want to do, why are you trying to raise this funding, and are you sure that you can put this money to work in a way that will have a high return on investment.”

Practical Ecommerce

Practical Ecommerce

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  1. Bart Gibby November 2, 2011 Reply

    I hope you get a large exit Rand, so you can start another awesome value add company like SEOmoz has been to the SEO community. I know I have said this to you personally at Mozcation in SLC, but I wanted to publicly thank you as well. The education, training, and tools your team produces is the best in the industry.