A year after launching Toronto-based Influitive in September, 2010, founder and chief executive officer Mark Organ knew that he needed to find an innovative approach to financing.
In its first year, Influitive had gone through just over half-a-million dollars and had a prototype and some accounts to show for it.
However, to gain traction to grow further, Mr. Organ needed to find $2-million in early-stage financing for his new venture.
Behind Influitive was Mr. Organ’s belief that marketing is undergoing fundamental change, and companies needed to motivate their “army of advocates” – customers who are their biggest fans and evangelists.
To help companies harness the power of these advocates, Mr. Organ wanted to build a software platform that companies could customize to provide a great advocacy experience for this group of customers and encourage them to remain enthusiastic evangelists for their products. Companies can issue fun challenges for their advocates, request reviews from them and provide rewards for participation.
The idea for Influitive was sewn from three separate threads in Mr. Organ’s life. The first thread was his experience with his previous start-up, Eloqua, a provider of marketing automation software, founded in 2000 and now a public company listed on Nasdaq ). While running Eloqua, he analyzed how people bought their products, and learned quickly that buyers liked to rely on advocates, such as word-of-mouth referrals and online testimonials.
“Purchases were lightening quick for buyers who had had contact with multiple advocates. They didn’t even ask for discounts because they knew they wanted the product. Unfortunately, though, we couldn’t increase this momentum because we were focused on the buyers and not the advocates,” he recalls.
At the same time, Mr. Organ was himself an advocate for another company. “I was learning Mandarin through ChinesePod ‘s products,” he recalls, “and I’m a huge fan. After six months of inexpensive and enjoyable learning, I was able to have a business meeting in China without an interpreter.”
He was eager to spread the word about how much he loved the product, but he noticed that his advocacy diminished over time, because there were no incentives, or even any recognition, from ChinesePod for his efforts.
A third thread came at home. Mr. Organ watched his wife plan a trip by consulting social media sites such as TripAdvisor. He noticed that she went through the reviews, paying attention to those from people who were in similar circumstances as them,with two kids and the same socio-economic status. He observed that she trusted their recommendations more.
As these three threads came together, Mr. Organ began to recognize how powerful it would be if companies could motivate their armies of advocates, and Influitive was born.
He was able to put together $375,000 in convertible debt from himself, family, friends and a couple of angel investors. The money financed development of a prototype.
“I’m a big believer in raising money from day one,” Mr. Organ says. “It helps you get your story straight, keeps you sharp, and gives you great feedback. If you’re building a growth company and want to get to scale fast, you need to start fundraising early.”
After six months, in March, 2011, Mr. Organ initiated an insiders’ round of common stock, which raised another $200,000. This round was only for current employees, advisers, investors, and their families. All 10 employees and many of their family members became investors.
“I had an insiders’ round at Eloqua, too, and it worked really well. It creates a culture of ownership,” Mr. Organ says. "We give stock options, and they’re great, but really, people can feel that they are getting something for free. Buying equity into a firm is different. You value the shares more because you’re putting out money for them.”
After another six months, however, Mr. Organ knew that he needed to raise outside capital. The question was how he should go about it.
In looking for capital, Mr. Organ found that Canadian investors were not interested. U.S. investors seemed more interested, but didn’t show any sense of urgency. Things were moving at a snail’s pace, so Mr. Organ decided to try the crowdfunding site AngelList.
AngelList is a platform that links startups with angel investors, venture capitalists and advisers. Mr. Organ describes it as a “social network for raising money.”
“Fundraising has always been a clubby, old-boy-network thing, but AngelList is 100-per-cent transparent. Everyone can see who is investing in what companies, and how much they’re investing. People can also see your employees, customers and advisers.” he explains.
In November, 2011, Mr. Organ listed a $2-million Series A preferred share financing round, and posted a second round – a $360,000 convertible debt round – soon afterwards. “It’s very unusual to have two rounds posted at the same time, but we did it because we were in an unusual situation.”
After posting the first round, intended to fund market traction, Influitive had the opportunity to hire a great – but very expensive – marketing executive, and needed a quick infusion of cash. That was the reason for the second round.
Having the two rounds posted at the same time actually proved to be beneficial, because different investors were interested in different types of investment. Some investors wanted to have a smaller, faster investment, while others wanted to own part of the firm in a longer-term investment.
As well, the presence of both types of investors provided reassurance. The successful debt issue reassured equity investors that the company would be able to build up its management team, and the successful equity issue reassured debt-holders that they’d be able to convert the debt.
Mr. Organ was able to raise $3.75-million through AngelList – $1.4-million more than his most optimistic scenario – which he says provides Influitive with enough funding to get the 19-employee company to a stage where it is cash-flow positive. Investment is now closed and he is focused on growing the business.
One result of such crowdfunding is that Mr. Organ has had to pay more attention to investor relations than is often the case for startups. Influitive has 42 shareholders, located worldwide. “A potential disadvantage of crowdfunding,”is that you have lots of people to communicate with and expectations to manage,” he says.
To mitigate the potential downside,Mr. Organ makes sure that there are recognized industry outsiders on his board of advisers, whom other investors trust. He’s also invested in a professional investor relations program so that non-board shareholders feel comfortable with the company.
Despite having to take these measures, Mr. Organ emphasizes the benefits of crowdfunding.
“Lots of shareholders bring lots of leads and lots of buzz about the firm. Having strong local investors in the mix is important because they can provide immediate help and advice.”
For example, a local investor helped him line up a new chief financial officer. Through Influitive, Mr. Organ has illustrated how an entrepreneur championing advocacy has been able to build an advocacy component into the financing of his startup.
Special to The Globe and Mail
Becky Reuber is a professor of strategic management in the Rotman School of Management of the University of Toronto.
This is the latest in a regular series of case studies by a rotating group of business professors from across the country. They appear every Friday on the Small Business website.
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