3 lessons we can learn about investing from the DealCloud acquisition

3 lessons we can learn about investing from the DealCloud acquisition
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Greg Brown is the administrator of the Charlotte Angel Fund, Charlotte’s largest group of angel investors, and the founder of Cardinal Finance.

It was announced last week that Charlotte high-growth software company DealCloud was acquired by Intapp for an undisclosed price.

The company, which was founded in 2010 by Ben Harrison and Rob Cummings, built significant value and provided the sort of financial return to the founders and their investors that justifies the hard work and risk associated with startup businesses.

The DealCloud story provides us with some lessons about starting a company and early-stage investing.

Lesson #1: Charlotte and North Carolina angel investors missed the boat on this one.

Ben and Rob started DealCloud to solve a problem that they experienced in their work as private equity investors with Falfurrias Capital.

Rob had startup success on his resume prior to DealCloud. Ben had worked in both investment banking and private equity. Hugh McColl and Marc Oken, who are the founding partners at Falfurrias in addition to having Bank of America CEO and CFO roles on their respective résumés, were early financial supporters of DealCloud.

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Yet almost everyone said no.

The Charlotte and North Carolina angel investor communities passed on this one. Rob and Ben pitched or met with over 100 investors but only attracted one additional angel after their initial insiders round.

People worried about the big companies who could come into this space. Despite smart and successful people with direct experience in the space investing their time and money to pursue this, they worried that the market would make do with lesser functionality from generic providers such as Google, Microsoft and Salesforce.com.

It’s obvious in hindsight: This is a team that should have been backed, but wasn’t.

Rob graciously says that maybe they just weren’t as good as they should have been at articulating to potential investors the pain they were solving for or the need bankers and private equity investors had for their product.

He’s probably too kind.

Lesson #2: Successfully raising early-stage capital is not a perfect predictor of future success.

DealCloud was not embraced by angel investors.

They only grew as fast as their revenues would support until they had garnered sufficient customer revenue to attract interest from venture capital investors. At that point, they took on institutional capital from a venture capital firm from outside of Charlotte and used it to apply accelerant to customer acquisition and business models which had already been proven.

I can name dozens of Carolinas-based startups that have received far more in angel investor funding over the past five years than DealCloud did and have virtually no chance of creating one-tenth of the value created by DealCloud.

Raising money is not a milestone or a value-creating event. It merely provides a resource that helps a company achieve milestones and create value.

Lesson #3: Doing a lot with a little is the name of the game.

According to Crunchbase, DealCloud raised a total of approximately $10 million of investor capital prior to its sale to Intapp. Had it taken them $25 million, $30 million or even $40 million of capital to earn the same offer from Intapp, the outcome may have been a much less happy group of founders and investors.

In fact, if it took them $40 million to get to this point, they might not have been able to consummate a deal due to it not creating an acceptable financial outcome for some or all of their shareholders.

The relationship between the value that a startup creates and the amount of capital that it takes to get there is what determines whether a company is a financial success.

Well-known venture capitalist Jason Lemkin says that a company must sell for 10 times the amount of capital raised in order for everyone to be happy with the deal. That’s a pretty good rule of thumb that founders should think about as they consider the implications of raising money for their venture.

What, if anything, does the DealCloud example say about the Charlotte and North Carolina startup ecosystems?

DealCloud did benefit from a variety of resources in our city and state.

While investor support was tepid, they were the recipient of grant awards from both the Charlotte Venture Challenge program and NC IDEA. Additionally, they were tenants in the coworking environments at Industry Coworking and Packard Place where they formed multiple beneficial relationships.

DealCloud provides the most recent piece of evidence that a Charlotte-based company can raise capital and/or create a high-growth company that realizes a significant exit transaction. They join a list that includes Yap, AvidXchange, Red Ventures, LendingTree, GoodMortgage, SmartSky Networks, MapAnything, Passport, Payzer, Stratifyd, SignUpGenius, BriteVerify and others.

The Charlotte startup ecosystem is not yet the equal of Silicon Valley, Austin or even the Triangle, but it improves by the day, and the list of companies above is evidence of that. The 75+ members of Charlotte Angel Fund, who have committed over $3 million to fund interesting early-stage startups, are another piece of the puzzle. Exciting young Charlotte companies like Elements Brands, Skipper, SkillPop, Ecomdash and Atom Power are more bricks in Charlotte’s entrepreneurial foundation.

Success stories such as DealCloud will beget more success. Let’s celebrate them and support those who have the courage to embark upon the same entrepreneurial journey.

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