EXPERIENCE
HBR.ORG
Case Study
Is a StartUp’s Strength
Becoming Its
Weakness?
The founders of a wildly popular website consider whether to start
charging for its services. by Ramana Nanda and Liz Kind
U
nable to solve their impossible
Ramana Nanda
is an associate
professor at
Harvard Business
School. Liz Kind is
a senior researcher
at Harvard
Business School.
service—as long as it survives.”
A Hard Slap at VCs
Friends since their days as engi-
neering students at Stanford, VV
Tikekar and Reza Rastegar had each
been involved in several start-ups
before joining forces on AndFound.
At first it was just something to do
between jobs—a way of “giving
back” to the entrepreneurial and
angel communities, while also giving
a good hard slap to Silicon Valley’s
competitive, exclusive, informationhoarding venture capital culture.
Reza, especially, relished that idea,
having experienced firsthand—and
hated—the VC world as an associate
and partner at a couple of firms.
In his view, it was an ugly
business. VCs knew much more
about funding than entrepreneurs
did, but they rarely offered any
guidance and tended to back people
“Just because I love you and your
they already knew.
AndFound had started as a blog
problem, VV and Reza went
site doesn’t mean I ignore what else
out for a ride. Miles down
is going on,” she replied. “These guys
on topics such as how to find funding,
the California coast, they parked
do a good job of matching us angels
pick a team, and make a capitalization
their bikes under the eucalyptus
with promising start-ups. It’s like
table. When VV and Reza began to
outside a winery conference center.
speed-dating. I must have talked to
hear from entrepreneurs asking for
It wasn’t a random stop. They knew
20 entrepreneurs today. But don’t
referrals to angel investors, they
that FundersPlatform, a rival to their
worry,” she added. “They’re no
decided to build a comprehensive
start-up, AndFound, was holding
threat to you. Their fees are killer—
database of funder profiles, using
a networking event there, and they
thousands for the companies, $500
information collected from the
were curious about what sort of
per deal for the investors. They’ll
investors themselves—what they
crowd it had drawn.
never be able to compete with free!”
were interested in funding, past
They soon found out.
“VV! Reza! What are you guys doing
Free. That was the towering
advantage of AndFound, an online
levels of investment, and so on.
Soon VV and Reza were playing
here?” It was their old friend Cynthia
platform that connected investors
middlemen, connecting founders
Finlay, a well-known angel investor
with a curated selection of start-ups.
with people in their database. Their
in Silicon Valley.
It was why the service, launched
next step was to hire engineers to
in 2012, had grown so popular with
develop technology that would
asked VV. He’d assumed that
users. But it was also potentially
enable start-ups to create online
FundersPlatform wouldn’t be able
a business-model weakness—it was
profiles, like Facebook pages, and
to attract high rollers like Cynthia.
the impossible problem that had
investors to filter search results—for
Reza seemed taken aback, too. He
prompted the contentious discussion
example, to search for founders who
looked down and busied himself
that had driven VV and Reza out of
had previously worked at Google or
with his bicycle.
the office and onto their bikes.
had graduated from Harvard or MIT.
“What are you doing here?”
JASON POLAN
VV put his helmet back on. “You’re
right,” he said. “You can’t beat a free
November 2015 Harvard Business Review 145
EXPERIENCE
Case Study
Teaching Notes
Interest in the site exploded, so VV
and Reza decided to form a company.
They raised seed money from a few
angel investors and a foundation.
They didn’t worry about revenue; user
growth and quality were the focus.
In fact, they deliberately chose not
to charge fees because they sensed
that doing so would drive away the
best entrepreneurs and investors, and
that once they lost those high-caliber
participants, the whole thing might
very well unravel. They assumed that
as the site became more and more
valuable to the start-up community,
some way to monetize the business
would eventually emerge.
Before long AndFound carried
information on 10,000 investors and
100,000 companies, ranging from hair
salons to tech start-ups. Screening
algorithms highlighted the best
Ramana Nanda teaches the case on which this story is based in
the course Entrepreneurial Finance.
WHAT INTERESTED YOU ABOUT THIS STORY?
The landscape for early-stage financing has been
shifting rapidly over the past decade, and online
platforms are transforming the industry.
WHAT ARE THE LESSONS OF
YOUR ORIGINAL TEACHING CASE?
Building a two-sided platform is tough, because
founders need to attract high-quality participants on
both sides—in this case, entrepreneurs and investors.
If one side declines in quality, the other will too. That’s
why in their early years, platforms prioritize user
experience and expansion of the user base ahead of
revenue. But investors want to see cash flow potential.
Decisions about timing and which business model to
choose can have a big impact on success.
HOW DO STUDENTS RESPOND?
They tend to be skeptical about the start-up, until they
do the numbers. Then they realize that it could easily
command a $1 billion valuation.
new entrants so that they could be
knew Hap’s real intention was to kick
the tires of AndFound and decide
whether to invest.
He was talking very informally,
but it was about real money—at
least $10 million, maybe as much as
$25 million—which VV thought the
company desperately needed in order
to hire staff, improve its technology
infrastructure, and sustain growth.
The problem was that Hap was
looking for explosive revenue growth.
VV explained why he and Reza cared
so much about “best” and “free,”
and why AndFound wasn’t chasing
revenue yet. Then Reza used the
“never” word—and that was that. Hap,
his mood suddenly sour, said it was
too late in the day for sunfish and
turned back toward shore.
VV understood why Reza was
so adamant about not
charging user fees. He,
individually reviewed and featured.
pedaled hard, caught up,
It was a full-blown social-networking
and shouted, “What?”
hub, with participants “following”
“I said we’re never going to charge
people and companies, commenting
our users for meeting each other!”
on posts, and “liking” other users’
Reza shouted back.
updates. As a result, everyone in
VV pumped his legs harder to get
too, saw AndFound as
a vital service to all the
extremely talented but
unconnected entrepreneurs and
investors who were suffering under
a badly broken funding system. But
the start-up community was using
out in front of his partner and stayed
in VV’s opinion, the site couldn’t
it—even VCs.
there for the rest of the ride. Reza’s
survive much longer—let alone keep
VV and Reza weren’t the only
players in the space, however.
categorical opposition to charging
pace with its competitors—without
fees was what had stalled the
an influx of cash.
Accelerators in the Valley and
business-model conversation earlier
elsewhere provided coaching for
in the day. VV knew they needed to
charging user fees, and VV and Reza
entrepreneurs and opportunities
continue that discussion, but they
discussed them on the way home
to pitch ideas to investors. One was
weren’t going to do it on their bikes.
from their visit with Hap.
FundersPlatform. In one sense,
the company was well behind
AndFound—it had only a few
thousand investors on its site—but
in another it was way ahead: It had
raised $10 million since its seed stage.
AndFound had opted not to raise
a penny beyond its first round.
Never Say Never
Cycling back toward Mountain View,
Reza yelled something over his
shoulder that got lost in the wind. VV
HBR’s fictionalized
case studies
present problems
faced by leaders
in real companies
and offer solutions
from experts. This
one is based on
the HBS Case
Study “AngelList”
(case no.
814036-PDF-ENG),
by Ramana Nanda
and Liz Kind,
which is available
at HBR.org.
146 Harvard Business Review November 2015
He thought back to a meeting the
previous month with Hap Berger, an
There were alternatives to
First, there was the company’s
new Talent portal. Aware of
investor even wealthier and better
how difficult it could be to find
connected than Cynthia. He’d flown
entrepreneurial talent, VV and Reza
VV and Reza to Los Angeles on his
had set up a section of the AndFound
private jet, sent a car to drive them to
site to connect start-ups with job
a Newport Beach marina, and taken
seekers in technology hubs around
them out on his boat, which was so
the country, allowing them to apply
big that VV actually got lost on it. The
filters, just as investors could with
purported goal was to look for the
companies. They were now making
huge, weird-looking ocean sunfish
2,000 introductions a week on behalf
that sometimes lolled just below the
of 30,000 candidates, and they
surface of the water, but VV and Reza
estimated that the service could save
HBR.ORG
a typical company $25,000 or
more in recruitment fees per
candidate. The service was currently
free, but it was certainly a potential
source of cash that wouldn’t conflict
with AndFound’s primary mission
of linking the best investors with the
best start-ups.
The tools and documents that
VV and Reza had developed to help
facilitate the funding process might
frustrated. “In our business, six
else had gone home. Physically
months is a century. Our traffic could
spent, VV and Reza sat down in
be up 200% in that time, which could
chairs and looked at each other.
drastically improve the potential
“We need to do a funding round,”
value of all the revenue streams we’ve
VV said.
talked about. It would change our
Reza didn’t answer.
valuation and leave us less vulnerable
“We need twice the staff we’ve
got now,” VV continued. “And
to dilution from any Series A funding.
we’re way beyond tapping angels
I’ve said this before, but I’ll say it
again: If we commit to a model now,
or foundations.”
“Personally, I think we can manage
we risk hamstringing our business.”
Now VV was frustrated. “Six
also generate revenue. Many had
for quite a while as we are,” Reza
already been made available free, in
finally said. “But OK, I’m game for
months? We’re barely able to handle
the form of blog posts, but perhaps
a funding round.”
everything we already need to do.”
AndFound could set up a paid
Improving algorithms, maintaining
“For that, we need a revenue
membership or subscription play
model. If our aim is to raise
the site infrastructure, continuing
for access to them.
$10 million to $25 million at a pre-
to review all the start-ups and select
money valuation of $100 million to
the ones to feature to investors—the
involve the investment transactions
$150 million, high-quality investors
list went on and on. “As the site
Two other options would
themselves. AndFound wasn’t
will need to see how, exactly, we’re
degrades, we’ll lose business,” VV
a broker dealer—the regulatory
going to get to a billion-dollar
continued. “FundersPlatform may
hurdles were too high—but as part
valuation in a few years so they can
not look like much of a competitor
of its mission to democratize the
get their required return.”
now, but wait until it starts to pump
start-up world, it partnered with one
to make it easy for small investors to
new capital into its operations—
“All those things we’ve been
while we get weaker.”
talking about—the Talent portal, the
“We’re never going to lose business,
invest in micro VC funds rather than
tools, the shared brokerage fee, the
in individual start-ups. AndFound
carried interest,” Reza said. “Let’s get
wasn’t making any money for its
serious about investigating them as
happened to the start-up community,”
services as facilitator, but it could
monetization strategies.”
Reza said. “And we’re free.”
decide to charge the broker dealer
a percentage of its fees.
The other option would be to offer
because we’re the best thing that ever
“But are they really going to
Reza had combined, in a single
take us where we need to go?” VV
sentence, the three words— “never,”
“best,” and “free”—that had come to
asked. “They’re capable of bringing
a product that helped experienced
in some decent money, but even in
define AndFound’s impossible
angel investors leverage their
combination, they’re probably not
situation.
expertise by aggregating funding
going to generate anything like the
from other angels on the site. Rather
growth we need.”
than charge a fee for the service,
But VV was even more
succinct in his angry
response: “Free is never
“I think you’re wrong there,” Reza
AndFound could structure each such
said. “We won’t know until we try.
best,” he said. “Not in the long
investment as a separate “fund”;
But even if you’re right, we’ll just
run. You’ll see: ‘Free’ is going
Q
if the investor made money upon
have to come up with other options—
to turn us into the best start-up
cashing out, AndFound would get
something else that taps into third
that never made it to maturity.”
a small portion of the profit.
parties’ interest in what we’re doing.”
But none of these revenue models
“But we can’t rely on slivers of
seemed to be a silver bullet; so, as had
our offerings and community. We
happened many times before, VV and
need a revenue stream that comes
Reza put the decision off.
out of our core business and strength:
Point of Contention
It was so late when they returned to
AndFound’s offices that everyone
connecting good start-ups with
good funders.”
“OK, so let’s postpone the
funding round,” Reza said, sounding
Tell us what you’d
do in this situation.
Go to HBR.org.
Should AndFound
commit to a revenue
model right now?
See commentaries on the next page.
November 2015 Harvard Business Review 147