June 10, 2020

Sad acquisition and why you should consider maximum amount of money during the "hype" - by Zane Witherspoon.

Sad acquisition and why you should consider maximum amount of money during the "hype" - by Zane Witherspoon.

This episode of Fundraising Radio is very educational and our speaker is Zane Witherspoon, co-founder and CTO at Dispatch acquired by Perlin. And in this episode Zane shares the lessons he learned from raising during the times when there was a hype around crypto and what was his major takeaway from that fundraising (spoiler: raise as much as you can while there is hype to extend your runway). He also talks about the acquisition that Dispatch went through and why it wasn't a great success.

This episode of Fundraising Radio is very educational and our speaker is Zane Witherspoon, co-founder and CTO at Dispatch acquired by Perlin. And in this episode Zane shares the lessons he learned from raising during the times when there was a hype around crypto and what was his major takeaway from that fundraising (spoiler: raise as much as you can while there is hype to extend your runway). He also talks about the acquisition that Dispatch went through and why it wasn't a great success.

Zane's linkedIn: https://www.linkedin.com/in/zanewithspoon/

 


Transcript

This is Fundraising Radio and today as a guest speaker we have Zane Witherspoon, cofounder and CTO at Dispatch labs that raised $8.5 million and was acquired by Perlin.

this episode we'll talk about, all different sources where you can raise money.
We'll also touch onto ICO and all this online fundraising.
we'll move on to the acquisition part.
Zane will ask you cough by you giving us some background on yourself and on dispatch lapse. Hey there, Konstantin happy, thanks.

much for the time and reaching out.
So my background is in cyber security.

My first internship out of high school was working network security for Raytheon, whose big department of defense contractor.

after that I moved to San Francisco, got into DDoSs mitigation with a company called nexus guard, and it turns out that, cyber security and photography go pretty well hand in hand, that it wasn't until I actually got a tax return.

That was big enough.

I didn't think I should just go blow it on a shopping spree that I thought about investing.

that's kinda when I started to learn about Bitcoin and cryptocurrency.

I got really deep into it really quickly, obviously like everybody has that story and crypto of discovering it, maybe putting a little money in and researching and just going deep down the rabbit hole.

next thing I knew I was organizing events.

for about a year throughout 2017, I organized the San Francisco Ethereum meetup, where we had a ton of projects come across our stage.

It started as small little homegrown projects over the course of 2017 and the crypto boom. those projects turned into large multimillion dollar projects pretty quickly.

right around the same time I met my co founders, Matt McGraw, and Patrick Wickstrom, who were, Matt was angel investor in Patrick's company.

And Patrick was looking for technical support.

he came to our San Francisco with Miriam developers meetup, and we hit it off, started talking ideating around this idea of a classic blockchain, take out the middleman, play around data.

in particular around content is how it started. So we put together our business plan.

We put together, I draft up some business architecture and some technical diagrams and started working on the code.

we contacted the legal team and decided to open up a friends and family round around.

This was November, December, 2017.

it was supposed to just be, around 500,000, but were absolutely overwhelmed by how much interest there would be for our project.

next thing we knew were over capacity.

we ended up closing that at a million and opening up our next round immediately after.

just, I think, I don't want to say exclusively because of timing, but it certainly helped.

we had raised that 8.5 million in a matter of a couple months, which I know is not the traditional fundraising story.

Yeah.

Let's first, let.

Me first ask you when exactly do you start raising.

was this point when you were like, okay, it's time to open up friends and family round.

Yeah, were working on it for a good three, four, five months first.

not taking salaries when there were small expenses, or the CEO Matt was paying for them out of pocket.

it was really, I think, I don't know if there was an exact moment when it felt like this is the right time to fundraise.

We just knew that it had to happen if this project was going to go anywhere.

as soon as we had the legal documents in hand, we'd paid the lawyers for the SAFT agreements, or just simple agreement for future tokens, a play off of Y Combinator, safe agreement, simple agreement for future equity.

Yeah.

we were able to go out there and start collecting signatures, running KYC.

we started doing of team building at the same time.

we started looking at, developers that had experience in CDNs because were focused on distributed content.

content delivery network is what a CDN is a content delivery network.

that's, every time you download a movie or a video game from somewhere, some big file, they've got multiple servers all around the world that are ready to deliver that content to you.

that's a content delivery network and, it's, it was actually pretty similar to what were planning on building, but in a more decentralized model.

Got it, got it.
he raised two rounds basically in a row.
he closed one round more than you've expected, basically double more, twice more than you've expected them. Then you've opened up the second round.

You raised all those eight point $5 million in just two rounds or was it distributed?

Yeah, so we, one of the lessons that we learned and, constantly, like I said, this is going to be more, educational and inspirational.

I think if I can pass on to the wisdom that I've gained through the process, that'd be super happy.
we had, influx of interest coming in at the time and we said no to a lot of it.
Once we reached that eight and a half million, we said, no, we want to some more progress.
come back and start fundraising another round at a better valuation, like traditional Silicon Valley people do. we spent the next six months working on our MVP.

when we launched our test network, which is a major milestone in a distributed network project, we thought that we had enough traction to go out and fundraise more effectively.

And, so we opened up for our plan was another 6 million.

we ended up raising about like 750,000 on top of that.

There was just so much less interest in mid 2018 and like the sharp drop off in the crypto market.

? Right So the impact of timing on fundraising is very significant.

the ability to raise more than you think you need, I think is also pretty important.

If it's available, then it's, you don't know that it's always going to be available.

in hindsight, we definitely wished that we had, accepted more at the time when interest was really high.

Got it, got it.

That's pretty easy.

I to be honest, expected that you'll say like, we should stick to the plan and raise just 510, then just raise it was full, all Brown, but something new, something that I did not expect, but let's talk about, the way you raise.

So you raise through SAFT.
to be honest, I have never heard that before.
How is it different from safe? So was that particular difference because it's not an ICO, right? it's eh, ICO is kind of a vague term.
it was a private sale of tokens.
the law around securities and cryptocurrencies at the time was very vague.
It's since clarified a little bit.

It's not super clear just yet still, but essentially, instead of doing a large public sale to anybody who wanted to participate, were targeting accredited investors who were able to invest in speculative startups.

the simple agreement for future tokens really meant that our business model as a company was not around sales, but it was around the usage of the network were developing.

it's architected in a way that the more people are using this network, the more demand there is to use this network, the more value those tokens were worth.

instead of selling equity, we sold futures on these tokens that were developing.

through our whole fundraising process, well, it very much was a matter of selling ourselves as an investment.

We never actually had to sell any equity.

Nice.

you retain a hundred percent, of the company share, even after you raised eight point $5 million, right?

That's right.

That's right.

Because essentially the company at a certain point, it would be kind of obsolete, besides the treasury of tokens that we would be, the goal would be to decentralize.

We could get it off the ground, but ultimately we wanted to build a community that could maintain and develop it further.

crypto is philosophical in that sense.
to be honest, I hate philosophy clearly in my head.
So it was never a huge negativity.
Let's not dive into that topic, but let's talk about things that you mentioned. So you were targeting a crate investors.

How were you doing this? How was it different from something that you call like a normal fund raising versus where you actually looking for that one Crunchbase or was it through some connections through that network that you had? How do you target those people?

Yeah, it started with, to be really honest.
The first group came from our friends and family round.
thankfully we had a couple of people on the team who were very well connected.

Matt McGraw, the CEO had a company previously that he had sold called rocket science, which was a managed service provider that provided services for most of the venture capitalists down in Silicon Valley on Sandhill road.

not only did they love him so much, they all bought his products, but every time they signed a new investment, they sent them to him for most of their managed services.

he ended up having a portfolio of companies, of customers for his company like Airbnb, like Facebook, like get hub, like Heroku, like door dash, like Instacart, like all the real big web 2.0 startups.

he had a lot of introductions that he could make at the beginning.

even the ones that I'd say our first round came from his connections and another one of our founders where I'm on fray.

also very connected by throwing dinners all around the city for years.
once we had that first round in, it was mostly referrals.
We were able to build out a network of yes, if you're interested investing great.

Who else do who'd be interested investing who else is made a list of who else was investing in the space, looking at our our competitors and figuring out who their investors were, who and they're pitching to so that were able to build a targeted list.

we actually did have somebody cause we brought on so much money so quickly.
we had a VP of investor relations who helps manage a lot of those relationships from the get go.

she was very instrumental in helping us find new connections, find new investors and in making sure the relationships with the existing investors are strong.

That's really impressive.

you mentioned something that really caught my attention, which is one guy who was throwing dinners around the CD for years.

What do you mean by that? What do you mean throw in a dinners? I mean, I know it's not literally throwing juniors, but yeah.

Yay.
Well he kind of literally was organizing these dinners about once a month for around 10 years in San Francisco. it would be a dinner that's about 30 people or so, and finds a big space for it.
He'll bring in a professional or semiprofessional chef.

it is a ticketed event, so you have to pay to attend, but you'll also find a speaker to talk about some topic and he's covered so much ground from everything from AI to romance in the workplace, gender equality to space travel, just always have like a, a new theme for every dinner.

he has a very large network because of it.

That's really interesting that's it, which is kind of parallel to my network building, being through organizing these San Francisco with Ethereum meetup, I've really found that hosting events is a absolute hack to growing your network.

Right.

Because not only do you get to meet a bunch of people at once, but when people think about a subject, you're the one who comes to mind as an organizer.

Right. Right.

also in that meetup or whatever events you are organizing, you automatically basically become the main guy or the main girl, because like, you're the one in charge.

So it's really, it's a nice.
Opportunities start coming to you.
Right.
Right right.
So let's talk about the acquisition.
when did you sign that had to sell? When was it that you were like, okay.
We're.
Yeah.
What other things were tough on the treasury management side almost right after we received our funding.

We because of being a crypto company and believing in the future of cryptocurrency, we accepted most of the investments in different cryptocurrencies, Ethereum, Bitcoin, and dash, and to liquidate millions of dollars worth of cryptocurrency.

You need a business account on most of these exchanges. It's not something you can do at a consumer level.

we made a few institutional accounts and then almost immediately afterwards, the sec issued cease and desist orders to all the exchanges that were selling unregistered securities in the U S so all of our accounts were canceled and closed in the middle of the cryptocurrency freefall.

ultimately I think we actualized about 3 million USD out of all the cryptocurrency that we so could have invested heavier in treasury management, for sure.

Right.
Insight is 2020.

So, that's when, that also sparked part of our raising the next round in, middle of 2018, which like you said, it didn't go quite as well as expected.

The demand had fallen off as quickly as the high prices of cryptocurrency had.

we started thinking about other ways to make the company sustainable.

it was hard at that point because we had 25 people more or less in the organization.

They had families that mouths to feed.

so, if weren't able to sustain ourselves through fundraising, then the next best option was a acquisition then a company that did have the funds to help see this project through to the end.

So.

We shifted our pitch and started talking to a lot of other companies, both in the traditional enterprise world and in the cryptocurrency space.

we ended up signing an agreement with Perlin labs in Singapore, who was working on a similar kind of technology to ours complimentary, and they really wanted access to our development team.

we signed the paperwork, made a drink, press announcement, and, this again, much more educational than inspirational.

They ended up backing out of the deal and they never paid us for the acquisition post, the public release, a publicity announcement, mostly other interests in acquisition or the other conversations we had have were having had dropped off.

were kind of left without a lot of options other than to pursue legal action in Singapore, which for the amount of the acquisition, what it was, we decided it wasn't worth it.

the technology is open sourced and we got the main net launched in December of 2018.

in terms of business and utilization, pretty much everybody had to find other jobs and that was more or less the end of dispatch.

Alright.
That's a said, that's a 10 set story.

I mean, I'm gonna, I'll add in more to it's come to light at I, in hindsight wish that we had been more selective when we had the demand for who is investing.

because a lot of people have come forward or a few investors have come forward and said, actually it wasn't my money.

I was investing.

I was investing these other people's money and now they're very upset, which is a tough situation, but it's caused more headache than we would have originally expected.

another lesson learned is that not only is it better to take the smart money, the dumb money, but the money can actually have a negative impact on your organization as well.

That's, that's a really sense story books, it's really educational, so thanks. Thanks a lot for sharing it.
Yeah.
We all had a great time.

I can't think of anybody at dispatch who would say that it was a negative experience.

It was a pretty phenomenal year and a half that we had growing and then shrinking very quickly.

obviously lots of lessons learned.

I think that we did have a pretty big impact on the space and the weight shifting the way people were thinking about distributed data and distributed data analytics in particular.

That's, I think one of the major benefits of working on a startup, you can have tons of fun. this is the nod for grim doing this.

my next question actually was a successful founders as a source of capital and Feis. For sure.
You qualify as a successful founder.

I will not take that away from you, but do you still get, some, do people pain to your LinkedIn or do they try to shoot you an email, asking like, Hey, can you review my, project that's in cryptocurrency space or are they trying to get you on board as an advisor or actually as a cofounder of something crypto related? Do they do this?

Yeah, yeah.

have being a CTO and managing a team of, were, around 13 engineers at our peak has dramatically changed the course of my career in terms of, had hunting and LinkedIn.

Honestly I, I'm so constantly bombarded on LinkedIn at this point.

People trying to sell me managed services or overseas development, that it's very hard to get any signal through that noise at all.

on the flip side, people that I do want to hear from, often reach out quite a bit, especially in the cryptocurrency space.

I do advise for three or four companies, in the crypto space primarily, and there has been a whole lot of interest to work with me.

I, I'm definitely still interested in entrepreneurship. It's an itch that I just need to scratch.

in the meantime, if there are gaps, when I need to pay the rent, I'm very fortunate to be in a position now where I, I know my worth and other people do as well.

That's awesome.

how does the hap Andy now I like that, before that I was getting really sad, feeling bad for me.

Yeah no, I'm doing great.

That's great to hear.

you said that you get a lot of noise.

I know that's a common practice for anyone who got acquired in any way, even if it's not like a very successful acquisition, you still get tons and tons of inbound emails from random people who you don't care about.

how should founders who really are not trying to sell you anything? They're just trying to get you on board as an advisor, or just want you to take a look at their pitch deck.

How should they approach you? I find email to be pretty effective.

I, I, before, taking on a leadership role, I was a big fan of all the in semester platforms like telegram and Facebook and Instagram messenger and LinkedIn, Twitter, DMS.

honestly, those are so public facing that, reaching out to me via email is almost always going to get my attention.

right now I'm working on a project called fathom privacy, which is still in line with the distributed data that I was working on at dispatch.

if anyone wants to reach out to me and learn more, feel free to hit me@zaneatfathomprivacy.com. Perfect.
I will leave that email into the description of this episode.
if anyone wants to talk to Zane, hit him up there.

at this point, I'll ask you a last question, then we'll wrap it up. So it's a culture action.

What do you want? What one thing do you want the least her to do as soon as this episode is over? So one very specific thing that you recommend them doing,

To be honest, I would say, start utilizing your network as best we can and grow it if you can. I am a big fan of events.
Like I mentioned, I know that in COVID times, that's a lot harder to do.
you can get creative by even just anything that brings people together.

It will be effective and making you a thought leader on the subject.

I have friends who specialize in making Facebook messenger group threads that are really effective.

I have friends who put together really effective email lists.

Just any way that you can bring people together, whether it's virtually or actually in person to start to grow your network and opportunities will come to you.

Right? Yeah.

that work is extremely important, but just personal note from me did not go too much into that because I've seen some people who are like so focused on their network.

That's in a one guy told me like, yeah, I have 26,000 people on LinkedIn.
I'm like, okay.
what's, what'd you do with those 26,000 people? And then just utilize the network too.
I just was, I was just, I just wants to prove him being a, not, I'm not going to say bad words on my own podcast. I will not say that I was being a bad person.
I went there on his LinkedIn page and loops how many reactions he's last post God.
I think it was like three likes and like, okay.

Yeah.

That's, that's exactly what I'm talking about.

So don't dance,

You've got to create value for people.

You have to have that intention from the start.

It's like bringing people together for the sake of bringing people together.

You're bringing them there either to educate or to let them meet other people or just giving them a chance to express themselves or talk about their project.

Right? No, that's exactly what my summary was.

I was just saying it in a more negative way for making some more positive and things for making Danny really get, so we'll wrap it up.

Thanks a lot, Zane, for coming up and for sure your story, it was preset story book with a happy ending.

I think so.

Thanks a lot for sharing.

I think it was still pretty inspirational even though it's not like a bleak template of success that you followed, but the winding roads and the path to success.

? Right Exactly.
Exactly.
that's what's third world is about thank you for coming up and for sharing that story. Thanks so much Constantine.
Thanks everyone.