If you’ve taken an Uber lately, odds are you’ve seen one of those containers displaying assorted goods for purchase — gum, candy, cell phone accessories — in between the two front seats.
Cargo, the startup behind this “in-car commerce platform,” says it has worked with more than 12,000 rideshare drivers to sell $2.4 million worth of merchandise over the last two years.
Founder Jeff Cripe came up with the idea back in 2015. Since then, he quit his job, got accepted into Techstars and raised more than $6 million from investors. He broke down how he did it from the angel round and beyond when I spoke with him on the How I Raised It podcast. An edited version of that conversation appears below.
How did you come up with the idea for Cargo?
I think like a retailer. So when I looked at how big Uber and Lyft had gotten, the first thing I thought was: that’s a massive distribution opportunity, and vending machine business are typically pretty good businesses.
The drivers are hungry for additional income. We sort of had built-in service personnel inside the vehicle — the drivers who could actually manage the inventory — if we could supply it to them cost efficiently. The mechanics were sort of all there.
We tested the idea in New York City with a couple of acrylic boxes inside of Via cars. Something like 8.5 percent of people were actually purchasing things that we put inside the vehicle. If you’re a retail guy like me, 8.5 percent conversion is unbelievable! It was a really bootleg operation that was done with Square credit card readers, laminated signage that I made at Kinko’s and acrylic boxes I bought on Amazon filled with products I bought on Amazon.
You got into Techstars. Was that New York or Boulder, or which program was it?
We applied in February of 2016 and we were admitted in May of 2016, a couple months later. We applied to a couple different programs. I think we applied to New York, which was sort of like the general accelerator, the Minneapolis program, which was retail-focused, and the mobility program in Detroit.
That was the one we really liked, even though it was a little bit newer and that’s ultimately the one that we were admitted to, so we went there. I quit my job the day I got into the accelerator and moved to Detroit two weeks later. I had a very supportive boss, so I didn’t leave him hanging and he was excited for us.
I had an awesome time in Detroit. It really is an up-and-coming city. I would attribute a lot of our success to Techstars, in terms of helping us get some initial funding, really making us an investable company, pairing us up with Cooley — which has been our legal counsel since day one and helped us transform ourselves from an LLC to a C Corp. In a number of different ways, from team to product to council to administrative stuff, it made us an actual investable company. That’s where we got our legs and got the foundation.
Did you raise an angel round while you were in the program or what was the next funding event?
We did. When you go into Techstars — I don’t know if they still do it the same way today — but when we did it, they put in cash for a defined equity piece in the company. Then you have the option to take $100,000 convertible note on like a $3 million cap. So we took that note and we basically said, it’s a little dilutive, but the nice thing is that somebody just basically set a valuation for us.
So we used that to raise another $130,000 on the same terms. We did that in the program just to have some operating capital. We didn’t really tap into it except for to pay rent while we were there, which was like 900 bucks a month because we chose to live in the suburbs. We really just kind of kept that in the bank.
One of my personal KPIs, while going through the program, was to raise a seed round immediately afterwards. The program ended in September and we had been warned that if you’re going to try and raise capital, you’ve got to raise it before Thanksgiving, because afterwards it’s nearly impossible to get a deal done. I knew it normally takes three to six months to raise a round. So I started raising pretty much as soon as we got into the program, and that ended up working out pretty well for us.
I became a much better fundraiser in the program. I think by the time Demo Day came around, we had $800,000 or $900,000 committed. By November 4, 2016, we closed our seed round, which was — including the $250,000 convertible note — $1.75 million.
Let’s unpack that a little bit. Explain the day-to-day — what were you doing to find investors, get the introductions, generate interest.
The first thing was preparing to be a better fundraiser and one of the things that really helped with that was Techstars and this video tutorial that we went through and then a roleplaying tutorial with David Cohen, the founder of Techstars.
Without rehashing the entire two-and-a-half hour long session, the main principle was: when you are first raising a round of financing, you have no leverage to talk about pricing. So don’t talk about pricing. The big thing that we learned was, try to go out there and start with people who are pretty warm on you. Maybe it’s friends and family or maybe it’s investors who followed you for the past seven months who you’ve kept up to date with newsletters and other things.
Go to them and say: look, you know how hard it is to get that initial commitment, but once you have a third to a fourth committed things start to pick up steam. So I’d really love for you to commit to this round. Give me an amount that you’re willing to commit and tell me any conditions — do you want us to be located in a certain city? Do you need me to have a certain type of co-founder? Do the terms need to be a certain thing to de-risk that investment for them?
We don’t actually ask them to wire the capital or anything, but they’ve hard committed to that round, assuming that you satisfy the conditions that they’ve attached to their commitment, and you start building that portfolio of interest. By the time Demo Day rolled around, we had about $800,000 in these commitments and some people have certain conditions. But the interesting thing that happened was, as soon as we got to about $1.25 million in committed capital, we then found a lead that pushed us to $1.5 million.
We now had momentum and we had pricing leverage and we were this interesting, hot company. Now, all of those conditions — oh, you need to be in this city, you need to have this team member, you need to be doing X revenue by the end of the year — fell away because I had leverage. That’s when we finally started to talk about price.
If I can boil all that down, it would be: secure interest before you talk about price with investors. Once we learned that, I swear to God, my hit rate with investors went from one out of every 10 to — I had better than a coin toss of a chance of walking into a room and closing a deal.
That’s really fantastic. Did any of those conditions stick around once you had that momentum?
Investors like to tiptoe up to the line and say yes — or, let’s continue the conversation, which means no, by the way. They preserve optionality. I gave these guys an out. So we both knew that if we didn’t do everything they wanted, they could say, Hey Jeff, I know you did two out of these three things, but you didn’t do this thing, so I’m out now. But they chose not to exercise that option. They wanted to be part of the deal because it was a hot deal.
In addition to measuring outcomes and exits, you want to be the first investor in Uber. You don’t want to be the Series E investor in Uber. There’s value in that. There’s a lot of psychology behind fundraising that was really helpful to learn.
The first thing I did was learn how to fundraise, and that is something that can be learned and taught. The second thing was starting a pipeline. You need to identify a pipeline of investors that you can actually go out and either speak to because you have intros or seek intros to. So that’s what we did.
I didn’t use Hubspot and Salesforce — we just used an Excel document, which had: the name of investor, whether they’re a VC or angel type of investor, where they’re located, what their minimum and maximum allocations are, where we are in the deal cycle with them and what is the likelihood that that translates into an investment. You assign it a probability and at the bottom of that, you know you need to raise $1.5 million. You basically have a pipeline of 50 investors. And you see if the number of meetings that you can potentially set up based on those probabilities will result in a $1.5 million raise or if you need to enlarge your pipeline or if you’ve got too much in your pipeline. Once we had the pipeline, that’s when we started going out and actually securing meetings.
How did you determine the minimum and maximum allocation? Your pipeline approach and probability is very interesting, but how did you figure out that part?
Just ask. Or spend a bunch of time on Crunchbase and look at what stage the firm usually participates. And usually firms self-identify — we’re a series seed, a venture firm, we don’t lead. If you’re talking to a big firm, you need to look at what that partner typically invests in. So it’s really about asking, because all of the partners have different levels that they can execute deals on.
Do you recall how many total investors you’d talked to and how many ended up coming in on that round?
Yeah, we probably met with 45 firms and I think we had seven on the cap table by the end of it. More said yes than that, but not everybody made it into the round, so we probably ended up converting 25 to 30 percent into participants. Fewer than that actually ended up on the cap table.
Did you have a lead?
We did have a lead, Rosecliff Ventures, a New York City fund that focuses almost exclusively on consumer.
It sounds like it was oversubscribed — magic words for any round. How did you pick who to let in? How did you message to the ones that couldn’t make it in?
We were pretty explicit when we started raising capital about which investors we wanted on our cap table: people with logistic experience, people who are really deep on consumer retail, and people who are really knowledgeable about mobility.
Fontinalis Partners, Bill Ford’s investment arm, participated — really deep on mobility. Bleu Capital in New York City participated. The founder of that fund and two or three of the partners there ran one of the largest distributors of Western food goods into China. When it comes to CPG logistics, these guys are top notch.
Techstars Ventures participated. Our relationship really drove their investment since we had gone through Techstars and they’re just a really good generalist fund. And then Rosecliff, they’re all about consumers — they were into Allbirds, Juice Press — a bunch of really good consumer companies.
So for a couple of them, they may not have fit the mold and it was pretty easy to explain [to them why they weren’t let into the funding round]. We spent a lot of time building relationships with VCs. You need to make sure that you’re comfortable and excited about everybody on your cap table. If we didn’t feel like it was the right fit, we probably made up an excuse, and then some of them it was just order. They came in at the end and we were already fully allocated.
Is there anything you would do differently if you were doing this all over again?
We got lucky with a few things. You have to have a co-founder. The data shows that you have to have a co-founder. Initially, I was trying to do it mostly alone. Eventually I wised up and found my co-founder.
I resisted doing the newsletter for a while. But Techstars encouraged us to do a newsletter, and send it out monthly to investors. Honestly, probably 40 to 50 percent of the capital that we’ve raised has come as a result of those newsletters, because we’ve kept ourselves top of mind with investors. Our lead for both rounds came as a result of the newsletter. It’s not a fancy email. It’s a list in my Gmail. I would have started doing that more quickly.
Nathan Beckord is the CEO of Foundersuite.com, a software platform that has helped users raise over $1 billion in seed and venture capital since 2016. This Q&A is based on episode of Foundersuite’s How I Raised It podcast, a behind-the-scenes look at how startup founders have raised capital.