How Foundry Group Got the Gist of T.A. McCann’s Startup: Anatomy of a Software Deal

Every deal has a back story you can learn from. In the case of Gist—the Seattle software startup that announced yesterday it raised $6.75 million in Series A funding from Foundry Group and Vulcan Capital—the key connection came about because of a timely combination of blogs and social networks. Which is fitting because Gist is all about managing those kinds of information streams, which we’re all increasingly being bombarded with, so as to help people build better business relationships.

Gist released its product in beta trials last September. It’s basically a way to put all your information about your business contacts—e-mails, blogs, tweets, articles in the media, and so forth—in one place, with an efficient, user-friendly dashboard interface. Founder T.A. McCann says his target customers fall into three camps: executives and salespeople who spend a lot of time building relationships; “super networkers” who need to keep track of many different contacts; and the “Twitterati” who are the earliest adopters of social software.

An investor like Brad Feld of Boulder, CO-based Foundry Group fits in all three categories. Last fall, managing director Chris Wand from Foundry reached out to Gist about its product and set up a call with McCann. “Our plan was to put our product out there, get feedback, and raise money in the early part of [2009]. Foundry cares a lot about the ‘Implicit Web,'” McCann says, referring to websites and services that aggregate and synthesize personal information from the Internet. “They blog about a lot of their themes. These guys are switched on, they’ve thought about it.”

In November, the Defrag 2008 conference took McCann to Denver. “I went on Twitter and read more about Foundry,” says McCann. “I found out Brad’s a big runner. I said, ‘Hey, I’m going to Denver, I like running, can you recommend a place to run?'” Feld suggested they meet up at the hotel for a run. They put out a general invite on Twitter, but they were the only ones who showed up. Over the next couple of days, McCann and Feld spent three hours running together on local trails, shooting the breeze about running, Gist, Foundry Group, and other topics. “That only happened because Brad published that he likes to run. And because of Twitter,” McCann says. “That afternoon, we showed [Gist] to Foundry. He and the other guys started using it.”

By January, McCann was well into the fundraising process. (Vulcan Capital previously had seeded Gist.) “I was raising money, and I’d use Gist all the time,” he says, adding that the software allowed him to prepare for meetings quickly, keep track of what info he’d sent to whom, and generally be better informed about each person he met. McCann talked with many venture firms around Seattle and elsewhere.

But one thing in particular stood out about Feld and the Foundry team: they really got Gist’s offering. “Other investors hadn’t used the product,” McCann says. “On Christmas morning, I’m getting feedback from Brad Feld. That’s a person who cares about it—he’s passionate about using the product.” By the end of March, Gist had a term sheet, and the deal was finalized shortly thereafter.

I’ve heard several people in the startup community question the size of the deal—why did Gist need $6.75 million when it has a small team (10 people) and is close to releasing its product? Especially in the current climate for funding software startups? One clue comes from a talk Feld gave in Seattle in February, where he said, “It’s not necessarily cheaper to scale a business to a large company…To create a large company, you still need $20-30 million…it’s not that $250K gets you there.”

McCann, for his part, says, “We wanted to do a plain vanilla Series A, in the $3-5 million range. Ultimately, both of those guys [Vulcan and Foundry] wanted to put in more…It’s a big round.” As for the market opportunity, he explains, “We’re stepping into a big space. It’s the overlap between personal communication, Web content and search, and social networks. Each is a multibillion-dollar space, but those spaces are overlapping and colliding in a very interesting way. Raising $300K isn’t the right strategy for this company. We said, ‘Let’s go big.’ Even if you just solve the e-mail problem, or part of the social networking problem, it’s exciting—and scary. That’s what we do as entrepreneurs.”

In the meantime, Gist’s service now connects to more types of e-mail systems, in addition to Gmail and Outlook, and it supports Twitter (you can import friends and followers as a new inbox). There are also new search features that can be personalized on the user interface, to help you find information about people, companies, documents, and attachments. McCann says the number of beta trial customers has been kept deliberately small—around 2,000. And now it’s time to really focus on their feedback on Gist’s “personal assistant” interface. “I just have to worry about you, the customer, having this beautiful personal assistant focused on doing this work,” he says. “Let’s just keep building stuff that smart people with money will use.”

McCann says the new funding should easily last 18 months. Gist has plans to double its staff to about 18 or 20 by the end of the year. “For those of us just raising money now, we have a bit of time to figure it all out,” he says. “We can be methodical about our process, build the product, and listen to our customers, and not spend too much on marketing. We’ll be positioned very well when the economy comes around.”

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