The founders of a $1.3 billion startup raised $250 million while keeping over 50% of the company for themselves (2024)

This funding is a moment of triumph for founder CEO David Steinberg, he jubilantly told us on the phone.

"We were looking to raise maybe a $50 million to $75 million round, really trying to accomplish bringing in enough money to do another acquisition. But every group we met with were saying 'We don’t do deals that small anymore,'" he said.

Given that no one would invest $75 million or less, the team went back to the drawing board with its bankers, upped their ask to $100 million and the term sheets started pouring in, Steinberg said.

"We started off looking for a smaller amount of money and got rejected. Then we raised the amount and got oversubscribed," he laughed. His analysis: funds today are overflowing with money and partners don't want to spread themselves too thin with smaller deals and too many portfolio companies.

But there was an even sweeter win to all this. Steinberg, Sculley and the top management team didn't have to give up that much of their company in equity. They still own more than half of it, Steinberg says.

Turns out, they had an old-fashioned secret weapon: profits. "We are already profitable and have been cash-flow positive for three years," Steinberg said. In 2016, the company was said to have brought in $300 million in revenue, up from $200 million the year before. And it's been growing "by about 50% a year," he said.

That cash flow has helped the company largely finance its needs through debt over the years.

Things could have turned out very differently. Unlike a typical Silicon Valley startup however, Steinberg and his partners didn't listen to the VCs back in the day when the company hit a trouble spot and was looking for investors.

Silicon Valley math

The catalyst for Zeta came during a dark phase in the company's history.

Steinberg was lying awake in bed one night. The company he and Sculley had bootstrapped to about $60 million of profitable revenue was in trouble.

It was a big-data cloud-software platform that specialized in helping the for-profit education industry find customers. Things had gone well, but many such schools had gained a sleazy reputation for charging a lot, putting students in big debt and underdelivering on the promised new careers. The government was cutting off funding for schools when their job placement stats didn't meet muster. And the once thriving sector was withering.

"If we don’t pivot, we're going to die,"Steinberg thought to himself that night.

He decided to twist his startup into a marketing cloud that was broad enough for any company to find new customers, beyond those focused on education. He knew he needed to make some acquisitions to acquire the tech and customers for a quick turnaround.

And to do that, he was going to need funding.He and Sculley had invested the first $15 million or so themselves and Zeta was cash-flow profitable even in its early years.

They did the rounds on Sand Hill and "nobody liked us,"Steinberg recalled. They were perturbed that the company was managing its growth to stay at around 50% to keep its costs in check and its profit margins healthy.

One "top tier VC" told them,"The fact that you've built this business to profitability doesn’t interest us. We care about market share and growing as fast as possible,"Steinberg remembers. He advised them to take all their cash, put themselves into the red, hire a bunch of sales people and grow revenue as fast as they could.

Many Valley VCs still think that way. Very few VC-backed companies are profitable when they start selling their shares in the public market. Many startups even radically boost their sales and marketing spend before their IPOs to show investors they are still in hot-growth mode.

Although venture capital investors might object to the characterization, a common knock against VCs is that their primary goal isn't to build a sustainable long-term company, but to grow the company's value through revenue and market share — at least until the VC can sell its stake at a profit via an acquisition or an IPO.

"You could argue that [the motivation] is even worse than that. They are not only looking for a quick exit, but also to deploy as much capital as they have, and keep you needing money, so they can keep pumping money in and taking over a bigger percentage of the company," Steinberg says of VCs.

That kind of Silicon Valley mathdefinitely works for many founders. But Zeta was founded in New York — although it now has offices globally — and prefers the New York attitude that profits do matter.

In the end, they found a VC that appreciated their old-fashioned, profit-loving style of leadership, BobNiehaus of New York's GCP Capital. "He gave us $20 million and helped us raise another $50 million in debt and helped us buy our first software assets,"Steinberg says.

With healthy cash flow coming in, the company continued to prefer to borrow money rather than sell pieces of itself to finance things like acquisitions. By 2017, its value had grown vast enough to raise a lot of cash by selling a small piece of itself, while keeping its controlling stake in its founders' and executives' hands.

The $140 million round was led by GPI Capital and GPI's Bill Royan will join Zeta's board.