Squareknot’s $300K saga

Squareknot was broke.

It was spring 2014 and the startup, which bills itself as a Github for making things in real life, had run through all its funding: $500,000 from Center City’s Gabriel Investments and $30,000 of founder Jason Rappaport’s personal money. There was a promise of $1 million from an investment firm with local ties, but it had fallen through.

“We had been planning everything around that million,” said Rappaport, 24.

He had hired six people on the promise of that money, signed their offers, given them start dates and now, he had to tell them those jobs didn’t exist anymore. As for his existing four-person team, he told them that their next paycheck would be their last. Nobody quit.

Heartened, Rappaport gave himself an ultimatum. He’d hit the local investor circuit, try his damnedest to raise money and if he didn’t, he’d call it quits.

What follows is a story about what it takes to raise early-stage investment in this town. Namely, a prominent champion or two, momentum and some naïveté. We’ll spoil this part: Rappaport raised a modest $300,000 exclusively from local investors and is on track to launch a public beta this month. But how he did it? That’s the more compelling story.

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First, Rappaport lowered his expectations.

He had been aiming for a million-dollar raise from big-name venture capital firms. But he realized that a venture capital firm wasn’t going to make a big bet on a startup they didn’t know at all. His new goal? A $250,000 round backed by angels.

Then he started making the rounds, pitching to local investors at Delaware Crossing Investor Group, Robin Hood Ventures and Benjamin Franklin Technology Partners.

It was after the Delaware Crossing pitch that things changed.

Rappaport was on the train to New York City with his girlfriend — they were going to a live taping of the Rachael Ray Show — when he got the email.

What are you doing in Philly? the email said. You’re not a Philly company, you’re a Silicon Valley company.

The sender was Paul Martino, a Silicon Valley investor who splits his time between the West Coast and his home in Doylestown. Martino sold his First Round Capital-backed adtech company Aggregate Knowledge for $150 million to Neustar last fall.

When he called Squareknot a “Silicon Valley company,” he meant a direct-to-consumer startup with a huge potential audience. A potential user base so big that it didn’t need to figure out how to make money just yet. “You don’t see a lot of those deals coming out of Philly,” he said in a phone interview this week.

I want Squareknot to do to Philly what Tumblr did for New York.

In his email, Martino said he had seen Rappaport pitch at Delaware Crossing and wanted to introduce him to some Silicon Valley VCs.

Martino worked fast. By the time Rappaport got off the train in New York, most of the meetings had been set.

At that point, Rappaport said, “I’m just, like, kind of freaking out.”

One minute you’re pitching Philadelphia angels and the next you’re shipping off to Silicon Valley. (But first, you’re watching Rachael Ray.)

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Right before Rappaport left, First Round Capital’s Josh Kopelman invited him in for a pitch.

While Squareknot was in a funding bind, Rappaport’s CFO, the precocious and impeccably-styled Raheem Ghouse, had submitted an application to StartUp PHL, the city’s early-stage investment fund run by First Round Capital.

Rappaport pitched to Kopelman and Ben Cmejla, Kopelman’s operations manager who helps run StartUp PHL, at the firm’s University City office. (Full disclosure: Technical.ly rents space in this office.) As Rappaport remembers, Kopelman didn’t seem that into it.

There was also the uncomfortable moment that followed after Rappaport name-dropped the Silicon Valley investors he was going to meet with.

Kopelman told him: Never show that list again because I’m going to call them all up.

“Great,” Rappaport said.

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The Silicon Valley trip morphed from a few days into a few weeks.

In May and June, Rappaport pitched to prominent venture capital firms and angel groups, headed to San Francisco for Maker Faire and had a burger with a big name Chicago restaurateur who was in town. All this had been set into motion by those first introductions from Martino, whom Rappaport met with in Silicon Valley. (Rappaport asked us not to name the people he met with on the West Coast since none of them made any funding commitments to Squareknot.)

Rappaport, a North Jersey kid who graduated from Lehigh University and practically radiates with enthusiasm, was like a kid in a candy shop — except one filled with Silicon Valley glitz instead of gum drops.

But by the end of the trip, he still hadn’t raised any money. Time was running out.

It didn’t make sense to him.

Many of the investors he met with seemed really excited about the company, a Wikipedia-like crowdsourced guide to making and doing things that takes cues from Github’s “branches.” But they all said the company was “too early.” And they all kept asking about Kopelman. Was he going to invest?

If Josh Kopelman hasn't invested in your Philly startup, 'it can be a black cross on you.'

“He has this monopoly over Philly investing,” Rappaport said.

It felt like, if he wasn’t going to invest in Squareknot, no one else would. (Rappaport’s not the first to say that. One Center City entrepreneur, among others, said that if Kopelman hasn’t invested in your Philly startup, “it can be a black cross on you.”)

Rappaport was working with Martino and Gabriel Investments’ Richard Vague, the one investor that had already bet on Squareknot (he also gave the company a small cash infusion during the Silicon Valley trip). Other than that, Squareknot had exhausted all its options. (Martino’s venture firm, Bullpen Capital, focuses on Series A investments, so Squareknot was “a round too early,” he said. He is, however, a Squareknot advisor with a stock grant.)

Then Rappaport got the email from Kopelman. He wanted to talk.

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Kopelman was in.

Squareknot would be one of the first investments made by the StartUp PHL angel fund, a new city-backed fund that could invest in startups that weren’t quite ready for the city’s seed fund. The company would get $100,000.

A blur of investment, sparked by Kopelman's imprimatur.

Now, Rappaport could tell everyone Kopelman was investing, in hopes of turning that $100,000 into $250,000 or more.

The next month was a blur of investment. The money kept rolling in, from Benjamin Franklin Technology Partners, from Delaware Crossing Investor Group, from Clutch CEO Ned Moore and Verilogue president Jeff Kozloff.

The apex was a swanky, investor-only party at Martino’s house in Doylestown, where Martino said Rappaport would raise the rest of the money he needed. Rappaport and Ghouse were the only non-investors there. The pair studied the list of investors who would be there, doing “extensive backgrounds” on each one. Tech scene veteran and Morgan Lewis attorney Steve Goodman, who had taken a shining to Rappaport, helped with talking points, as did Martino, Vague and Gabriel Investment’s Holly Flanagan.

It worked.

The whirlwind ended with $300,000 in the bank for Squareknot. Rappaport said he’s eyeing $200,000 more. It’s not Silicon Valley money, but it’s enough, for now.

His team of nine, a mix of full- and part-time employees, is plugging away at the company’s bright Center City office, on the 25th floor of 1735 Market Street, right next to cloud optimization startup Cloudamize and Vague’s Governor’s Woods Foundation.

Rappaport, who moved to Philly from Allentown almost two years ago, couldn’t be happier. It’s not just because his company got a second chance. It’s because that chance is here in Philly.

“If no one in Philly had invested in us and the city had let us down, we would’ve moved,” he said. “But now, we get to stay here.”

Squareknot has about 160 users in its private beta, including local maker Peterson Goodwyn, who uses it to post how-to guides for his products, and one civic hacker who used Squareknot to demo at a hackathon. The latest version will launch later this month to the public, with invite code access.

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Rappaport hopes it can be that consumer-facing startup that makes tech people pay attention to Philly, a town of business-to-business models and more niche consumer-facing companies, like SnipSnap and DuckDuckGo.

“I want Squareknot to do to Philly what Tumblr did for New York,” he said.

He followed that up at a press conference for StartUp PHL this week, flanked by Kopelman and Mayor Michael Nutter, in the city’s new Innovation Lab: “When you look at a lot of other cities that have eventually grown huge, awesome startup communities, there’s always one great consumer-facing company that pops up and makes everyone interested in that location, and, although I don’t know if Squareknot will be it, we sure damn well have to try.”