Why 99designs raised $35 million from Accel Partners

April 29, 2011, 12:00 AM UTC

99Designs, a crowd-sourced online marketplace for graphic designs, today announced that it has raised $35million in venture capital funding. Accel Partners led the round, and was joined by angel investors like Stewart Butterfield (Flickr, Tiny Speck), Dave Goldberg (SurveyMonkey), Michael Dearing (eBay, Harrison Metat) and Anthony Casalena (Squarespace).

This is the first institutional round for 99Designs, which spun out of  Australia’s SitePoint in early 2008. The company pays out over $1 million each month to its global pool of 100,000 designers, and is cash-flow positive.

So I spent some time on the phone with Patrick Llewellyn, the company’s Australian CEO who now is spending most of his time in Silicon Valley. What follows is an edited transcript:

Fortune: You’ve been in business for three years. Why raise a big VC round now?

Llewellyn: It’s really about the timing being right. For the last 12 months we’ve been aggressive in growing our operations in San Francisco. When I arrived last year we only had one person on the ground here, and now we have 11. As we’ve gotten greater exposure to the U.S. market during that 15-month period, we’ve also gotten closer to investors.

Sixty percent of our customers are now in North America, and 30% of our designers are here. So the time was right to bring on an institution like Accel – and people like our angels – whose networks can help bring our business to the next stage. I think their investment also is a sign of how our market has matured, and the really rapid growth we’ve seen over the past four months.

Okay, but why raise $37 million? You could have gotten access to those networks with a $5 million investment.

I think it shows our model is being readily adopted and that it’s a big opportunity. Also, we really need to keep hiring, and we’ve found in this town that the first question a prospective employee asks is ‘Who backs you?’ Just saying we’re a cash-flow positive startup from Australia doesn’t necessarily help given the types of people we’re looking for.

Also, I think that when you have the ability to take money you sort of want to grab it. A large round gives us plenty of runway for the growth initiatives we have, and to pursue some strategic M&A opportunities. It also gives us the ability to provide some liquidity to shareholders and employees. We also can establish an employee option pool. We want to be able to reward people for past work and have incentives for future work.

So some of the $37 million will be used for liquidity, not for working capital?


What types of growth initiatives?

Well, a big focus for us is to localize our offerings. We’re a dotcom charging in U.S. dollars right now, but the companies we take the lead from – like VistaPrint or IShuttterStock – are great at customizing their platforms for local users. One of our angel investors, David Goldberg, has great experience in localizing.

What types of M&A targets?

That’s kind of a work in progress. Our focus really is on building out the capabilities we have to help designers growth their freelance businesses, so we’re looking at that side of our marketplace. Small business lead generation businesses, and things like that.

When pitching this to VCs, how did you defend your barriers to entry?

There are lots of platforms, so there is no great barrier to creating one. The major challenge, as a two-sided marketplace, is achieving critical mass. And of getting the balance right between acquiring designers and also acquiring customers. Lots of people have raised money to compete with us, and we’re constantly surveying the landscape to see where our next competitor might come from. But 85% of our customers come from word of mouth, so it’s hard to replicate.