O’Shaughnessy, Batalion, Frederick, and Aleksenko thought they had a winning formula. “We’d build lots and lots of products, apps, and partnerships,” O’Shaughnessy says. “We’d bridge that online-to-offline way, drive a commerce transaction.” The company was beginning to make money, and the founders, who had been working without salary since the beginning, felt comfortable paying themselves $4,000 a month. “The wives and girlfriends were really happy about that,” O’Shaughnessy recalls.
While the rest of the team stayed focused on the products, O’Shaughnessy began to research venture-capital pitches, reading successful ones online, finding out everything he could about how to ask for money. “I had this hypothesis that team plus traction equals money. I made that the core of our pitch,” he says.
He had several conversations around town before meeting Rainey, who, as one of five Grotech general partners, deals in consumer Internet technologies and admits to a penchant for “shiny objects”—exciting new technologies that might change the world.
Rainey looked at Hungry Machine and got serious: “At that point, they understood Facebook better than just about anyone in the world.” Rainey says he’s met only two other entrepreneurs in his career as extraordinary as O’Shaughnessy—and one of those had made $70 million by his 30th birthday. Rainey wanted in on whatever Hungry Machine was about to do.
He visited the firm in its apartment/office above a Georgetown antiques store and then had O’Shaughnessy out to Vienna for the big sell: the partnership meeting where the young CEO pitched the company to Grotech’s leaders.
“It’s five to ten guys asking questions and telling you all the ways you’ll fail,” Rainey explains. “They know they have all the leverage, and they assault every component of your team, your technology, your idea.”
O’Shaughnessy recalls walking out of the meeting and thinking that perhaps his earlier optimism about Rainey had been misplaced, saying to himself, Man, maybe we’re way off.
Rainey thought the Hungry Machine guys were right. “Tim had complete command of his understanding of his opportunity,” he recalls. “It was a visceral reaction—this guy knows his stuff. You’d be surprised how many people come in with a fuzzy view of what they’re trying to create.”
The next day, Rainey called to say Grotech wanted to move forward. Negotiations began in earnest—how much investment, the valuation of the company, how the money would be repaid in an eventual sale or initial public offering (what’s known in venture capital as the “liquidation preference”), board seats, possible dividends. O’Shaughnessy enlisted his attorney brother-in-law’s firm to help with negotiations.
In the end, Grotech put in $4 million, and Steve Case, through his investment company Revolution, added another million. With $5 million in the bank, Hungry Machine, which had taken on the public name of LivingSocial to reflect its products better, had its runway.