05. Bootstrapping vs Fundraising
Estimated Time
- Reading: ~6 minutes
- Video: ~33 minutes
- To Do: ~30 minutes
To-Do
1. Self reflect on your core skill set and identify gaps where you will need a co-founder or team to supplement
2. Ask yourself, is your idea a lifestyle business or does it have venture scale?
Top Insights
- The three pillars of building a great company
- Product — Team — Customers
- Building any combination of these three early can get the conversations started with investors
What is Bootstrapping?
- The ability to create company off:
- Sweat equity or
- Revenue that you immediately started generating
What does it take to bootstrap a company?
- Core skill requirements to bootstrap
- UX designer, developer, product manager, and/or business and sales experience
- Important to have some combination of these
- Either you, or someone on the team
- Individuals running accelerators typically think a team needs to have:
- A developer on the team - someone to implement the plan
- It is a red flag to investors if you can't get a developer on your team
- Friends and family
- This isn't really bootstrapping since you are raising a round
- But it is often informal enough that we'll touch on it here
- You always have the option to ask friends and family for some funding up front
- Especially if that is the barrier to getting your startup off the ground
- I know not everyone has a rich uncle to help fund their idea
- But if you aren't willing to ask friends and family to invest in your idea...
- How are you going to ask investors to put their money into your idea down the road?
- Use the money to get into an accelerator or get your first customers
- Keep your day job
- If you don't want to raise funds from friends and family
- Work on the weekends and nights
- See if your boss will keep you on as a consultant a couple days a week
- Remember what we talked about with IP
- Make sure you are following your current employee agreement
- Have your landing ready before you take off
- You need a runway to understand how long you have to support yourself while pursuing your idea
- Do you have the money you need to stay solvent while you try and get your startup off the ground?
You are not entitled to be a startup founder
- The longer you bootstrap the less dilution you'll have on your cap table
- Example: In a friends and family round, maybe you raise $250k at a $2.5M valuation
- Meaning you gave away 10% of your company to get started
- Imagine if you don't raise the $250k early
- Instead, you build a functioning MVP by yourself
- Or with a co-founder
- You still have 100% of the company
- Now, with a functioning MVP, you can raise a seed round for $500k at a $5M valuation
- The 10% you give up now, got you two times the check size
- Pegasus Company
- A company that flies over funding rounds
Bootstrap then Raise Funds
- You can always raise funds after bootstrapping
- What are the signals to get investors excited about a bootstrap company?
- A modest team of motivated individuals who are building a great product
- If you have revenue
- Do not be ashamed of your revenue!
- Share it proudly!
- Hiring team members off of revenue while bootstrapping is impressive
- SaaS companies are a little easier than Marketplaces to bootstrap to this point
- Build something!
- What you build is greater than who or what you know!
- Build an MVP first!
- Then worry about a deck, pitch, networking, etc.
- Don't try and get meetings until you have a couple users and a product to show
- You are wasting your time trying to schedule meetings prior
- Spend the time you'd spend at a coffee meeting making your product great!
Bootstrapping requires some skills
- Use YouTube and online resources to supplement your current skillset
- Fill in gaps by learning or ensure someone on your team has the necessary skills
Reasons to bootstrap and NOT take VC
- You keep autonomy and scale at your own pace; less pressure
- Raising money is tough — and time-consuming
- You don't want to give up any ownership or equity.
- Dilution is very real and not something to overlook.
What is Venture Capital (VC)?
- VC is not a right - not everyone raises venture capital
- It is a competition
- Capital allocators have to find the big winners to keep their jobs
- A very small percent of businesses in the world raise VC
- VC is impatient capital
- Looking for unrealistic, unnatural growth
- Growth that is greater than ~20% month over month
- Doubling every three or four months
- Why does VC even exists?
- Every 30-40 companies in Silicon Valley reaches this growth
- When a companies hits this growth, the returns are huge
- Founders are in a competition, in a fight to raise
- It is not for everyone, and it is not fair - that is the reality
Venture capital is jet fuel
- Do you even want venture capital?
- If you put jet fuel on a skateboard, or a bike, or a car...
- It will explode!
- Venture capital is not meant for these forms of transportation
- Jet fuel is for rocket ships - venture capital is for rocket ships
- Ask yourself, is your idea a rocket ship?
- Is you business on track for unrealistic, unnatural growth?
What types of business should seek venture capital?
- In general, fundraising is a path for very few startups and companies
- Most companies in the world are building a "lifestyle business"
- Which is not a negative term!
- A lifestyle business means you are probably living an incredible lifestyle
- Bringing in millions of dollar of revenue a year
- While working lighter hours than a venture-backed founder
- Lifestyle businesses are not venture scale
- Meaning they won't return 100-1000x on an investment
- It is rare they are going to reach $100M+ in revenue
- Do NOT take "lifestyle business" as an insult
- Just know you won't raise venture capital funds
Does your company have venture scale capability?
- Here's how you can find out if seeking VC is the right fit?
- It's important to ask yourself if you need venture capital backing
- Be honest with yourself here
- In other words: is this a venture scale business?
- What is your path to $100M a year in revenue?
- $100M a year is a big number
- That is ~$275k a day ... ~$10k+ an hour
- What is your plan to bring that in?
- Will large amounts of capital justify giving up 50, 60, 70%+ in ownership of your company?
- Is your company a software or marketplace business?
- We will explore this more in Building: Business
- Why can software can grow so fast?
- There is no cost of goods
- You write the software once and sell it as many times as you can
- Why do marketplaces scale so nicely?
- As the frequency of transactions goes up
- The company take rate increases right along with it
- For a company like Uber raising venture capital was a no brainer.
- Large amounts of capital helped them build a moat to fend off competitors like Lyft
- This was easily worth Travis and Garrett Camp giving up what is now billions of dollars of equity.
- High margins & high scale
- SaaS, Cloud Computing, and Consumer Subscriptions are businesses that also scale gracefully
- Selling hardware is not a high margin or high scale operation
- Services or consultants have a tight margin (not high)
- Something else to keep in mind
- Building to sell (or be acquired) is a dangerous idea
- Trying to build a business just for the sale is a terrible idea
Outlier Success
- Venture capitalists only get excited about the high growth companies
- Chances of this kind of success is rare
- Side note: A venture capital career
- Venture capital firms are typically defined by 1-2 successes (outliers) in each fund
- Venture capitalist often participate in ~5 funds in a career
- This means they are only around for ~10 hits from those funds
- Of the 10 outliers 1 or 2 will be the majority of their returns
- The top 10 will be 95% of their career returns
- Each partner will work on 1 (maybe 2) of those in their career
- This means that a career in venture capital can be made with 1 successful outlier in a decade
- They want to know what is going to be the career defining investment
- Is your company the one that will define them?
- Hopefully this side note helps you understand how venture capitalists think about investing
Bootstrapping vs fundraising comes down to
- How far can you get while bootstrapping?
- How far can you push out dilution?
- Can you skip a round of fund raising?
- Do you have the skills required to successfully start a business?
- Is your idea, your product, your company venture scale?
- How much control and equity are you willing to give up?
- What is your clear path to $100M?
- How will your idea return 100x - 1000x an investors money?
- Lifestyle businesses can grow into venture scale - ask Calm
- The important thing is to build a great product, delight the customers you have, and grow your team
- The three pillars of building great companies are constant
- Regardless of if it is bootstrapped or funded
- Product — Team — Customers
- This is the flywheel to success!
To-Do
1. Self reflect on your core skill set and identify gaps where you will need a co-founder or team to supplement
2. Ask yourself, is your idea a lifestyle business or does it have venture scale?