05. Bootstrapping vs Fundraising

Estimated Time

• Reading: ~6 minutes
• Video: ~33 minutes
• To Do: ~30 minutes

To-Do

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

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