18 10 / 2018
Should you raise money or bootstrap?
Should you raise money or bootstrap? (By bootstrap, I actually mean raise < $250k from individuals / angels).
Having run a startup that raised money and now in running a VC, ironically, if I were starting a product company today, I would start out with the mentality of bootstrapping for as long as I could. And, maybe, just maybe, I might consider raising more money under a few limited circumstances.
I would raise more than $250k if I had a company that:
1) Was growing 30%+ MoM in sales and my operations could not keep up to fulfill those sales
I’ve noticed for operationally-heavier companies (i.e. not SaaS businesses but generally tech enabled services or alike), it can be easy to grow your sales quickly, but often these companies need to throttle their growth, because they do not have enough people to fulfill these services.
2) Was a marketplace with high engagement
Marketplaces tend to be “winner take all” businesses, because they are only valuable if both the supply and demand sides are both liquid and efficient. And, this happens when you have a lot of supply and demand, which means to really thrive, you need to be willing to invest in a land-grab on both sides.
This is why you see companies like Bird, Lime, et al raise so much money. They need to saturate cities with scooters and with users. (basically buy you as a user) In some sense, their businesses are “easier” on the supply side than the current ride-sharing market, because they can manufacture more scooters and don’t rely on people to drive them. They can create infinite supply. In the ride-sharing market, supply is basically a zero-sum game. I.e. someone who is driving for Uber right this moment cannot be driving for Lyft or a food delivering company or what not. That person’s time is occupied. The ride-sharing market will change over time with self-driving cars, and that will also become a marketplace with infinite supply which is easier than trying to grab two sides of a market. But you still need tons of money to manufacture a lot of vehicles.
3) Was growing net revenue 30% MoM for many consecutive quarters where I felt confident to really pour big money in marketing channels
If your business gets past a certain threshold – call it past the $2m runrate (series A territory), and you are still growing at a fast clip using a repeatable marketing channel or two that works, then it likely makes sense to step on the gas.
The caveat is that many companies have a difficult time crossing the $10m runrate – this is very difficult to do (series B territory). So you are taking a gamble that with more cash, you can get to series B metrics. It’s just really hard to keep growing 30% MoM with large revenue numbers. But also, running a company at that level involves a large team, and it’s tough to manage a larger team. But despite those risks, I would still raise money in this circumstance too.
So what are good bootstrappable companies?
I think the perfect profile of a boostrappable company is a SaaS company. There are often little to no network effects, so your competitors affect you less. I.e. company A using product X doesn’t affect company B’s decision to use it *most of the time* AND company B being on the platform has no affect on the user experience or value that company A gets out of product X. There are low operational costs – software has high margins, so you can often pour profits back into the business to keep growing (at least to a good level).
I also think events businesses are good bootstrappable businesses. VCs don’t like to invest in these, so it would likely be impossible to raise VC money at any point in time with this type of company. But, as I’ve mentioned that events businesses can actually have really low operational costs despite what most people think. If you can get the venue / food / staff / content all free, then the costs are just marketing and your own salary. And on the revenue side, you get your money upfront when people buy tickets or sponsors send you money ahead of the event. And you can often pay vendors on a net 30 basis. So you get money upfront and pay costs later in most cases. People often cite scaling as a stumbling block, but if you look at the truly efficient events companies – Web Summit comes to mind – they basically just print money and have a scaled playbook to be able to do events all around the world.
We have a lot of Shin Ramen in our office as a micro VC too.
I think people often equate bootstrapping with low growth or “lifestyle” businesses (which somehow investors seem to equate with “no money” but not always true). But, I think that’s false. With the right conditions, bootstrapped companies can be super high growth, high revenue companies. It’s actually not true that you need VC money to grow really fast. With high margin and low cost businesses, you can grow really fast without much or any external funding. And at the end of the road, you can decide what exit you want to take (if even). You have control over your own destiny in a way that most VC backed companies cannot.
I also think people think raising VC money is sexy. It’s like a stamp of approval. But the truth is, VCs are wrong most of the time! Most of their startups end up failing. And the flip side is that there are a lot of great businesses that don’t need VC money to grow really quickly (for all the reasons mentioned above).
I think ultimately, very often entrepreneurs end up raising money for the wrong reasons or raise money too early. They think life will be easier if they raise money - the salary would be better and having more help would be better and pouring more money into marketing would be better. On the surface, I’d say that all of this seems better – of course we all want more money! But unless you have found fast growth channels, your people and marketing dollars end up not being put to very efficient use, and you are actually no better off than if you had bootstrapped your company but you have given away more of your cap table.
So from seeing things as both an entrepreneur who has raised money before and now being a funder of many startups, this is what I would do if I were starting a product company today.
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