This is what we did with my company. Raised a $1.1m seed in 2015, and still running the company today. It's a very profitable modest company now with 25 employees.
At the time we raised the seed round, we thought we were going to go the regular VC funded path, but somewhere along the way (probably when we became profitable) we changed our operating model to one similar to a bootstrapped company.
Some investors got annoyed (some probably still are annoyed), but we've offered to pay them back their original investment. I used to get angry emails from investors telling us it's terrible that we're not burning money, because you have to invest and burn money in order to grow fast.
I really like the position we're in now, with 100% total control over the company, no board of directors other than founders, destiny is in our own hands. No pressure to raise since we're profitable, and we continue to grow by reinvesting profits back into the business (hiring more people).
This strategy 100% will not work if you tell investors this is your plan from the start. VC-backed and bootstrapped companies operate very differently and have very different long-term goals. Bootstrapped companies typically aren't compatible with the goals of investors. I have trouble seeing how you would pitch "raise 1 round" to seed investors successfully. And I absolutely would not recommend being dishonest about your intentions if you know this is your plan from the start. (For us, we truly believed what we told our original investors and the vision we painted, and only changed our operating model a couple years later after burning nearly all of our seed capital)
Investors have myriad tricks up their sleeve to deceive and take advantage of founders. I’d have absolutely zero ethical issues with clawing something back in that relationship.
This is cool, as long as you have some way of compensating people that took risk for equity
Personally, I took a very low paying job at a VC-backed company over 10 years ago. Left some time later with a significant amount of equity in the form of stock options. The company has grown immensely since then, they became profitable and stopped raising money
Now I’m stuck with a bunch of ISO options that I need to spend money on to actually own the equity, without any foreseeable exit/liquidity event. The company is not offering to buy back anyone’s stock and won’t even provide financials to find a buyer myself
To be honest. I want to build my company this way only. When I get product market fit and I have insights that we can grow up exponentially by burning money I won’t mind doing it. But this is very hard to pitch to a VC. You want to be honest but that honesty rarely converts into a fund raise.
That’s not to say they won’t make money in the future. Their investment still exists, and while I’m not optimizing for a quick exit or extremely fast growth at all costs, we will eventually exit.
Not sure if it will be in 2 years of another 10 years, but we will eventually. At which point they’ll make at least 5-10x their original investment.
When I offered to buy back shares from early investors most said no and opted to keep the shares for a pay day in the future.
> When I offered to buy back shares from early investors
this is obviously a loss for the investor if they accepted. The time value of money is not zero. Unless you're willing to also pay the expected return from such an investment, you'll have just asked them to provide free capital for you with nothing given back.
This is when I break out the worlds tiniest violin :)
I agree with you, but so what?
The expected ROI for any given seed investment is $0. It’s common knowledge at this point that seed investing is a numbers game where nearly all seed investments fail and a tiny percentage return huge.
I consider our investors successful in that we’ll, at a very minimum, return more than they would have seen if they had invested in the S&P 500 over 10 years.
Better yet from both an ethical and efficiency perspective is to simply not raise money at all. I bootstrapped completely and am far healthier and happier because of that choice.
I've bootstrapped all of my businesses too. However, that isn't a viable path for every business plan. If you need a lot of money to even begin, if you want to maximize return very quickly and exit, and so forth, VC is a better way.
It's all about tradeoffs, and the right tradeoff depends on the specific venture.
I do, however, think that a lot of people starting companies seek VC funding when it's not appropriate for their venture, just because they perceive that to be the only, or best, way.
It totally depends on the investors. In the given example of raising at 3m and selling at 10, a lot of investors would call that a failure and push instead to raise more for a bigger eventual exit.
It sucks, but the failure rate of a startup is so high that it's understandable when VCs need their successes to make it big.
On top of that, for a founder that ~5m exit may be life-changing. For the investor, probably not.
They can "push" for whatever they want. I think this is the trap a lot of founders find themselves in.
I know someone that did a couple rounds (2 plus a bridge) and pretty much just stopped listening to the VCs after that. They essentially pivoted it into a lifestyle business with no dreams of IPO or exit. They pay themselves (and a small handful of employees) a nice salary. The company is minimally profitable and very stable. The VCs are never going to see a dime of return. I think its kinda hilarious.
Seen this several times in my career. It's not all VC hockey stick growth, many companies are just profitable, they have 10-20 employees and the owner lives a great life style. Generally the pay is pretty good and they focus on customers like any other company.
It doesn't have to be billion or bust, only once ego is involved does it become billions or bust.
Right, but it sort of needs to be hockey stick growth for the math to work out at the VC firm. So, like, fine, you can glide into a steady state of comfortably running a company over the long term; that's great! You should do it if you can! But you can't go pitch that to investors, since you're basically pitching a loss for them.
I'm not saying you're really facing any legal liability here but the strategy you're proposing here involves defrauding your investors. They're going to make these demands explicit before you close the deal!
I don't see this as a strategy so much as just a natural consequence of the system. Most companies "fail" from a VC perspective; some percentage of those are still profitable and keep the founders/employees engaged. Everyone wanted the hockey stick but they got something else. It's not fraud.
Right. It's fine/expected if the "failure" comes in this category (though many investors would encourage you to simply repay them and move onto something with more growth potential).
The unethical thing would be pitching a unicorn plan when the actual strategy is building something much smaller.
It is if you assure your investors you plan to take risks to pursue hockey stick growth, but instead you intend to keep the money in the bank and putter along.
In my example, the company was in no way planning this to be the outcome. They were shooting for a big acquisition or even IPO by capturing a sizable % of a $400b market. At some point it became clear this was not going to happen, but a path to profitability became clear so they followed it. From a fiduciary responsibility perspective this is a perfectly fine choice to make, but it is the last thing the VCs want as it results in zero ROI for them.
Right. Everybody who works in startups has the experience of shooting for the moon and getting as far as, like, Tulsa. No harm in that! Tulsa's a big city. It's only a problem if Tulsa is where your sights were set before you pull the trigger, which is the feels I get from people talking about this as a company formation strategy. No VC is going to wire you funds on a pitch that's about making high 7s, low 8s tops if it ever succeeds at all.
The VCs won't see a return, but what's the upside for the founder there? Paying yourself a "nice salary" is not a win considering how hard it is to get a company off the ground.
Raising a couple of rounds can reliably render solo founders financially independent.
If you can easily cash in for $5MM+ and a steady salary while maintaining full control of a startup with loads of cash in the bank, would you risk it all for much more, or ride it out for as long as you can in comfort?
I don't know about that. Paying yourself a nice salary, having a stable job doing something you probably (at least at one point) find interesting, and having lots of autonomy seems like a pretty nice gig.
The decision point isn't when you raise the first round, it's when you decide not to raise a second one. You will have already spent a lot of time trying to build a big company and realized that isn't going to happen. Now it's time to figure out whether to convert your previously-ambitious startup into a stable, small company. Depending on the sector and business model, this may mean you don't even have to work that much. If you're selling SaaS and have low churn, you could hypothetically take it very easy and just pay yourself. VCs would not like this, and if you try to raise for a future company, funders would be wary for sure.
It’s fine if they’re happy with it, but you then go on to again state that there’s some sort of objective failure here. There’s not. If you think that there is, you’re living in a bubble.
I put "failure" in quotes because they absolutely did fail in what they originally set out to do. Nobody raises venture capital to build a "minimally profitable and very stable" business.
Thinking about it like the old joke that "if you want to be a Millionaire, start with a billion dollars and launch a new airline."
Even if the outcome is desirable, it can be a failure if you started off with a different/bigger outcome in mind.
> Nobody raises venture capital to build a "minimally profitable and very stable" business.
You're not understanding the article. The point is to implicitly want to run a lifestyle business from the onset, it's just that you don't tell the investors that explicitly. So you do set out to raise (one round of) VC just to have a cash cushion and then continue on as if you're bootstrapoed. From the VCs' perspective, you've failed, while from the founder's perspective, you've succeeded. See the top comment from the user cj for clarification. In other words, it's a "hack" around the traditional thinking of VCs.
Don't patronize me, your comment would have been better without the asshole remark.
In fact, it's you who struggles with reading comprehension. All of the examples from the article are massively successful businesses, not lifestyle businesses.
An article about planning to build a small lifestyle business wouldn't focus on examples like Klaviyo or Zapier.
It's not about lowering ambitions or setting out to build a small business. It's about being more capital efficient on the path to building a big business. In fact, that's the entire point of the article: how you can potentially get to a huge outcome without losing control across many rounds of funding. Nothing in the article is tailored towards small lifestyle businesses.
Honestly, it's a pretty great outcome. Maybe not if you aspire to be a billionaire, but that thinking is just a trap for most people.
In his case, he's now CEO of a stable small business. The whole company is WFH permanently and he probably only honestly works for 20-ish hours a week and doesn't have to answer to anyone other than the customers that use his product who are generally pretty happy. Of course there is the occasional fire to put out, but WAAAY less stress and work than a big corp for similar pay. Plus a ton more freedom and control. Not to mention, cashing out (eventually) via acquisition is still entirely possible.
But that's the point isn't it? If you only raise one round, like the $3m, a round is only like ~15% of the company so they don't have the power to dictate whether you attempt a bigger exit or not. I also don't understand why this "third way" isn't more common because you get the initial big boost of being able to hire a team, but you still retain 70-85% of the company instead of repeated dilutions where founders end up with 5-10%. I know I know, 5% of $1b is more than 85% of $50m but it usually seems like you become worse off and just another job you don't have control of where someone else is putting their thumbs on the scale and you can get ejected from.
Liquidation preferences make a difference to the math here. For example, a 3x liquidation preference would guarantee the investors the first $9 million of proceeds from any exit in the $3 million investment example.
Really? You might've been in these investor meetings. AFAIK, founders are telling investors about the big vision, we'll raise money right now and wishfully become very big. In what way are investors stipulating, "ok we'll fund your seed/A but only so that you can hit certain benchmarks that you will definitely be raising a series B in a year or two." Is it that direct?
I was naive when I started out talking to VCs and made the mistake of saying that we might only need to raise one round. Of course, this is not what any VC wants to hear, since it doesn't align with their goals.
It is possible to just raise one round, but it requires that you use the right kind of instrument, and that you don't give up too much voting control. My guess is that if this sort of thing becomes popular, VCs will insist on certain key terms that will allow them to prevent this sort of strategy, and any founders who resist the key terms will be viewed as suspect.
This is exactly what my current employer did. It's also the best job I've had in a 25 year career. Business is very stable and provides a nice life for the small group that we are. No VC's harping at us to do more, more, more. We made a profit the first year and have every year since.
Yes they can. And "traditional investors" might be perfectly fine with dividends plus a solidly run company (i.e. valuable on its own). It's just unlikely to satisfy investors who were promised either a nice exit or a hockey stick.
This "third way" is only really possible if you're strategically aligned with the "one round" investors you have. It's easy to point to a few companies that have gotten buy-in from their investors and generated a multiple of 100x returns, but for the vast majority of companies that raise one round, their investors are still going to push for "swing for the fences" returns - which usually means recommending raising more money.
Consider:
- Venture capitalists are generally funded with a 2% management fee and a 20% carry. AKA their limited partners (investors in the VC fund) are looking for returns over 10 years that are better than an index fund, even burdened by those extra fees. In other words, they've only achieved the most modest of success if they have a 3X overall average return, and are incentivized by the carry to aim for much much higher returns.
- VCs only make money if they can sell the shares. I.e. there's an M&A event, an IPO, or a secondary market.
- Even without a majority share, VCs generally get "preferred share" rights, which include the ability to force a company to have a public offering/sell itself (These are called "registration rights" in the Investor Rights' Agreement). Granted these haven't been used frequently in the last decade and a half, but it's a potential hammer that VCs can wave if a founding team/management decide to try to just run a company as a smaller profitable enterprise.
On the last point, that is why it is CRITICAL that you do not give your investors the right to demand registration based on the mere lapse of time. In most rounds I do, I get investors to agree that demand registration only arises after an IPO. It looks like a small point. But it is essential if you want to keep your options open (which is really what the Saastr article is about).
I'm going to guess that the typical VC model of 2% and 20%, only hockey-stick mega-exits, is generic, milked to death, and alpha eliminated. Early Silicon Valley VC got its huge returns being innovative from the typical Wall St. NYC banking firms, at a time when early software projects needed capital for servers and big offices. Now, it's a standardized banking apparatus and the software co. landscape has changed. VC itself will get disrupted by the smarter financiers taking advantage of the alpha here, filling the gap by making more, smarter % return allocations into overlooked software co's that don't need $200m for a software co. in a remote-work cloud infra world.
This has been our strategy. We bootstrapped as long as we could. We got 1 & 1/2 products live. But with a long sales cycle, and security certificate requirements, we needed funding to cross that chasm. We’ve raised one round and our goal is to get to break even. Our competitor have gone the other route, VC after VC, and while it’s enabled them to grow, it’s left a bad taste in their customers mouths (who’ve effectively been burned and churned). It’s made it easy to differentiate ourselves, and our motivations, and ultimately win their business.
Growth at all costs often means “if it doesn’t win a new customer it doesn’t matter.”
It’s takes concerted, continual focus to ensure customers actually solve their problem & renew.
If that’s not a priority, you don’t hire the people with the DNA & skillset to deliver it.
Many startups are learning that you can’t just pivot your strategy from acquisition to retention. Your product, your team, your culture all have to make major changes to succeed at it.
Of course, you don’t have to be bad at fulfillment and retention to win new customers. But you won’t be able to allocate as many resources to acquisition.
Do you think we will see any bootstrapped companies become billion dollar corporations? Companies that start close to or are profitable from the get go. Obviously small revenues.
Starting small with a specific market and conquering it and then ramping up the product to go after bigger and bigger segments.
Or is that just impossible in today’s landscape?
Like for example as a swe I have an enough of money I could use to self fund myself. If it goes wrong I just need to work 2-3 more years and I have another 500k.
That’s not what you were talking about though. You were talking about having a billion-dollar company. There are plenty of bootstrapped companies that make a nice profit delivering something that people want. Literally look around you. By chasing a billion dollars you are just swapping one largely pointless ladder for another one.
Maybe this is just me getting hung up on semantics, but in my view that "third way" is still being VC-backed. True, it's to a lesser degree and so you sacrifice less for it, but you are still giving some legit control to the VC firm.
Have seen this a lot in the conference I run on the topic. Sometimes it’s on purpose but most times it’s just not being able to cross the series a chasm. If you have mostly angels this works pretty well as it sets you up to make everyone happy in a smaller exit.
No, being venture backed implies you're cashflow negative and you're relient on funding to live.
If you're a founder of a venture backed company, one of your main jobs is to build a pipeline of investors and constantly be planning for the next round of funding (that takes a significant amount of energy away from building the company).
With this strategy, you raise one round, then you go back to being similar to a bootstrapped founder where your only focus is to make the business sustainable and you're not spending mind-share trying to raise more money.
No, being venture backed means a venture capitalist invested in your company. All that other stuff is just like, your opinion, man. It's extremely popular in Silicon Valley but that doesn't mean it's a fact, or even that it's particularly common in the rest of the world. In fact, I'd wager most venture-backed companies only raise one round, and this endless-money fever dream is the rarity.
Okay so your entire comment thread is really arguing about the semantics of what the phrase “venture-backed” means. I really don’t see what’s the gain by pursuing this line of discussion other than to be argumentative. Everyone clearly knows what everyone else means.
No, my entire comment thread is about this article pretending to have invented a third option, when in fact it's still just the two. It's a bullshit clickbait headline, where a more honest one would have been "Endless fundraising isn't necessary" or something. Everyone clearly doesn't know what everyone else means, or else the headline wouldn't be misleading and someone else wouldn't have tried to convince me that 'venture-backed' means your business should be a ponzi scheme.
In a very narrow strict sense, yes. But I would argue it's not really venture-backed. For me, venture-backed means that over time, the founders collectively own a minority of the shares, and the board structure is such that venture capitalists collectively hold a majority of the board seats. This means that technically the investors could do anything they wanted to with the company.
This is qualitatively different from the founders collectively having a majority of the shares (even factoring in granting tons of equity to thousands of employees), or, if not, they at least control a majority of the board seats for a long time, if not forever.
Mark maneuvered for the best of both worlds with the dual class voting shares. He owns the majority of the vote but only ~13% of the share capital. From the rumblings I've heard, I don't think VC allow this type of Google/Meta share class anymore, and/or SP500 don't include new entrants, but not super knowledgeable here.
I work with quite a few company with dual class voting common shares. I will never understand the notion of not implementing that at incorporation if you want it. Will you have the leverage to get a VC to agree to let you keep it? Maybe, maybe not. But the worst that happens is you get rid of it, which is virtually costless.
Honestly, implementing a 10M share one class common company just to make a VC happy sends horrible signals for negotiating with investors. It shows that you are happy to pre-negotiate against yourself from the get go just to look VC friendly. If you cared about retaining control, why would you do that?
At the time we raised the seed round, we thought we were going to go the regular VC funded path, but somewhere along the way (probably when we became profitable) we changed our operating model to one similar to a bootstrapped company.
Some investors got annoyed (some probably still are annoyed), but we've offered to pay them back their original investment. I used to get angry emails from investors telling us it's terrible that we're not burning money, because you have to invest and burn money in order to grow fast.
I really like the position we're in now, with 100% total control over the company, no board of directors other than founders, destiny is in our own hands. No pressure to raise since we're profitable, and we continue to grow by reinvesting profits back into the business (hiring more people).
This strategy 100% will not work if you tell investors this is your plan from the start. VC-backed and bootstrapped companies operate very differently and have very different long-term goals. Bootstrapped companies typically aren't compatible with the goals of investors. I have trouble seeing how you would pitch "raise 1 round" to seed investors successfully. And I absolutely would not recommend being dishonest about your intentions if you know this is your plan from the start. (For us, we truly believed what we told our original investors and the vision we painted, and only changed our operating model a couple years later after burning nearly all of our seed capital)