No Venture Capital Needed, or Wanted
nytimes.com
nytimes.com
These days, since startups are much more fashionable, it feels like it's the majority of startups are all about getting VC funding and ran by much more "idea" people.
Lots of people did it. Getting real shit done post crash was a glorious time.
Now we are growing like any other startup would, just instead of being fueled by VC funding, we are being fueled by all of the profits from all of the selling I was able to do and all of the word of mouth that happened afterwards.
You've probably never heard of me and no media outlet cares about me because I started as a not so sexy B2B, but the company and its products are growing much more ambitious in scope as we are getting the capital to do so, and now we are in the same position as many other VC funded companies, except I have 100% equity and don't have to worry about searching for a way to become profitable or running out of money since the second I decide to stop reinvesting everything into growth the company will instantly be extremely profitable.
"except I have 100% equity and don't have to worry about searching for a way to become profitable or running out of money since the second I decide to stop reinvesting everything into growth the company will instantly be extremely profitable."
...is the grand finale that comes with VC-less businesses. :)
We bootstrapped with time (evenings & weekends) until we had enough revenue to keep the lights on, at which point we quit our full-time jobs and pursued it 100%. We're in our fifth year now and we closed 2015 with $2M in revenue. Excluding compensation, our operating costs (servers, professional services, supplies, t&e, taxes, etc) are about $125k.
While things are great, growth has also slowed due to sheer bandwidth available from only 3 people. We've definitely struggled with hiring. When a new employee's salary directly comes out of your own compensation, you tend to become very particular about people pulling their weight, so we've churned through 10 people so far. I've had a very difficult time competing for top talent.
At this point I think the networking and advice would be the most valuable thing a VC could bring to the table, as we have an abundance of cash and technically a very easy business to scale. Just need capable people who like to be well-compensated.
"we're going to invite you for a fifth round of interviews to make sure you're someone in line with our vision and understands our mission"
the criticism of this being that some people call this free work
In fairness, I think besides those who are well enough off to not need to work, a paycheck is the main reason people work.
I'm just a junior engineer who admittedly doesn't know anything so take this with a grain of salt, but firing people because they are not similar to you seems bad for the company. After all, if they do good work in a timely manner, shouldn't that be more than sufficient?
If you only hire people who are like you, then it seems like you'd get a serious lack of diversity too, even though the benefits of diversity are well studied.
Then again, you're the one running a successful business while I'm just a random guy browsing HN when I should be working!
Something is wrong here.
1. You are able to hire somebody. Your salaries may be to low that you may have a bias here. But people do start.
2. After a FEW MONTHS you realize that they are not able to "hack it"
Sounds much more like a management problem than a skill problem.
Disclaimer: EU freelancer here.
The problem is this idea of looking for top talent.
The vast majority of people in virtually any human endevor are mediocre. Be it an orchestra, army or corporation. Maybe 5% to 10% of an organization is top talent, the rest are average.
What makes any organization excel is having managers and leadership who can take a team of average folks and make them produce brilliant sounding symphonies. Develop THAT skill and you'll have no limits.
If I'm hearing you correctly, it sounds like you have 3 people, ~$1.8 MM net profit and since your tax burden is low it looks like you pay out most of that by the end of the year. So are you looking at annual compensation of $500-600K each?
Why not stop paying yourselves so much and reinvest more in your business?
IMO, it's a lot easier to hire and take risks on money if it's set aside in a pool of money that you've designated as NOT being for founder salaries. If you cut back to a more reasonable $150-250K salary each, you'd have tremendous free cash flow available for all sorts of hiring and even acquisition possibilities.
It's very hard to stay competitive when you have nobody to compete with, and expanding your product into new markets can, perversely, give you competition because you paint a target on your head (hey, we do X, and they're taking our X lunch, we should start doing Y and see how they like it).
Maybe a little bit of growth would be good for them. Me, I like about a 25-30% growth rate a year. As a lead dev I've always struggled to keep up with the changing team dynamics when it's bigger than that, and most of my peers have had similar experiences, differing only by degree.
I don't think I've ever seen someone manage more than a 2x growth rate without the wheels coming off, and yet I've seen many try 5-10x and flame out in the process.
So for them to ramp up without growing pains, they could easily add one person this year, another in about 8 months, and another 6 months after that. As the team gets bigger you can hire people more often, because you're used to it and your protocols for absorbing new people get better and better. Just remember to assign some of those people to trying to do more with what you already have, and identifying frugal expenditures that have multiplier effects (I've had to beg for $5000 in hardware and gotten another FTE instead so many times it's become a cliche). The working smarter aspect will keep your team lean and build a lot of confidence they'll need when a competitor or a fractious customer finally shows up.
Hiring someone to manage would probably be the most useful next step.
Are you a limited company or a partnership? If you're an LLC, it's not your own pocket, it's the company's. This feels pedantic but is very important both legally and psychologically.
Remember it works the other way round for your employees. Their extra work goes into your pocket, not theirs (unless they're on commission!)
If you had 1,000 employees, would you see every last one as taking from your pocket? Come to think of it, maybe this is why so many business owners nickel-and-dime employees into misery.
you tend to become very particular about people pulling their weight
You're a founder. They're not. They are never, ever going to be as committed as you. They're going to do the 9-to-5 and then go home and think of other things. This is fine, because their compensation has a bounded upside and yours doesn't. Unless you're giving them a huge equity stake, which doesn't sound like the case. You have to reconcile yourself to this. Trying to make the whole company out of founder-level committed people is like the old joke about "you know the indestructable aircraft black boxes - why don't they make the whole plane out of that stuff?"
I could not have said this better myself. I worked - as an IT manager - in a relatively successful startup recently and experienced that same realization. The founders were very young, in their early 30's, and had a daily, constant serious, ornery, mistrustful attitude towards staff. The founders worked 6, 6.5 days a week, 10 hour days. However, some of the most junior staff also worked like that. They were mistrustful with regards to the amount of time people put in, and these founders paid almost everyone under market even though they themselves were standing to make millions off of the expected sale of the company.
While the founders believed everyone in the company was swindling them by cheating their work time, as a manager I knew that people worked very hard, with enormous stress.
As you can sense from the original poster of this sub thread, the two positions (founder v. salaried employee with a little bit of stock options) are irreconcilable EXCEPT if the founders start to realize the added value of the employees versus their cost. "An employee's cost" == short-term thinking. In my opinion, if you're churning through 10 people and you're only still 3, I'd wager (without knowing more facts it's just a wager) that the comment about not finding 'top talent' is a rationalization for something else that's wrong managerially in that startup. Mentorship, training, higher pay, patience, better interviewing are all possible avenues to pursue to AVOID the 'churning through 10 people' scenario.
Provided your new hires are making sufficiently more than they're costing you, and allowing for a ramp-up period, that should be enough. Perhaps the problem is that the founders have a very unique set of skills that they're selling - which makes for a great business, but is inherently hard to scale without a cloning machine. The business needs to be standardised and process-ifyed a bit in order to make it easier to train new employees, or hand off work from the founders.
"Founder Stakhanovism" is actually somewhat workable. Divide your time in the working day into "key" and "grunt" work, where the "key" work is your unique marketable skills and the grunt work is more routine, then hire someone to follow you around and do the grunt work.
Your point about commitment is definitely accurate, though the 9-to-5 and "content with just my salary" attitude was what a lot of people tend to exhibit, even though they could have 2-3x'd that salary.
You mention commissions; I'm not clear whether you're talking about salespeople, developers or consultants? Or something else? Only the former traditionally work on commission.
The thing is that each additional hour of work has a nonlinear "cost" to humans. The 80-hour week is something that not everyone can do in the same way that the 3 hour marathon is not something that everyone can do.
I suppose I really need to do a nice writeup of my experience where, due to chronic fatigue, I had no real alternative but to work 25-hour weeks for a few years.
We actually do pay very close attention to revenue-per-employee, that's ultimately what drives the firing decision.
Aren't these bonuses? Unless the developers are closing the sales.
> We don't directly track nor care about hours, just output and results.
Okay, and are you expecting the kind of results that would take most people 60-80+ hours?
side note: I also happen to be in the market for a new mattress and was wondering if anyone has tried these Saatva's?
The vast majority of Americans can't (and shouldn't) start companies. The risk far outweighs the reward. Even those who can afford to start companies overwhelmingly fail.
Starting a company is a luxury of those with lots of cash or lots of connections (or both). You read articles about teenagers getting VC, but that's a very small minority of the people who get funded.
Of course every situation is different. $100K+ commitment is not unreasonable if fundraising is difficult. Then again, some people raise a million bucks after a few weeks of prototyping.
In any case, people with money have more flexibility than people without it. One of the hard truths of startups.
Getting the know how and connections I can understand but VC for the money to fuel hyper growth...it sounds like a questionable proposition. Why would I put off testing the most fundamental hypothesis of my business (can it be profitable)?
Are there any known companies that explicitly didn't take any money after YC? It feels like once you take the first bit you're sliding down the slope since investors are pushing to take further rounds which usually pop up valuation. YC->bootstrap mode seems like a reasonable approach but the YC program seems to be built around pitching to the next round of investment (demo day). Has YC considered an alternate program where the explicit goal is being profitable after the program (black number day instead of demo day)?
"It's difficult for inexperienced merchants to recognize value. We'd spend countless hours trying to explain 'pain' and our cure but some just didn't care because they handn't felt it yet. With our limited resources, we had to figure out a way to only work with those who valued the medicine we were offering."
That's brilliant. It's brilliant because it might be the trick to getting more uptake in my niche, high-assurance systems. They cost more with some sacrifices to use. Most won't buy them since they don't see the benefit. Yet, such methods are utilized in railways, airplanes, some industrial controls, and some defense organizations. They've felt the pain of failure on their bottom line. So, there's always a niche that prefers paying a bit more to eliminate lots of risk and uncertainty out of their operations. Plus headaches. Money you spent upfront isn't pleasing to look at but you can almost forget about it vs stress of occasional fire-fighting in random places.
Does this actually happen?
I would think this not only happens, but is common.
http://mashable.com/2011/04/13/facebooks-complicated-ownersh...
But most startups are not built with sustainability in mind. They're a get-rich-quick scheme.
That is the truth.
Of course there are success stories as well, YMMV.
So, every year a fair number of companies 'exit', that is, their founders and their investors tend to make a substantial multiple of the value that they put in. The latest investors usually have the best terms, earlier investors have lesser terms and the founders will have the worst terms. The multiples for the latest investors will be the lowest, for the earlier investors higher and for the founders the multiples will be the highest. But that does not say much about the absolute 'take home' amounts.
It is rare - but not unheard of - for liquidation preferences to eat up all of the result, but it is not at all rare to see founders make substantially less than they thought they would make. And those are the good cases, in a bad case (for instance, a bankruptcy) all of the proceeds could go to an investor + all of the IP if you are not very careful. So make sure you understand the terms and internalize 100% that a large valuation during a funding round can work for you as well as against you quite easily depending on the final price your company will fetch at an exit and the exact parameters of the deal.
VC money is not free.
This is not simple stuff and plenty of founders are hopelessly naive when it comes to understanding their position.
That is by far more money than I've seen in my entire life. Of course you don't need money for your startup if you're already rich.
Its tangential, but it is very interesting that even in developer circles devs think they are middle class when they make $130-150k a year even if their cost of living is ~100k which means their total savings even after a decade (and something eating into their rainy day fund, including vehicle / home purchases and such) they still don't have two years living expenses saved up, you are still definitively working class.
Very few people today are actual middle class anymore, by reasonable standards of what to define it as, since cost of living has gotten so absurdly high relative to income compared to what it was decades ago.
350k would easily last you a decade in a smaller, low cost of living town. You'll be driving a 2011 Honda Civic, limiting how often you eat out at nice restaurants, and not buying name brand, but you won't exactly be struggling.
I know developers who have saved up that kind of cash in about 6 or 7 years, working in relatively low cost of living areas.
You simply have to save and invest half your income. ;)
I'm assuming the plan required the input of lawyers or other expensive advisors. Still it seems excessive for a bootstrapping company.
“I’m much more meticulous and efficient. I might go a little slower, but in the end I believe I win.”
Slow is not how you win.
I think this article fundamentally misunderstands the goal of VC backed companies: Billion dollar exits and paradigm shifting technologies. That's not for every company.
This presumes a lot about entrepreneurial ventures at a vastly generalized level. While this may not be true of the high tech entrepreneurship most at focus on HN, there is a myriad of other entrepreneurial activity (maybe not using the 'startup' marker) where this is a very reasonable statement.
Right. While still generally debated, when talking about "startups", across the board speed, aka high growth, is the common factor [1].
If the discussion is around "entrepreneurship" generally, then high growth and speed isn't even a goal usually.
After 16 years in business, Starbucks had a whopping 17 locations.
After five years in business, Domino's had three locations (12,500 today).
Specifically Dominos was taken over and completely restructured to move really fast.
Fast is absolutely how you win - but it matters when you are fast. That's the whole point of Venture money, to go fast aka "Growth Capital". You don't do that in the beginning, you are patient but if you want to grow, you have to grow quickly, otherwise you get taken out by a larger competitor who can get to market faster. Failed unicorns put growth capital before they have a solid market position.
This only applies if you're in the pre-launch phase and you haven't gotten to market yet. For those organizations that are already on the market, how fast your ramp up does not always mean you will win. The inherent risk of VC-fuelled fast growth is that the excessive funding will overshoot the actual value very quickly - and suddenly what was supposed to be a healthy $1B business becomes a "$30B" (on paper) series-J failure with no hope of getting a reasonable exit. In that case, I feel the slow/patient growth to $1B is far better for everyone involved (except VC).
There is a long list of (ex-)startups that make me scratch my head: in what parallel-universe could they possibly be worth $X - which ever way you slice it - their revenue cannot support the exuberant valuations.
I have wondered if it's a cultural thing or just that there is more money/investors/people willing to take/give money in California.
1) glitter or brainwashing 2) they don't know how to sell before they build (you're guaranteed a business if you have paying customers/clients)
Also, it's a business, no lifestyle about it. Almost all businesses are bootstrapped (just like most businesses are not in the valley).
In the article Rudzin worked for 20 years within the industry and he surely within that time had accumulated a lot of niche knowledge which helped him succeed.
Say X is a high school teacher with an insight that a better mattress is needed in the marketplace. She follows up on this and goes on to start a company that initially shows traction. X after a while will discover that her lack of knowledge in finance, distribution, negotiation, HR, legal etc (in a general sense, and on an industry-specific level) is a barrier to her companys development. Capital will help solve this problem by allowing her 'buy' and domesticate expertise within the company and and use same for expansion and growth.
Maybe my perception is warped but is this even _possible_ today, or during the peak a year or two ago?
“I don’t remember seeing a company going public on the Nasdaq in the last 20 years who arrived at the I.P.O. with only management owning the company,” he said. “It’s almost a rite of passage.”
Why would you sell a business that you owned 100% of that was able to be bootstrapped to $100 million in revenue. What possible business that you could invest the proceeds in that would be better than this?
I'm sure Casper gives Saatva very healthy competition -- in fact, it's the only of these companies that I've even heard of until now.
By this definition Bezos was not bootstrapped.
Spring / traditional mattresses are a bit of a challenge (size), but foam mattresses can be packed up relatively conveniently (Leesa was 2x2x4.5 for a queen) and shipped w/ a decent 90ish day try/return policy.
Different than the days of going to a mattress dealer and having the same manufacturer give different names to the mattress based on dealer so "price comparison" was difficult/impossible.
It's true beyond a doubt that if you bootstrapped a $100mm in revenue company that can profitably grow from reinvestment you don't need VC money, and in fact if you want to IPO, you can you do that without giving away any upside at all (until the IPO day that is, when the bankers get their cut).
However, getting to that point might be easier with the aid of some wise and well connected folks.
At least, that's the good part of SV.
The Atlassian guys bootstrapped to $60M/year in revenue (in 2010).
The money will be used to give some liquidity to the founders and employees, expand its product portfolio, and possibly acquire other startups.[1]
There are plenty of other posts around where MCB talks about how the capital let them pay bonuses for early employees etc.
[1] http://techcrunch.com/2010/07/14/atlassian-accel-60-million/
He said if he could do one thing differently, it would be to only take money when he felt that opportunity was slipping away, and there was nothing else he could do about it.
Let's say you can get to $100mm in recurring revenue, and your company has $95mm in costs. Let's say that you know that every $1 in cash that you invest in Sales will generate $1 in new business every year from here on out. (This is a good business after all!)
If you don't take any VC money, your business will grow as follows: 100M -> 105M (100+100-95) -> 115M (105+115-95) -> 135 (115+115-95)
Now let's say you take $20mm from a VC, or the public markets. You now are investing $25mm in the base year, from which to grow.
Your revenue stream would be 100M -> 125M (100+ 120 - 95) -> 145 (125 + 125 - 95) -> 185 (145 + 145 - 95)
So you have a 185mm revenue company rather than a 135mm company on the back of the investment. If your company trades at a $5x revenue multiple (similar to what Qlik traded at today) you have increased the value by $250mm for the $20mm initial investment.
The math is a little fuzzy, but the general idea is as long as you can use the money smartly to increase your rate of growth faster than the VC (or public market's) required return on capital, it's worthwhile for all parties.
The math is off, mathattack.
Growing by $5m a year on $100M (5%) doesn't mean you'll grow by $25m a year on $120M (20.8%).
You make the good point though that raising the growth rate from 5% to 6% would make a difference.
But the idea is that $95M of the costs are fixed, so whatever you add goes to growth. So on 100M of revenue you have 5M to invest in growth, which will get you a 5M revenue stream the next year. On 120M you have 25M to invest.
This sounds far-fetched for traditional businesses, but isn't so off for SaaS companies. Once you get through sales, general and administration and fixed R&D costs, the margins on great SaaS companies is very high. It can be 80 or 90%. This is why GAAP metrics can look bad on them for a while (have to get over the fixed cost hurdle, and sales costs can be very high) but once you're profitable, it's a huge cash cow. This is one reason why Salesforce and Bloomberg do so well. They make tons of cash, and any competitor will need to lose money for several years to catch them.
This may be why PE companies are getting into the game lately.
It's possible to create a more realistic model, but the core idea is "If you have a great company, it still can be ok to get VC money to grow it even faster."
[0] https://www.google.com/finance?q=NASDAQ%3AQLIK&fstype=ii&ei=...
I know it's a lot more common for tech companies to take venture capital but there are plenty who do not.
Option 1: hedge fund: take a large amount of outside capital, but also sink enough skin into the fund that your interests appear aligned. If things go well, you can become a billionaire within a decade. If things go badly, you're burnt out of the industry (with famous exceptions) and you've lost a significant part of your net worth.
Option 2: start a prop shop or just trade your own assets, take no outside capital, go more slowly and take less risk (as less hunger for returns) and you might have a lower probability of burning it all, but you can only increase your net worth so much within the same decade. At most a few multiples of what you started with.
If there's a bull market, the first strategy is especially attractive because a. you can level up like crazy because debt is cheap (on top of the investments in your fund which are also coming in cheap) b. everything goes up, so just find the more volatile stocks (e.g. tech) as they go up faster. This strategy has made many people rich but you need to find a way out before the crash, because you'll find the perfect storm of your financing terms tightening suddenly, your high volatility stocks cratering faster than the rest of the market (that's why you selected them!) and your LPs (investors) all wanting out at the same time. There'll be white knights but they'll take their pound of flesh.
The prop shop partner on the other hand can wait out the crisis and buy the bottom or safely trade the volatility. He has comparatively less pressure on all of the above. These are the moments of greatest opportunity.
I always thought the same applied to startups. Eschew massive financing if you can, aim for lower volatility markets, and start the thing in a downturn when you have less competition and people are more sensitive to quality, is a lower upside but higher probability of upside strategy.
No less than Steve Blank puts forth this idea: http://www.inc.com/zoe-henry/steve-blank-tech-bubble-burst-p...