If things are going well profitably bootstrapping a software startup, how should founders think about raising VC money vs continuing to grow funded by earnings?

From Modeloptic’s co-founder, Luke Harris:


Founder notes on this critical, ever-perplexing decision:

(Featuring founders from: Calendly, Know Your Team, WP Engine, Parse.ly, and Yarno. Folks who bootstrapped for years before deciding on fundraising and also those who decided not to.)

#1: Calendly’s founder and CEO, Tope Awotona, on how some terribly unprofessional experiences of raising an early round made him determined not to chase funds until recently, and forced an astute urge of making their business model work faster. (Source)

As I went to raise those initial rounds, I actually thought that I did not like the process of raising money so that ended up shaping a bunch of decisions in the business. I, myself, did not enjoy the process of fundraising.

The reason I did not, is, in the early days of the business, pre-revenue, you’re mostly raising from the least professional investors and that process wasn’t really great for me…That’s why once I had raised that initial round, I was determined to never raise again.

What that meant was there was an urgency to establish a business model and that’s what we ended up doing. Raised a seed round in April of 2014, around August 2014, we decided to introduce a paid plan.

In introducing a paid plan, we had projections that about 1 percent of signed up users would convert to paid. It ended up being 3-4x of that. So the performance was actually much better than what the projections were.

What also happened is that as we began to monetise, it crystallised the business model and product strategy in a lot of different ways. Because we saw people who were most likely to convert. They had very specific roles. So we ended up building our product strategy around those high converting users.

So the company became, through a combination of product strategy and the sign-up/paid ratio being much better than we anticipated, the company became profitable probably within 18 months or so. By late 2016 or so, the company had become cashflow positive and soon after that became EBITDA positive. That’s how the company has grown since 2014 all the way through, even until now…

I’m glad that I took the bootstrapped path. It really exercised some muscles and I think it really allowed Calendly to be successful with a maniacal obsession with the customer and the user. And also doing that while prioritising an effective business model.

What I also know now is that the journey to build a company is a very long and difficult one. So I think you need as many allies as you can throughout that journey. I believe the best entrepreneurs and founders are those who’re in it for the long haul.

If your goal is to be in it for the long haul, you just need a lot of allies along that journey, the sooner you can have them on your team, the better. What I also know now is that VCs and private equity have never been more founder friendly.

So I think a lot of founders who’re bootstrapped, the reason not to take on capital is that people fear they’d lose control of their business. The reality is that they can protect their vision and also get the help that’ll help de-risk their path and ensure enduring success.

#2: Know Your Team’s CEO, Claire Lew (@Claire), on what the idea of optionality meant to her and how that informed their first raise after profitably bootstrapping for five, gruelling yet rewarding years. (Source)

We felt that having investors would distract us from listening to those people we wanted to listen to most: Our current and prospective customers. We wanted to continue to focus on adding value and delighting managers, executives, CEOs, and employees. We don’t want to sell the company. And we’re not interested in chasing an exit. We want to do what’s best for our customers and make sure their interests are protected.

The minute you accept money from someone or an institution – be it an angel investor, a venture capital firm, or a bank – their interests inevitably bleed into your interests. Your interests aren’t your interests anymore. And they definitely aren’t your customers’ interests, either.

We spent six months rebuilding the entire product, marketing site, onboarding process, and billing system between just the two of us. When we shipped the brand new Know Your Team in December 2018, we had $140,000 in the bank – and we held our breath.

Then, we exhaled. We saw 555 sign-ups in the first month alone. Since then, almost 2,000 managers have tried our product, and hundreds of managers have purchased Know Your Team in the past six months….

What we built was working – but we needed help. Especially, as we looked at what we wanted to build next: KYT 2.0. Our vision for Know Your Team is for it to be the resource that every new manager in the world can learn from and benefit from… and we knew what we needed to do to make that vision a reality. It was going to take time and some extra hands.

Not to mention, at the end of last year, Daniel and I had to be honest with ourselves: We were tired. As a two-person team building and growing a product used by 15,000+ people, it was the two of us coding and designing every product feature, onboarding customers, fixing bugs, handling customer support, writing every single blog post, producing our podcast… and more. It was a bit of madness. We worried that our pace of work wasn’t sustainable and that we might burn out.

So for the first time in five years, we considered raising money….

I knew exactly what we needed the money for. We needed to pretty much scale my time and Daniel’s time. We needed time to build Know Your Team 2.0. We needed help to create a world where bad managers are the exception, and the learning curve to become a good manager isn’t so high. And we wanted to do it in a way where our customers’ interests came first – not our investors, not our board’s, and not even our team’s.

I knew that raising money from a traditional venture capital fund didn’t align with us. If optionality is an important part of why I’m doing this whole start-a-business thing, traditional venture capital seemed to detract from that optionality, instead of increasing it.

By nature of venture capital’s business model, a $100MM business is considered a failure. Taking 10 years to generate multi-million dollar profits is a failure.

However, to me, both of those outcomes are excellent outcomes. So long as we’re helping people in a meaningful, sustainable way, that’s success to me. /Small in headcount, big in impact, independent, profitable./That’s my vision for Know Your Team. Venture capital didn’t seem to help make that picture clearer.

But Indie.vc? The promise seemed right. So we applied.

#3: WP Engine’s founder, Jason Cohen, looks back at almost a decade and a half of bootstrapping and highlights why it made sense, why it ever makes sense, to take the VC route. (source)

Well, the question is why would you ever raise money, even if you’re one person, who needs someone else telling you what to do, ever. And who needs anybody asking questions. I thought the point of being an entrepreneur was that you get to decide things without consensus or at least consensus with other people you’ve chosen. So, yeah, why do it at all?

In general, the answer is actually really obvious for anyone with any business, which is, there’s always more crap you want to do than you have money for.

And maybe that starts running out if you’re Google and Microsoft and actually have quite literally $100 billion in the bank and making money and you really can’t spend it fast enough on things that matter to you, that are strategic to you at that point.

Then, I guess it changed, but WP Engine started as a bootstrapped company and I bootstrapped it for two years before raising any money and of course the company before that, SmartBear, was bootstrapped and before that ITWatchdogs was bootstrapped.

In other ways, all the companies I’ve made were bootstrapped. Although now we’re obviously on a very different trajectory. My 20-year career has always been in bootstrapping until WPEngine, even including that in the beginning.

To me, that’s my mentality, who needs other people’s opinions but then, again, it’ll be nice to have some money because it’s hard to find a business where you can say, ‘here’s an extra $100K, or 500 grand, do you know what you’d do with it?’ Usually the answer is yes. And, in general, that answer remains ‘yes,’ but the size of the money scales with the business.

Like, at this moment, ‘no,’ there’s nothing we could do with an extra $100K, we can’t even hire one person for an extra $100K. So, no, that’s not helpful at all. But it’s always true that there’s some initiative where the size of the initiative is bigger when you have more revenue and therefore more aspirations for what you want initiatives to do.

Where it’s useful to have money ahead of the money coming in from the customer, of course, that’s why you should charge annual because that’s another way to get money faster than you’d otherwise get…

#4: Parse.ly’s co-founder, Sachin Kamdar, on a perennial refrain most investors shared with them (‘you’re not raising enough,’) and how they chose to ignore that and grow responsibly by raising a much smaller amount from existing investors instead. (Source)

Despite strong, sustained business growth many told us they wouldn’t be able to invest in our next round. We scratched our heads: “why?” The answer was always the same: “You’re not raising enough.”

West Coast investors said the same, suggesting we weren’t “thinking big enough.”

We wanted $5M. They offered $25M+

We were curious how serious they really were, so we went down the “how much can we raise?” rabbit hole. We found ourselves with offers for more than $40M, 8x what we needed.

The idea of deploying $40M was exciting, to be sure, but it was also a head scratcher. Why were these funds pushing for more than we needed?..

We explored every angle for how Parse.ly could deploy $20-40M strategically. With each offer, we found ourselves spending time looking at how we could justify spending a huge amount of money rather than what would work best for our business.

We’ve always considered capital restriction to be an exercise in focusing the company, and doubling down on what’s working. That approach has helped us prioritize and kept the company finances healthy.

Startup unicorns aren’t a myth. But, the idea that you need huge sums of money to become one is.

With profitability in place, we didn’t see a reason to put the company into a deep expense hole when revenue growth could be pursued efficiently. That’s the power of the SaaS business model; it’s predictable. We could see a near future where both profitability and growth were realized.

Taking a large raise would shoot our common share price up dramatically and employees would be forced to foot a large tax bill to exercise and might never recoup that; for an example there, check out what happened with Good Technology .

From studying the data, this much is clear: VCs are cash-rich right now, and it’s affecting startups. It pushes companies to raise more money than they actually need. Their viewpoint is, if VCs focus on writing bigger check sizes to companies that have a conceivable path to $100M in annual revenue, then they can put their capital to work “efficiently”.

But that efficiency is self-defeating: writing bigger check sizes doesn’t, in itself, put that capital efficiently to work. It might, instead, breed company inefficiency.

#5: Yarno’s co-founder, Lachy Gray, on submitting to the obvious benefits of external funding, only to realize how it just wasn’t a fit, for multiple fundamental reasons. (Source)

When I first learned of VC funding it made a lot of sense. Our primary concern was running out of cash, and in our eyes VC funding equalled a big cash injection. Win!

We felt this concern most keenly one and a half years in. We’d signed a few clients and appeared to be gaining momentum. Yet then we experienced a lull. With no historical data to rely on, we didn’t know if this was typically a quiet period or if the early sales had lulled us into a false sense of security.

At the time there were two things we desperately wanted more of; time and money. We felt we were onto something with the product and that with time we could prove it. But as I’ve learned the wonderful thing about business is that expenses carry on, oblivious to revenue and the stress levels of its owners.

Although we were say 70% certain it was just a quiet period, the uncertain 30% was screaming at us to consider a plan B. So I diverted my attention to creating a pitch deck for investors. I researched how to write a 10 slide pitch deck and invested hours into every slide. Much time was invested in reading stories from the perspective of VCs and founders of great success and dismal failure. And Mark and I met with potential investors.

It was during this process in general, and our meetings with investors specifically, that reaffirmed our desire to stick with bootstrapping…

We’d always talked about how we hoped the business would grow. It became immediately apparent that our desire to grow and an investor’s desire to scale a business 50x or 100x were widely different.

To 50x Yarno would require us to move towards a “low-touch” model. One where clients can signup, onboard and use the platform with minimal assistance from us. In our opinion this is what most SaaS based learning companies do. Which removes one of our key differentiators…

To 50x Yarno would mean rapidly expanding the team. My initial reaction to this was awesome! I feel that with more Yarnoers we can produce more results for our clients. Yet it also means more hiring, more people in the office, more onboarding & training, more hierarchy and more wage expenses. All variables that are manageable with time, yet I imagine are exponentially challenging with speed…

Bootstrapping forces us to ask and listen to our clients about their needs and pain points. We don’t have the luxury of a year’s expenses in the bank to focus on building out the product. Instead we operate within constraints, which forces us to question every enhancement and feature on the product roadmap. We define what we should Stop doing, as much as what we should Start doing.

How did you deliberate over this decision? Would you approach things differently today? Chime in?