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I bootstrapped my first company to several million and revenue by doing contract work on the side. Later, I decided to use the money from my bootstrapped company to launch another startup. Once we got some traction I decided to take company #2 the VC route. 0/10 would not recommend! :-) I'm working on a blog post about why bootstrapping can be much better for founders.
I've since gone back to company #1, where I own 100%, and pivoted it into a service to help engineers go from FTE -> contract -> truly bootstrapped startup. Of course, you are could always just go from FTE -> contract if starting a business isn't your thing.
We've got quite a few devs in our network now.
More info: https://blog.facetdev.com/the-facet-developer-network-the-fr...
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I'm in a similar position; company #1 is successful and now running without me and I'm switching focus to company #2 and considering the VC route as this business has appropriate scalability. I'm quite interested to hear why you are 0/10 on going that route. Will you be posting that to the facet blog or how can I ensure I see that when posted?
Also happy to talk one on one about my experience. My direct email is in my profile.
From our FAQ:
What companies are considered "FAANG or similar" We don't have an official list, but generally it includes Facebook, Apple, Amazon, Netflix, Google and any other company where we are confident the hiring bar is sufficiently high and the user scale is sufficiently large.
But they still seems hamstrung by not understanding that startup investing is inherently a hits-based business. At some point they're going to get a 1000x return, whether they want it or not, and it will make all their previous investments look financially insignificant.
A startup doesn't have to be the "the next Facebook" to return 1000x. It could be an Atlassian or GitHub, two previously-tiny bootstrapped startups.
The big advantage of trying to make your money off your big hits is it allows you to be genuinely founder friendly. The big hits pay back so much that you can be generous and high-minded with the rest, like YC.
1. Giving up 15% for ~$150k would suck as a founder.
But 8% would be a good deal. Forcing smart founders to insist on the minimum end of the range seems like a bad place to start the relationship.
2. Having an investor make monthly payments and control your salary would suck as a founder.
It's going to cause anxiety about the money being cut off and it will make you feel like an employee that has to report to their boss. Investors should be peers and partners.
Seems like they should just make the deal 8% and pay the money at once, and trust that you've chosen good founders. If they blow the money, well, you messed up. And if they spend it differently from how you would, but succeed, who cares?
On pt 2: there is no mandatory monthly payments, and we don't really control founder comp. What we're trying to do (which relates to the point I skipped over above) is attempting to come up with a structure where a founder can build a profitable business doing 7 or 8 figures while the investors get "suitably" risk adjusted compensated for that success.
Whether you think our valuations "suck" or not, we have spent a lot of time thinking about what we can do to build out a novel ecosystem that can provide fertile ground for these kinds of businesses. What we don't think works is simply say "hey, you know what this is a hits business, so forget about valuations and just give them a SAFE".
If you had a business that wanted to raise financing but was honest about the fact that the founder did not thing they were going to become GitHub you'd know what I meant :)
But the entire point of startups being hit-based is that not even the founders themselves know how big they could get. The founders of Atlassian and GitHub could not possibly have known. Their opinion at the beginning was totally useless. They very well might've said "We'll never be as big as X" with total honesty.
So it's not a matter of "honesty" at all. Businesses and people evolve. Ambitions grow. Even Mark Zuckerberg had absolutely no idea how big Facebook would become.
This is a counter-intuitive fact of startups that seems hard to internalize, but it's the very nature of such highly scalable companies.
It doesn't require that you "forget about valuations". You can absolutely try to get returns on your average outcomes, in total they should be significant. But it just takes a single 1000x return to dwarf them all, and now your big hit is all that really mattered financially.
I think the 15% valuation sucks and the 8% valuation is high but reasonable. As a founder I would not want to give up more than 8% but I wouldn't want to come across as a hardass either, which is an awkward spot to be placed.
Good luck!
If you're funding people at $2m valuation without customers and with a SAFE, then yes the only way to get there is with the hits. We are betting that's not the only way, but it does mean we cannot compete in the valuation olympics.
I'm definitely not saying that 1000x returns are all that matters, just that they're an inescapable reality.
My understanding is based on what I believe are three facts:
1. A given startup's financial returns can range from 0x to 1000x or more due to the uniquely-high scalability of tech startups.
2. It's impossible to predict how big any particular startup's returns will be (i.e. not even the founders or investors can know).
3. Some very small percentage of any (sufficiently large) startup portfolio will return huge multiples unless you do something incredibly backwards.
I'd imagine that YC generates much more than 12% IRR even excluding their hits. But what makes them so incredibly profitable is their hits. And because of their understanding that the hits are what makes them so profitable, they can rationally afford to be very generous towards all of their startups, which makes great startups want to apply, creating a virtuous cycle.
Creating a firm that tries to be YC-without-the-hits seems totally fine, except if you still end up with huge hits, because then you're just YC with much less founder-friendly terms. It may feel like the conservative and safe approach but it could also be the riskiest possible path, by serving to filter out the best startups.
There's a huge market opportunity for YC competitors that are remote but operate on the same terms. And when someone does this, they'll be first choice for all of the best startups, just like YC is. And it seems smart to compete with what's possible rather than with what currently exists.
What makes you think so? 12% IRR is 3x capital in 10 years. YC terms are $120k for a SAFE * 256 companies/year = $30m/year. 10x is $300m return per cohort.
Assuming we remove the unicorns, and that 50% die, that's 127 companies (half dead, one unicorn). Assuming again that the non-dead raise subsequent funding over various rounds, diluting YC's original stake down to (say) 4%, then all the 127 remaining companies would need to sell for an average $60m to beat a 12% IRR. Given how many exits are actually zero investor return acqui-hires then I think that's unlikely.
" then you're just YC with much less founder-friendly terms."
I don't think so, because nobody who applies to YC is going to be able to get any funding what so ever if they argue that they want to become a $20m ARR vertical SaaS business. So I guess it boils down to whether you think it's more founder friendly to say "no" than it is to offer our terms.
I just think the entire concept of asking founders how big their companies could be doesn't make much sense. If Drew Houston predicted that he would be willing to sell Dropbox for $1 million in six months, and the Google Guys wanted to sell Google for a few million to Yahoo, YC had zero idea how big Airbnb would be, etc. what exactly is the point?
My understanding is that YC asks the question "How big could your company become?" but discounts the answer very heavily because of how hard it is to predict at the earliest stages. Almost any startup can give an answer about how they could conceivably be huge. Anyone trying to build a $20 million ARR SaaS company has a very easy answer.
It seems obvious that a founder with nothing would love to have a nice $20 million ARR business. It also seems obvious that when they achieve that level of success their ambitions will often grow, as happened with Dropbox, Facebook, Google, Stripe, and virtually every other hit startup ever.
I do think there's a good point about focusing on sustainable growth, and "not growth at all costs" but this just seems like what all the best founders and VCs actually practice, so it boils down to "don't be stupid".
A) There is nothing wrong with how funding currently operates in the tech space. It allocates resources optimally in terms of risk adjusted returns for investors and there is no room to try alternate approaches.
B) There is no way to assertain what the potential size of a business is, anything could become Dropbox (including - I dunno, a SaaS focused on kitchen countertop installers)
C) The only way to provide suitable risk adjusted returns for investors is the current approach (focusing on finding unicorn outliers that can scale to 1000x)
Uncritically believing that investing in software companies can only ever be a "hits driven business" is the reason why there is such a giant gap in the market that Tinyseed, Earnest, Indie VC, and lots more coming will fill.
The big disadvantage of trying to shoe horn every business into being a unicorn is that you cause a lot more founders to fail by forcing them to try to grow fast enough to raise the next round or flame out trying.
I've created a simple markdown version, for easy editing here: https://zenlibs.com/write
Just fill in the specifics and share as a gist or on Github.
Have you shared the code anywhere?