Throw out that five-year plan, build something now, and don't take any money
37signals.com
37signals.com
We could have just left it at that but we had plans to become an open source company as well as a hosting company. Developing new software projects like Rubinius, Merb and Vertebra take time and money to pay top notch engineers. So we decided to take a gamble on going big and we took some VC money. The thing is, we already had a profitable business and the VC's came to us, we never sought them out.
So we were able to accelerate our strategy by taking the VC money and we got excellent terms since we already had a profitable business. And we took money from Benchmark that was less then other VC's were offering us because Benchmark's contacts and knowledge has been a huge strategic advantage for us.
We have been able to grow our 3 person startup to over 80 employees worldwide, and through our VC's contacts were able to secure a series B from Amazon, NEA and Benchmark.
We would never have been able to accelerate our growth and ideas as fast as we have if we never took money. By taking money we have cemented our place in the Ruby landscape as the 800 pound gorilla ;)
So yes maybe it is the safe play to not take money and try to sell a product that people want and thats great! But sometimes it really is worth taking big risks with big money working toward big goals.
This is not an either or scenario and both ways of doing things are equally viable
How did you determine what your funding goal was?
ps - thanks for the post - 'from the trenches' insights like these are really valuable.
pps - members of your founding team also created the BASIC Stamp? Neat!
We basically built something like ec2 but with more advanced features like load balancing and clustered, posix compliant filesystems. And we shipped before ec2 came out or was even known about publicly. This kind of system costs $$ to do right so the 120k went mostly to hardware and data center costs to bootstrap us to the point where we could take customers.
We started planning in february of 2006 and shipped in september 2006 and it's been a wild ride since then.
ps - sure, no problem. Let me know if anyone has any other questions.
pps - yeah one of our founders started Parallax who made the BASIC stamp.
Overfunding does kill some startups, but it's an exaggeration to call it the number 1 cause of death. What kills the most startups is building lame products.
I think their point is that those factors are related. If someone gives you a huge pile of cash, there's a temptation to answer any criticism with "you think it's lame now, but just wait -- once we're done you'll love it".
If you don't have a lot of money, you can't use that excuse -- you have to build something which people want from the start.
It's easy/popular to blame bad products on investors, but usually that's pretty unfair. I think (at the seed stage) it's usually due to the founders.
I think better advice might be "don't take so much money that you have to give up early control."
It seems to me that a well-run angel funded startup will get to market quicker and have a slightly bigger (and potentially quicker) exit if the founders play their cards right. So you trade a small minority stake for getting "there" (wherever there is) months or years sooner as well as having a slightly better shot at a win due to investor influence.
This all assumes a goal of eventual liquidity, of course.
There are "angel rounds" like YC that just get things started. I'm not worried that Paul Graham is going to exert undue influence over your company. Once the 20k is spent, what's he going to do? Write a nasty essay?
But there are also a lot of "angel rounds" that provide runway. They're much smaller than "A Rounds" --- mid-low hundred thousands --- but it's just like an A-round, for 2-4 people. Those investors control the agenda.
And in both cases, the real issue isn't what happens after you get funded. It's what they make you do prior to funding you.
Whether you call it an angel round or a seed round, I don't quite understand how the investors control the agenda. My experience (which at this point is fairly intimate) with sub-$1m rounds is that you generally give up 20-30% of your company and no board seats. In the rare event that an investor takes a board seat, you can generally argue for the board should reflect the cap table and there will be 2 co-founders on the board and 1 investor.
Of course, all things are different and some investors can be predatory.
Now, when you get into big Series A/B country, I think things change. Board seats start flying around and the founders can lose control.
But in the first round of mid-low hundred thousands? Not that I've usually seen.
Prior to funding (an interesting point) I haven't seen any influence whatsoever. We've marched to the beat of our own drum, clearly explained the vision we have for the company, and taken advice/feedback when we agreed with it. I HAVE heard of investors saying stuff like, "I'll invest IF you go in the direction that I want".
You want a good example? Procket.
That may include crazy stuff like SAP or PeopleSoft --- ew --- but it also includes Splunk and Palo Alto Networks and pretty much every security products. The buyer is the user for almost all of these products. Quality is very much an issue, although it's again stunted by VC.
We tend to hyperfocus on lines of code here, but any product manager at a software company would assume step 1.
I think the democratization of software, of the ability to build websites etc, is a wonderful thing, but I also think that it has tended to undervalue the marketing aspect. Perhaps its because for so many years the coders worked under the yoke of 'business types' who didn't know why a baby couldn't be delivered in one month with 9 mothers and now we feel like we can break free.
Hopefully someone will come along with some open source marketing AI and I won't have to worry about it.
Obviously, 37s had to do something more than simply getting bitten by radioactive spiders; but it's a good start!
:)
Bootstrapping isn't easy, the definition of the name simply implies it, and these kinds of posts are sort of reminding me why, even in the beginning I kind of doubt 37s. Getting Real appears to me a bunch of quotes with "I agree" type paragraphs after it. Can ANYONE here tell me why I shouldn't take money if it's given to me and focus on growing my ideas instead of doing it and taking the results afterwards with a proverbial "grain of salt"?
ec2, (I consider them my biggest competitor, they probably don't know I exist, and, well, my product is somewhat different) has lowered the cost of hosting dramatically. and there are places that are even cheaper than that (such as my company) - unless you are doing something like video sharing, hosting costs are simply not a huge deal anymore compared to programmer time. At what I bill out for as a contractor, for every hour of my time, you can run a amazon ec2 small node for a month and have enough left over for a cheap lunch.
At most (USian, at least) startups, pizza for the meetings should cost more than the hosting fees.
Even if you are running an application where hosting is a big cost, there are plenty of people (such as myself) who have hosting resources they'd be happy to trade for some small slice of equity. Actually, yeah. let's make that a standing offer. if you have a startup and need SysAdmin/hosting stuff and are willing to trade a silver of equity for that, let me know.
"we're getting too much traffic, and I can't afford the hosting - will you invest in me?"
And to cash out individually, I suspect.