Venture backed or bootstrapped? There's a third way: just raise one round
saastr.com
saastr.com
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)
Congrats on the success - have you thought about hiring a banker to seek an exit to PE?
From personal experience, after eight going on nine years, the itch to work on something new can kick in.
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.
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.
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.
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.
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
Personally I don’t like when founders talk up the value of equity. Stock options should always be seen as lottery tickets and nothing more.
A lot of countries have minority shareholder rights. This seems like something where those rights would kick in (even if you just have options).
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.
Imagine, founders _lying_ in their pitch decks.
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.
I'm just saying that this would be just as much a "failure" as it would be for their investors.
I know I never would have quit my well-paid, enjoyable job to start a company if this was the outcome.
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.
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.
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.
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?
Many founders would choose the latter.
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.
It doesn't have to be billion or bust, only once ego is involved does it become billions or bust.
The unethical thing would be pitching a unicorn plan when the actual strategy is building something much smaller.
Why would I?
> but the strategy you're proposing here
I am re-framing the words of others. Didn't propose anything.
> involves defrauding your investors.
I don't have any investors.
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.
Agreed. In our case we offered to buy them out.
Just got to pay back what is technically a loan, usually with quite low interest.
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.
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.
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.
Really want out of the swe ladder race and do my own thing. Build something ppl want :D
stonogo said, here:
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.
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?
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.
So it is a different way of building.
do you have some statistics to that? i'd expect that most startups that raise only once do so because they failed before they could raise again.
how many startups raise once and then become a successful profitable business without ever raising again? that's what "this third" way is about.