Bootstrap or VC? [video]
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FWIW, at the last YC event I intended, the partners were talking about how it's their job to get founders to stop thinking that way, and to think instead about making a great product, as you say.
Meanwhile, if you started out with a "lesser tier" accelerator/incubator, you'll have to prove that you have a good product _plus_ you have to fight an uphill battle and convince A tier VCs to even take a look at you.
I think YC tells that to their startups because they believe it. YC has always been about elevating founders and making "start my own business" a viable alternative to "get a high paying job". And from day one their motto was "make something people want". And when you exit they give you a shirt that says, "I made something people want".
They've always been product over everything else.
YC doesn't invest in companies who aren't aspiring for valuations in the 8 or 9 figures (even if mid/high 7 figures would still be profitable).
In the recent thread "Ask HN: Those making $500/month on side projects in 2024 – Show and tell" a user posted https://convertcase.net which is making $20K/month[1].
A traditional VC would never touch that, and if the user had sought VC investment, there would need to be plans for user sign-up, a SaaS dashboard where users can manage their projects and the different kinds of entities they would need to convert, integration with CI.. who knows what else.
At that point they'd be building a completely different business, and would no longer be able to build the sustainable version that might not ever get $50,000,000 valuation. And that business would likely require them to hire more people and raise more funding
False. YC even has a non-profit track: https://www.ycombinator.com/blog/what-y-combinator-looks-for...
But yes, YC is VC and YC wants to create unicorns and has little interest in small businesses or bootstrapping.
Joining YC is giving yourself a median outcome of failure - $0 for your common shares is the expected outcome (albeit likely true for bootstrapping founders too?).
VC incentives and rules mean that VC virtually always takes more than 50% ownership over multiple rounds. So even if founders backed a winning business, founders will usually have lost control. VC will often kick founders out (it's allowed in the contracts and is part of the game).
Which is to say: their investing is interesting but it doesn't have that much to do with long-term investing in startups. If you need plural millions to reach orbit, you're going to need to pitch a 9-figure company, because big-ticket investors have portfolio math that only works for those kinds of companies.
So, to me it doesn't make too much sense to talk about what a "traditional" VC will or won't touch. For most YC success stories, both kinds of VC are involved.
Both of these things are true: founders (and leaders of VC-funded businesses in general) have an incentive to focus on investment rounds and runway, and VCs have an incentive to tell them not to do that.
I think this mismatch is fundamentally due to the asymmetrical cost of failure. For VCs, it's a bummer if the goals of the current round are not met, leading to the company folding or an acquisition on disappointing terms, but it's arguably even worse for the company to sputter along, barely staying afloat from round to round, but never really catching fire, because they have to keep funds tied up in it, without ever getting the return multiple they're looking for.
But the people who actually work at the company have a much more concentrated investment in it simply staying alive, even at the price of short-termism.
It's just fundamentally different risk profiles!
Maybe VCs should gift founders enough wealth up-front to be financially independent. This would go a long way to align their risk profile :)
Having been around a lot of the batches, I don't think the majority prioritize "looking impressive". It's true that such types exist, and that they try to get into YC, but YC's application and interview process is designed to filter them out. If they get in anyhow, that's considered a failure on YC's part.
But you're right in the sense that some first-time founders who want to build a great product can be lacking in confidence, or aren't clear on some of the steps they need to take, and those are areas where YC can help a lot. For seasoned repeat founders, those presumably aren't the urgent issue anymore.
I'm very very negative on VC to this day except if you have a capital+time intensive barrier to break (most companies don't have this). 'You can't do it without our guidance' they'll say but the honest truth is they don't have much to offer apart from the money. VCs are not altruistic. They do the maths and figure out how to get returns regardless of how it will impact your stake. You'd be an absolute fool to take VC money without asking if it's actually a long term positive for you. There's always a better deal and giving them a significant share of your company on extremely generous terms for the promise of 'guidance' is going to be foolish IMHO. Bootstrapping is not some desperate scramble for money. The whole idea is to run the first phase off a shoestring so it has no real risks (apart from your own time and effort).
My current company is self funded. We turned down term sheets in jan/feb 2023 because we didn't like the valuations offered, and just changed our plan instead.
30 years ago pretty much every startup was still sui generis on pretty much every dimension. The saas boom let to an absurd convergence on business models from funding to marketing, so what kinds of products are made. And lots of people who started companies just to make money (nothing wrong with that I suppose...except aren't there easier ways?) rather than starting them primarily to scratch an itch. So a lot of "is there a cargo cult I can follow?" rather than "hmm, what do I really need to do to get to my goal?"
My own story: I knew people working in telecommunications who couldn't sell satellite terminals because the customer needed more than just a naked satellite modem and data plan. I met the first customer sent my way, charged appropriately and got them a solution. Think solar panels, battery, small embedded SOC, a database to write to and a frontend website to access the data. Surprisingly that only took a couple of weeks to get a prototype together (yay for startup agility and my own hacker knowledge!) and the Telco sold a lot of satellite terminals from that and they realized it was a good idea to send more customers in a similar predicament my way. Eventually it spun up from there and we bought the original small time Telco that was referring us (software pays!) so we could gain the monthly recurring subscription we generated on top of the software consulting costs. We're now one of the main people to go to for this sort of thing.
I think there's still these sorts of opportunities out there today. If you're thinking the way to do a startup is to force a new market using VC funding there's other opportunities just sitting there that can spin up more organically. In fact the bootstrap-able opportunities are probably more likely to succeed imho since they tend to spin up from an existing need while the "Uber for X" type of VC funding try to force a market to exist where none has before.
The traditional understanding is "building a business without taking on dilutive funding". This has always been hard, but in many ways it's easier now than before.
This video argues that if you want to be a trillion dollar company, you need VC funding. But they don't emphasize aiming to be a trillion dollar company has a tiny (<1%) chance of succeeding, requiring certain lifestyles (investment chasing). It's not for people looking to build fun products, live a relatively wealthy (but not outrageous) lifestyle, etc.
It is literally for founders who want to go the biggest or go home. Think carefully if that is you.
The # of unicorn technology companies without venture funding is very small.
VC funding a good model for rapid growth.
It may or may not bring "long-term viability," happiness, or weight loss. Those are mostly independent considerations.
"We give you money, you give us much more back"
My father in law had an agriculture business (pollen). They had customers and a product but they needed a three month loan to pay laborers to harvest the product so that they could use it for customers and then invoice and collect. The labor was well paid due to urgency dynamics, the farms they serviced had yields paying more (or avoid loss greater) than the cost of services, and there was profit left over for the banker's share plus his own business. As a side effect the food supply was both more stable and abundant. Without the capital less excess (or greater losses) would have existed.
This is effectively what VCs are hoping to find except at a far higher level of scale.
Or, I can bootstrap, have less stability, all the control to hire just who I need and when … and less stress.
I’ve worked at two companies that took VC. In both cases, investors didn’t care about anything except whatever metric showed “growth” so they could exit larger than they entered - the tech didn’t matter, the team didn’t matter. Based on this sample size and so many stories from SV about how founders and employees are treated, I have a hard time seeing VCs as anything but leeches.
If it's something which has value with a modest number of customers, not a significant fraction of the addressable market, then maybe less so.
With NeuML (https://neuml.com), I've went the bootstrapping route. I've been able to build a fairly successful open source project (txtai 6K stars https://github.com/neuml/txtai) and a revenue positive company. It's a "live within your means" strategy.
VC funding can have a snowball effect where you need more and more. Then you're in the loop of needing funding rounds to survive. The hope is someday you're acquired or start turning a profit.
I would say both have their pros and cons. Not all ideas have the luxury of time.
Video: https://www.youtube.com/watch?v=0CDXJ6bMkMY Transcript: https://indiefounder.substack.com/p/full-transcript-of-dhhs-...
This is fairly honest about the risks of VC: https://siliconhillslawyer.com/2017/08/01/not-building-unico... and the rest of his articles are amazingly insightful too - read em all if you want to be a founder.
I used to use their HEY email service until HEY decided to ban all societal and political discussions for employees. Which sparked a huge exit of talented people from their service.
And now DHH went "anti-woke" and it's sad.
I thought about applying but honestly 125K was not exciting enough for me :), now I just went to re-read the terms, it seems to be 500k(split for 7% etc) instead, which will be enough to make me applying, question is, how will I get them if I am accepted? first day, a few weeks later, or what.
Most would laugh you out their office asking for 7% of equity.
I often wonder if people understand why 1:23 companies survive the startup cycle.
Best regards =)
YC isn’t about the money. The equity you give away is also for the seal of excellence it carries, and the network it brings.
I would gladly give 7% of my small company today for YC’s network and seal alone, and 10% of the money they give.
The fact is liabilities come in many forms, and small mistakes may cast a long shadow if you are a startup.
Best of luck =)
One thing I think is missed from the Dalton and Michael's discussion is that while VCs know that bootstrapping is a very valid path and aren't lobbying against it, many young founders don't know much about bootstrapping. The biggest tech companies get the most attention and big companies generally need VC funding.
So I agree that it is a "fake" controversy, but I also think it is important for more potential founders to hear about how bootstrapping may be a very valid and good path for them.
VC backed competitors can spend 10-50x marketing spend of early bootstrapped companies quite easily.
Given the massive success of software companies over the past decade or two, hordes of driven, talented, and smart young people have joined VC-backed companies or aspire to do so. It's become culturally accepted that if you're an ambitious person, you should be working at - or better yet, founding - a venture-backed company.
The societal opportunity costs of this phenomenon are significant. I know dozens of young, talented people who are founding companies for no particular reason, simply because it's become the default path for what they're supposed to aspire to.
Is this the "fault" of venture capital? Not really - VCs are just trying to attract talented founders and make their portfolio companies successful.
But by doing so, they've created a negative externality, which is that VC has become the gatekeeper of perceived "success." That means fewer talented, high-energy people working in government institutions or critical industries - precisely where those talented people could have the greatest impact on society at large.
From talking to friends and younger people entering the workforce, this is almost always the bigger consideration. Most feel like starting a company is still a total shot in the dark from a success standpoint, and I feel like there is more skepticism than ever of the startup lottery.
What I totally agree with is that VCs need to be doing a much better job telling people that starting a VC-backed company is an extraordinarily bad way to make a lot of money. The odds are just insanely stacked against you. That said, most people gravitate to inspirational stories even if you're told it's at odds with what you can expect for your own journey, so, the more of these success stories there are (even if the ratio of them relative to total "tries" stays consistent), the more people will take the startup path.
I think your point about "inspirational stories" hits at the heart of something important. I believe there are plenty of successful software companies working in niche industries and having great impact, but their stories don't get amplified nearly as much as venture-backed companies do, partially because raising VC is viewed as a stamp of success that makes it easier to get press coverage, hire talented people, etc.
If there's one thing that I think needs to change, it's that we need to tell more inspiring stories about people who've achieved success without needing to raise VC. That'll also reduce pressure on VC to be the one-stop-shop for everyone's business ideas.
(Also, hi Vinay! Not sure you remember me, but I used to hang out on the "codechill" Slack a couple years ago. Hope all's well.)
When your partner is a billionaire you find it's a lot more challenging to do things exactly the way you want to, to live by whatever your vision for the thing is, and to tell said billionaire no if there's a disagreement. It's not that you can't per se, it's that there is definitely additional relationship and operational risk to the context, additional calculation. It's very common for big investors to have big egos and big opinions. Pleasing investors becomes a thinking mistake problem that you have to manage. That's a mental cost to keep at bay and it gets old/tiring. The same is true whether the VC is prominent or just your average SV VC, and it persists whether it's a small number of investors or a lot of investors you're dealing with.
Besides the obvious that venture capital isn't always right for every business or every business stage, sometimes it's never right for certain organizations. I'm working on a social network that will operate either as a public benefit corporation or non-profit org. There's no place for outside investors in there. Even if you eventually return to dealing with investors, do yourself a favor and build without them from time to time, at least for extended periods of time; it's refreshing to the soul if building things is what you really like doing.
However, they're still burying the lede and the key conclusion. From those admissions above, they go into sales mode and say that if you want to be a trillion dollar company, you generally need to raise VC funding. This part is also true in favor of VCs, but hides an important assumption.
All the above says is that VCs are good for certain company types, and not good for other company types. But people don't start companies to be a specific type, or to raise VC funding or not -- these are secondary characteristics.
The primary reason a founder starts a company should determine the company type and whether they take VC funding:
1) If you want to have a small (1%) chance of having a massive impact on the world (think billions of dollars of founder valuation), you should aim big and take VC funding.
2) If you want to have a larger minority (25%+) chance of being quite personally rich (think tens of millions), you should probably avoid moonshots and aim for base runs that don't accept VC money.
For 1), it is quite easy to see, only 1% of YC company founders, who are considered amongst the best in the valley, have a billion dollars of personal valuation at the end. If you want to be a Zuckerberg or a Gates, you have to aim for this, but know that it's very rare in the base population.
If you focus on the max valuation, then yes that clearly favors VCs. If you focus on expected utility for standard utility curves, that favors bootstrapping.
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Finally, as my personal opinion, it seems obvious a priori that VC startups would be a lot more over-promoted, after all, without VC-investable startups, VC funds would do poorly. Literally trillions of dollars depend on enough founders doing these startups -- and they have a massive marketing budget. [1]
On the other hand, bootstrapped companies have no clear "partners that require them" who would overpromote them.
Show of hands HN, who here thinks it's more moral or good or right to start a non-VC backed company?
The stories that you hear with hard work, finding a niche, product market fit, build a great product are all lies.
The true secret is what I think of as "dirty business".
Think: spam, sex, gambling, money making, scraping data, connections (which are not dirty per se but often not mentioned in stories).
Examples:
LinkedIn: spam Snapchat: sex Google: money making Facebook: sex, spam Slack: connections Uber: connections, money making Airbnb: spam
I can go on and on and almost any large scale success (over $10 million ARR) have had these things.
The only time these can be broken is when a new paradigm starts:
Examples:
PC Internet Mobile LLM
These usually happen every decade or so and you have ~2 years to make it (Dirty business also helps here to go really fast).
The other key insight is the way the capitalism system works, if you achieve the initial growth, you almost always will succeed. To go from $10 million ARR to $100 million ARR is easy as pie.
So, the bottom line is if you are a normal, moral person, who is righteous and thinking I will make something to help others and disrupt the world, you will fail.
The alternative is small tech businesses which at the most you can sell for a few million dollars. That is still achievable and easy. You must hyper focus on a location and a niche and just sell to them. But I don't think of them as a startup. They are more like your local salons and restaurants. A mom and pop shop which is instead dealing in software.
For B2B software you need to have at least 3 - 5 customers willing to sign $10,000 and above contracts before you write a single line of code. This is still possible but you need the connections and the deep insight of the industry to make something meaningful.
I do not know why so much of the literature and teaching stuff discounts that initial spark which causes startups to grow. They are all lies. Focus on connections with local politicians (donate $10,000 to the up and coming politician?), movers and shakers, buying large amount of scraped data etc. Think dirty business and then maybe you will have a chance of succeeding.
Would love any counter arguments and comments. This is from a very long, over a decade research into why some businesses succeed and others fail.
If anyone has some they like, I'd certainly appreciate links.