Kalzumeus Podcast Episode 11: Bootstrapping vs. Raising Money
kalzumeus.com
kalzumeus.com
Last year, I was exploring whether funding could help us grow faster. Talking to VCs and the firms that got VC funding gave me the perspective that raising funds is RARELY a one-time thing. Once you raise funding (and dilute 25-30% of your company), no VC wants that money to be sitting in your bank and earn 0% interest. So your burn rate increases exponentially and most VCs want their funding to burn within 18 months. This means that in order to sustain the company you'd have to raise the next round and dilute another 25-30% of the company, and this keeps happening until exit/IPO where the investors typically end up holding 80% of the company and pretty much controlling its destiny. And remember it was who you toiled day and night to make your dreams successful.
Someone who had raised funding advised me - as long as things are going fine, you the founder are in control of the company. And if you're not growing fast-enough (think 100% year on year), the investors are in control. It's not that VC money is bad per-se, however, I think losing control of your company as a consequence of external funding is bad. Disruptions happen, new competitor emerges and you could be thrown out of your own company.
For us, having HQ in India gives us a good cost structure (although funding scene in India is changing that fast, salaries are getting through the roof) so we've been able to fund, reinvest profits and grow the company profitably (and have a nest egg for worst case). However, given the costs in SF / bay area, I'm not sure how would one go about bootstrapping a company for long. Would love to hear thoughts from fellow bootstrappers in high cost-of-living cities/countries?
PS: A bootstrapped company I really admire is Zoho. They're 1700 people and they say they have two IPOable products within the company. Very admirable.
I would like your advice. Often I feel like I'm doing so much, I'm throwing everything and trying everything but nothing seems to stick. It feels like I'm not getting anywhere but very very subtle and small increments I see changes.
It's at this stage where the stress is greatest. You feel like you are ineffective, you start to doubt yourself, doubt your vision, you look at your competitors and feel less confident.
How did you manage this?
More importantly, what worked well when it came to marketing as a bootstrap company? Often the results are hard to see, for example, writing content, getting eyeballs to it is hard enough but not sure if the time and effort invested is worth it.
Lot of other questions, but mostly, that leap from being a one man company to hiring others, that's the most challenging part for the early stages, what would you say to those that are in this phase?
On the stress side, the way I manage is that I see bootstrapping v/s raising funding as a tradeoff between slow growth, higher chance of controlling your destiny v/s fast growth, higher chance of fizzling and higher chance of giving up control. Since it's chances and not certainties, what might seem successful competitors today might just be a matter of time. And what might seem struggle today could be totally worthwhile tomorrow. Since there are a number of variables that influence startup success, I think being clear of why you are bootstrapping v/s raising funds relives of a good amount of anxiety.
Anxiety is at peak if you want to raise funds but can't, and hence are forced into bootstrapping.
>what worked well when it came to marketing as a bootstrap company?
I wish there was a simple answer. Content worked well for me in 2010. But I hear that it no longer works.
"The bar is higher" essentially means that a task is more difficult than it previously was.
In the past it used to be easier to create low-medium quality content around a subject and be ranked well for specific phrases in search engines. This has gotten progressively harder to do and will likely only get harder going forward.
However, if you create high quality content in the area around your product then people will seek it out and you will also get the benefit of good search engine ranking. High quality content can vary, but it is essentially stuff that truly adds value in the area of your product.
You can look on Hacker News and other similar sites for companies that are doing this well. In some extreme cases you even have companies generating content that doesn't seem to be remotely related to their product, but it is still getting eyeballs and very likely sales (e.g. http://priceonomics.com/ and their blog).
In addition to blogging and generating content you should also be spending time cultivating and nurturing an email list of potential prospects.
Does this take a lot of time? Yes. I believe that it is a generally accepted rule that you should spend as much time marketing as you do developing. This is something that is easy to say and hard to do though. I know that even I, a full-time digital marketer in my day job, spend more developing my product than I do marketing it.
First, there are two VC industries. There is the one that funds biotech and clean-tech and there is the bubble-centric consumer web one that gets all the press here. The first exists to fill a gap (R&D projects that the mainstream private sector is too cowardly to try) and isn't sexy because the upfront capital costs are very high, meaning VCs take a lot of the money, meaning that founders becoming billionaires is next to impossible. But on the whole, the VCs in that sector are actually pretty ethical. Obviously, they're in the game to make money, but they're trying to make it the honest way: by capitalizing good businesses. The second, sleazier VC industry-- the one with the slimy co-funding/back-channeling culture that funds a lot of stupid ideas and frat boys-- is the one that gets all the press here.
As for that sector of VC, they're in the business of taking strategies that are profitable but illegal in public markets (e.g. market manipulation, insider trading) and applying them to private stocks that are less well-regulated. They encourage (and, sometimes, demand) extreme risk taking because they don't really care which businesses go up and down, they just want volatility (for it's own sake) in the market, never mind if this leads to bad decisions and damages the careers of people they view as peasants.
The slimy consumer-web build-to-flip VC will also never leave California. Why? Because a lot of the note-sharing that VCs engage in is illegal and simply can't be done except in-person, because it would be too devastating if the phone logs or emails ever surfaced in discovery. For one of many examples, they make a lot of back-channel reference calls in deciding whether to fund someone, and it's a well-known fact of HR that the main (if not the only) reason to make a back-channel reference call is to violate EEOC provisions.
That means they will push the executive team to take huge risks for the tiny chance of becoming a billion dollar unicorn, possibly destroying any chance of the business surviving at a more modest level. They don't want $10 million/year businesses and would rather see them go under ("aqui-fail") and move on to the next thing.
Jay, if you're around on this thread, I'd love to hear what sort of questions you were fielding from Naval.
It was at a dinner, so I was two beers in, but from memory some of the questions and answers were things like:
Q: How do you get new customers?
A: The great thing about MakeLeaps (For context: MakeLeaps is an online invoice creation and management tool for Japan) is that it's inherently viral, since every customer sends tens, hundreds or thousands of invoices to other customers, and each one is an opportunity to introduce MakeLeaps, since we have a tiny "Powered by MakeLeaps" stamp at the bottom of the email. In addition, we do paid marketing campaigns such as Adwords and retargeted Facebook newsfeed ads which we've found to be effective in Japan, and a lot of content marketing. We're working on partnerships with BigCo1, and BigCo2, and integration X and Y that could also be a great new way to get in front of more viable customers.
Kind of thing. Some other questions were just general fact finding such as:
Q: How big is your team?
Q: What's your biggest challenge right now?
Q: Why are you doing this?
Q: Why don't Japanese companies already use a tool like yours?
Q: What's your business model?
Are the ones that I remember of the top of my head. Happy to field any more questions, and thanks again for listening.
But if they get two or three, they start looking into this new service that everyone seems to be using now.
the bottom of the curve is painful.
it feels like you are trying to push a boulder and it is moving by millimeters.
it does move and its not much but you just keep pushing and pushing. sometimes despair and anxiety takes over, it's never going to work, stupid, i suck, im fucking it up, find a job.
so how do you manage yourself in those situation?
The toughest problem I discovered was marketing, putting your product in front of people, getting it noticed.
Not having VC money to spend means you have to manage it yourself. But marketing I am finding out is TOUGH. In fact it is by far the most difficult aspect of bootstrapping. PPC and expensive ad buys are out of the question. So what do you have to get new customers?
Sales cure all. Selling is not a problem if you are dealing with people with the wallet and mind to buy. You just need to guide them.
But getting those people through the door, building that volume of quality leads, this is tough.
All in all I feel like bootstrapping is a juggling effort while trying to push a boulder down a hill so that one day it will start rolling by itself.
Do I have a magic answer to it? No. Long, slow SaaS ramp of death all the way. http://businessofsoftware.org/2013/02/gail-goodman-constant-...
Spoiling a bit of that eventual post: one of the hardest challenges for me with AR was keeping up motivation to grind-it-the-heck-out over the years, because AR was not an intrinsically motivating problem/market for me. It would probably be 10X larger than it is right now if it had attracted the requisite effort from me over the years by being interesting-in-the-absence-of-major-growth. The next time I do a business, it will be something which will be certifiably Fun to me every day, for some value of Fun.
Incidentally: depression may be an orthogonal issue to this. Many of us in the community struggle with it. You're very not alone. Talk to someone -- me, if necessary.
Very much this.
I’m particularly interested in your comments about the problem of AR not being intrinsically motivating for you, because I’m in exactly the opposite position. My side business is in a field I very much care about, and on top of that it’s something I work on with my wife. It’s at the stage where it’s starting to pick up a little after a lot of work, but still a long way from overtaking what we can bring in from our established main business doing custom web/software work for commercial clients. We have absolutely no doubt that we could grow the side business faster if we could put more time and money into it.
Unfortunately, I’m cursed with being someone who insists on things being done properly. That means as long as we have paying clients of our first business who need to be looked after to high professional standards, we can’t be working so much on the new business that we’re compromising our performance in the older one. We want to be building cool new stuff all night the way I could when I was 21. We have a zillion ideas, and we know how we’d implement some of them, and we know from very positive feedback what sorts of things our customers want to see next. But we have to force ourselves not to do that if it would mean not being able to concentrate on the day job properly tomorrow, and that can be very frustrating at times.
The other downside of being Mr Every-i-dotted is that when you get silly amounts of new bureaucratic overheads to deal with — and we’ve had a particularly bad wave of that over the past year here in the UK — you want to make sure everything is above board and all the right records are kept and returns filed and so on. But if the same people are responsible for both doing all of that admin work and actually building what you’re building, that means you can wind up spending more of the limited time you have available on mundane things and less on what you really want to be doing to grow the business. Again, if what you’re building actually matters to you and you’re personally invested in seeing it develop to its full potential, that can be frustrating.
The huge upside that, for us at least, outweighs all of the above is that as long as the new business is bringing in enough to cover its costs and we keep getting nice feedback from happy customers, we enjoy it enough to keep it going. An unexpected but very pleasant benefit of doing B2C in a hobbyist market is that it seems when people like what you’re doing, they often make the effort to tell you about it. It’s amazing how much difference getting one nice e-mail from someone whose day you made a little better can make to your own day. So in a way, whether it’s a modestly profitable side project or one day turns into something bigger, we still win and we’re still happy to be doing it. Though we do look forward to the day we can build the mansion, buy the yacht, and retire at ($current_age + $small_number_of_years). ;-)
It will be nice to one day afford to work on something fun, but for now I need something that pays the bills.
It's like one step forward and three steps back. Slowly and I mean really subtly the momentum picks up but by no means is it a breeze.
I've seen the slow ramp of death and thinking 'thats not me' boy am I learning it now.
Product/Market fit is good, but you need Founder/Product/Market fit. A problem that resonates with you so deeply and personally, that you will climb mountains over years to solve it.
Short term problems, doubts and anxiety quietly fade away if you're 200% focused on a long term goal, where the outcome is of intense personal importance to you.
For me, I went through years of Excel hell in Japan trying to manage our invoicing because there was no good software available. I feel VERY, VERY strongly about fixing that for Japan.
Two further pieces of advice: I highly recommend finding some advisors who have done what you're trying to do. Getting a "Yep, that's the right thing to focus on" from one or two smart people tends to make concerns fade away as well.
I also recommend getting laser focused on why people are saying yes, and why people are saying no to your solution. Once you have great answers to both of these questions, your next steps become much clearer.
I felt like I hit that point with Mogotest. We had ironed out a lot of kinks, didn't piss away investor money on a 1.0 product that pivoted to something else, and spent a lot of time establishing a name for ourselves and doing market education. But when the time came to raise for growth, I was a bit surprised (naiveté in action) at just how much harder it was. It's not impossible of course, but if you're going to bootstrap, I'd just be aware that reassessing that approach may be much harder than just taking money to begin with.
ZenFounder - Startup. Family. Life. (Podcast, 2015) http://zenfounder.com/
Sherry Walling - Playing the Long Game: Making Entrepreneurship a Sustainable Life (2014) https://vimeo.com/95052086
Sherry Walling - Don't Burn-up in the Launch: Staying Emotionally and Relationally Healthy While Launching Your Startup (2013) https://vimeo.com/72211933
For marketing tips, be sure to check out the whole list of Microconf presentations, and the http://startupsfortherestofus.com podcast.