I'd like to see more of this in tech startups. Especially with all the free info from groups like Y Combinator that's online to help them. Just people in college, on summer break, or even retirement just cranking out code for a platform and doing sales trying to make it work. Should be more success stories out of it. I think most of these people just try to do too much themselves without external support both as a sounding board on their ideas and for how to run a startup. They probably read business books more tailored to lifestyle businesses and such whereas a startup has different rules.
This is exactly what I've been doing. It started with me coding the MVP myself with a little help from a summer intern and then me aggressively handling all sales myself until I reached a 5+ figure MRR where I could finally start to delegate some of that work to others.
Now we are growing like any other startup would, just instead of being fueled by VC funding, we are being fueled by all of the profits from all of the selling I was able to do and all of the word of mouth that happened afterwards.
You've probably never heard of me and no media outlet cares about me because I started as a not so sexy B2B, but the company and its products are growing much more ambitious in scope as we are getting the capital to do so, and now we are in the same position as many other VC funded companies, except I have 100% equity and don't have to worry about searching for a way to become profitable or running out of money since the second I decide to stop reinvesting everything into growth the company will instantly be extremely profitable.
Fantastic story, really neat to see you making it in this way. That's real entrepreneurship. The only thing that can hurt you is some venture backed start-up going aggressively after your customers by undercutting you until they run out of cash.
"except I have 100% equity and don't have to worry about searching for a way to become profitable or running out of money since the second I decide to stop reinvesting everything into growth the company will instantly be extremely profitable."
...is the grand finale that comes with VC-less businesses. :)
That was the feeling I got from the startup community about ten years ago — lots more bootstrapped, single-person, not-so-sexy startups.
These days, since startups are much more fashionable, it feels like it's the majority of startups are all about getting VC funding and ran by much more "idea" people.
We bootstrapped with time (evenings & weekends) until we had enough revenue to keep the lights on, at which point we quit our full-time jobs and pursued it 100%. We're in our fifth year now and we closed 2015 with $2M in revenue. Excluding compensation, our operating costs (servers, professional services, supplies, t&e, taxes, etc) are about $125k.
While things are great, growth has also slowed due to sheer bandwidth available from only 3 people. We've definitely struggled with hiring. When a new employee's salary directly comes out of your own compensation, you tend to become very particular about people pulling their weight, so we've churned through 10 people so far. I've had a very difficult time competing for top talent.
At this point I think the networking and advice would be the most valuable thing a VC could bring to the table, as we have an abundance of cash and technically a very easy business to scale. Just need capable people who like to be well-compensated.
When a new employee's salary directly comes out of your own compensation
Are you a limited company or a partnership? If you're an LLC, it's not your own pocket, it's the company's. This feels pedantic but is very important both legally and psychologically.
Remember it works the other way round for your employees. Their extra work goes into your pocket, not theirs (unless they're on commission!)
If you had 1,000 employees, would you see every last one as taking from your pocket? Come to think of it, maybe this is why so many business owners nickel-and-dime employees into misery.
you tend to become very particular about people pulling their weight
You're a founder. They're not. They are never, ever going to be as committed as you. They're going to do the 9-to-5 and then go home and think of other things. This is fine, because their compensation has a bounded upside and yours doesn't. Unless you're giving them a huge equity stake, which doesn't sound like the case. You have to reconcile yourself to this. Trying to make the whole company out of founder-level committed people is like the old joke about "you know the indestructable aircraft black boxes - why don't they make the whole plane out of that stuff?"
"You're a founder. They're not. They are never, ever going to be as committed as you. They're going to do the 9-to-5 and then go home and think of other things. This is fine, because their compensation has a bounded upside and yours doesn't. Unless you're giving them a huge equity stake, which doesn't sound like the case. You have to reconcile yourself to this. Trying to make the whole company out of founder-level committed people is like the old joke about "you know the indestructable aircraft black boxes - why don't they make the whole plane out of that stuff?""
I could not have said this better myself. I worked - as an IT manager - in a relatively successful startup recently and experienced that same realization. The founders were very young, in their early 30's, and had a daily, constant serious, ornery, mistrustful attitude towards staff. The founders worked 6, 6.5 days a week, 10 hour days. However, some of the most junior staff also worked like that. They were mistrustful with regards to the amount of time people put in, and these founders paid almost everyone under market even though they themselves were standing to make millions off of the expected sale of the company.
While the founders believed everyone in the company was swindling them by cheating their work time, as a manager I knew that people worked very hard, with enormous stress.
As you can sense from the original poster of this sub thread, the two positions (founder v. salaried employee with a little bit of stock options) are irreconcilable EXCEPT if the founders start to realize the added value of the employees versus their cost. "An employee's cost" == short-term thinking. In my opinion, if you're churning through 10 people and you're only still 3, I'd wager (without knowing more facts it's just a wager) that the comment about not finding 'top talent' is a rationalization for something else that's wrong managerially in that startup. Mentorship, training, higher pay, patience, better interviewing are all possible avenues to pursue to AVOID the 'churning through 10 people' scenario.
Provided your new hires are making sufficiently more than they're costing you, and allowing for a ramp-up period, that should be enough. Perhaps the problem is that the founders have a very unique set of skills that they're selling - which makes for a great business, but is inherently hard to scale without a cloning machine. The business needs to be standardised and process-ifyed a bit in order to make it easier to train new employees, or hand off work from the founders.
"Founder Stakhanovism" is actually somewhat workable. Divide your time in the working day into "key" and "grunt" work, where the "key" work is your unique marketable skills and the grunt work is more routine, then hire someone to follow you around and do the grunt work.
Yeah, we're an LLC. We structured pay so employees receive competitive above-market salaries and then very lofty commissions above that (which is tied directly to revenue earned from their contributions).
Your point about commitment is definitely accurate, though the 9-to-5 and "content with just my salary" attitude was what a lot of people tend to exhibit, even though they could have 2-3x'd that salary.
.. and you're wondering why they're not like you, who'd be willing to work an 80-hour week for 2-3x the salary versus their 40-hour week and 1x salary?
You mention commissions; I'm not clear whether you're talking about salespeople, developers or consultants? Or something else? Only the former traditionally work on commission.
The thing is that each additional hour of work has a nonlinear "cost" to humans. The 80-hour week is something that not everyone can do in the same way that the 3 hour marathon is not something that everyone can do.
I suppose I really need to do a nice writeup of my experience where, due to chronic fatigue, I had no real alternative but to work 25-hour weeks for a few years.
> I've had a very difficult time competing for top talent.
The problem is this idea of looking for top talent.
The vast majority of people in virtually any human endevor are mediocre. Be it an orchestra, army or corporation. Maybe 5% to 10% of an organization is top talent, the rest are average.
What makes any organization excel is having managers and leadership who can take a team of average folks and make them produce brilliant sounding symphonies. Develop THAT skill and you'll have no limits.
I wish I could upvote this 100 times because this is the absolute honest to goodness truth. It's not that talent is over-rated so much as really well-run places are underrated. Perhaps that's because talent is actually a lot more common, and thus better understood.
This. I work in a organization (sales) where the top 5%-10% generates as much revenue as the other 90%-95%. However the mediocre or just okay people are a crucial part of the system. The best teams in my company are a run by great managers that know how to get the most out of a average employee.
The picture of Google recycling old, cheap servers to generate vast amounts of combined computing power comes to mind. It's all in the management layer.
I'm in complete agreement. I know the business, I know the tech, and I know I'm absolute shit on hiring/managing. My cofounder isn't any better either.
Hiring someone to manage would probably be the most useful next step.
My current company has a comparable bootstrapped history and seems to be in a similar phase, but hiring hasn't been an issue.
If I'm hearing you correctly, it sounds like you have 3 people, ~$1.8 MM net profit and since your tax burden is low it looks like you pay out most of that by the end of the year. So are you looking at annual compensation of $500-600K each?
Why not stop paying yourselves so much and reinvest more in your business?
IMO, it's a lot easier to hire and take risks on money if it's set aside in a pool of money that you've designated as NOT being for founder salaries. If you cut back to a more reasonable $150-250K salary each, you'd have tremendous free cash flow available for all sorts of hiring and even acquisition possibilities.
Eventually someone is going to figure out how much money they're making in their market. Maybe someone they bragged to at a mixer, or maybe an employee of one of their customers.
It's very hard to stay competitive when you have nobody to compete with, and expanding your product into new markets can, perversely, give you competition because you paint a target on your head (hey, we do X, and they're taking our X lunch, we should start doing Y and see how they like it).
Maybe a little bit of growth would be good for them. Me, I like about a 25-30% growth rate a year. As a lead dev I've always struggled to keep up with the changing team dynamics when it's bigger than that, and most of my peers have had similar experiences, differing only by degree.
I don't think I've ever seen someone manage more than a 2x growth rate without the wheels coming off, and yet I've seen many try 5-10x and flame out in the process.
So for them to ramp up without growing pains, they could easily add one person this year, another in about 8 months, and another 6 months after that. As the team gets bigger you can hire people more often, because you're used to it and your protocols for absorbing new people get better and better. Just remember to assign some of those people to trying to do more with what you already have, and identifying frugal expenditures that have multiplier effects (I've had to beg for $5000 in hardware and gotten another FTE instead so many times it's become a cliche). The working smarter aspect will keep your team lean and build a lot of confidence they'll need when a competitor or a fractious customer finally shows up.
We don't actually pay ourselves anything absurd in salary and we have a lot of retained earnings sitting in the bank. We did try hiring and investing the finances last year (physical office, 6 people) but the inability to find the right people combined with my terrible managerial skills resulted in a pretty ineffective situation.
Seems like an arbitrary boundary to me. IF you can live with timezone differences, why not employ eg Europeans as freelancers? Taxes should be very plain then, perhaps you need some reverse VAT declaration but that's it.
Wages are lower here, too, so sthg like €80k would actually be pretty good pay.
Exactly how much more complex would the taxes be if you had non US people? Considering you're struggling with hiring, the complexity would have to be quite a bit to warrant missing out on non US talent, especially bearing in mind you could hire a pro to do your taxes when tax season comes around.
> very particular about people pulling their weight, so we've churned through 10 people so far. I've had a very difficult time competing for top talent.
"we're going to invite you for a fifth round of interviews to make sure you're someone in line with our vision and understands our mission"
not at all, if anything it's been the opposite (lack of vetting): we find someone that looks good on paper and interviews well, so we roll the dice and hire them. Then end up having to let them go in a few months when they can't hack it.
What do you think is stopping them from being able to "hack it"? It seems like if they've been there a few months already, you've essentially given them a few months training. Wouldn't it make sense to just continue that training until they're able to do what you want? Or, is there something else that is stopping them?
It's very possible they could have turned into something great and we were cutting losses too soon. That said, I have fairly high expectations and expect people to be motivated, tenacious and smart. We have such a broad spectrum of what we do (in a nutshell: infosec and data mining), it's difficult to simply train people for the myriad of scenarios they might encounter. This year I'll be stepping up my recruiting from the infosec community directly, up to now I've focused on polyglot devs with a background in security & web.
> all I find are people who just want a job with a steady paycheck
In fairness, I think besides those who are well enough off to not need to work, a paycheck is the main reason people work.
I'm just a junior engineer who admittedly doesn't know anything so take this with a grain of salt, but firing people because they are not similar to you seems bad for the company. After all, if they do good work in a timely manner, shouldn't that be more than sufficient?
If you only hire people who are like you, then it seems like you'd get a serious lack of diversity too, even though the benefits of diversity are well studied.
Then again, you're the one running a successful business while I'm just a random guy browsing HN when I should be working!
Being honest with yourself, would an employee exactly like you really be an ideal employee? Would they dedicate all of their productive hours toward your business or might they be spending some energy working toward starting a business on their own?
What's the ballpark of how much you're paying these people? How forward are you to candidates about that number? If the answer is too little for either, that might be the problem.
can you clarify what your specific issues have been? I think many of the readers on this thread, myself included, find it hard to believe that you've churned 10 employees and are having trouble recruiting and yet its THEM that's the problem and not you.
We've actually attempted that a couple of times (always with pay) but have always been turned down -- People either don't have the time for an eventual maybe or already have other offers on the table. I think in a job market that had a more balanced supply/demand that would work great.
I noticed all these entrepreneurs had access to at least 100,000 dollars of capital and most several times more then that which I think makes such self funding easier said then done, at least for a large class of Americans. How much capital does a founder usually bring to the table for the first round of VC funding?
side note: I also happen to be in the market for a new mattress and was wondering if anyone has tried these Saatva's?
The vast majority of Americans can't (and shouldn't) start companies. The risk far outweighs the reward. Even those who can afford to start companies overwhelmingly fail.
Starting a company is a luxury of those with lots of cash or lots of connections (or both). You read articles about teenagers getting VC, but that's a very small minority of the people who get funded.
It all comes down to your expenses. A good rule of thumb is to budget at least 6 months of costs before setting out. Maybe that's some tens of thousands of $. This is often enough time get some early traction before looking at angel investment or an accelerator. Hopefully at that point you're no longer burning your own money. VCs come much later.
Of course every situation is different. $100K+ commitment is not unreasonable if fundraising is difficult. Then again, some people raise a million bucks after a few weeks of prototyping.
In any case, people with money have more flexibility than people without it. One of the hard truths of startups.
It is the great irony of our times that a domain that requires so little working capital to start and grow reasonably well (software) is so hungry for money infusions. I hear that you need the money to grow quickly and growing quickly and capturing networking effects is the path to getting a horn on your horse. I'm not buying it. Being profitable as quickly as possible allows you to reinvest that money which then multiplies into even more investment capital.
Getting the know how and connections I can understand but VC for the money to fuel hyper growth...it sounds like a questionable proposition. Why would I put off testing the most fundamental hypothesis of my business (can it be profitable)?
Are there any known companies that explicitly didn't take any money after YC? It feels like once you take the first bit you're sliding down the slope since investors are pushing to take further rounds which usually pop up valuation. YC->bootstrap mode seems like a reasonable approach but the YC program seems to be built around pitching to the next round of investment (demo day). Has YC considered an alternate program where the explicit goal is being profitable after the program (black number day instead of demo day)?
That's awesome. Thanks for the link. I particularly like two things here. One was how the founder bootstrapped the business by straight-up asking old clients in his network to pay him enough to get started. You don't here about that much in HN writing on startups but it's extremely common in consulting with untapped potential outside of it. The other was this quote:
"It's difficult for inexperienced merchants to recognize value. We'd spend countless hours trying to explain 'pain' and our cure but some just didn't care because they handn't felt it yet. With our limited resources, we had to figure out a way to only work with those who valued the medicine we were offering."
That's brilliant. It's brilliant because it might be the trick to getting more uptake in my niche, high-assurance systems. They cost more with some sacrifices to use. Most won't buy them since they don't see the benefit. Yet, such methods are utilized in railways, airplanes, some industrial controls, and some defense organizations. They've felt the pain of failure on their bottom line. So, there's always a niche that prefers paying a bit more to eliminate lots of risk and uncertainty out of their operations. Plus headaches. Money you spent upfront isn't pleasing to look at but you can almost forget about it vs stress of occasional fire-fighting in random places.
> In their haste to get financing, start-up founders often fail to read the fine print and later discover that they have signed away huge shares of the profits.
Yes, and AFAIK it's a known business advice - if you want to build a sustainable company and get rich off it, the most valuable thing for you is ownership. Taking VC money is signing off some degree of ownership - you get some cash now, but seriously limit your potential value later.
But most startups are not built with sustainability in mind. They're a get-rich-quick scheme.
Or if you're not taking a moonshot you will hear the derisive term "lifestyle business" from people who turn up their nose at things like "profitability" and "life/work balance" and other things that don't make VC's 3 to 5 to 10x returns because that's all that matters in life, right?
Isn't Facebook the typical example of this? Many people aren't very good with legalese and really should consult an attorney for review of contracts, but when you're new to this and excited to get funding, you're dealing with a much more experienced party and are excited to get funding.
I would think this not only happens, but is common.
I've heard many horror stories, VC seems to be a two-faced industry. And their #1 stated legal goal is to maximize shareholder value, whether or not that is in line with the founder's initial vision / whether or not that means firing the founder to maximize profits.
Of course there are success stories as well, YMMV.
VCs will use their experience and the fact that they have done 10's of deals whereas your average founder will do 1 deal in their whole career as a natural advantage. The only way to counter that is to get yourself some competent legal advice in the run-up to getting funding and to make sure that your walk-away option (to go without funding) is a solid one. If funding is all that stands between you and being able to continue to run your business then you are playing for very high stakes in a game where others can dictate the rules. Better make sure you really understand the rules.
So, every year a fair number of companies 'exit', that is, their founders and their investors tend to make a substantial multiple of the value that they put in. The latest investors usually have the best terms, earlier investors have lesser terms and the founders will have the worst terms. The multiples for the latest investors will be the lowest, for the earlier investors higher and for the founders the multiples will be the highest. But that does not say much about the absolute 'take home' amounts.
It is rare - but not unheard of - for liquidation preferences to eat up all of the result, but it is not at all rare to see founders make substantially less than they thought they would make. And those are the good cases, in a bad case (for instance, a bankruptcy) all of the proceeds could go to an investor + all of the IP if you are not very careful. So make sure you understand the terms and internalize 100% that a large valuation during a funding round can work for you as well as against you quite easily depending on the final price your company will fetch at an exit and the exact parameters of the deal.
VC money is not free.
This is not simple stuff and plenty of founders are hopelessly naive when it comes to understanding their position.
Yes. The amount of founders who neither have any sophistication in finance or get poor (usually free) advice is probably more abundant than one would think. Funny enough, many people rely on advice from VCs (the same people who are trying to maximize their returns).
I'm not sure how they seriously wrote this story with that as the lede.
“I’m much more meticulous and efficient. I might go a little slower, but in the end I believe I win.”
Slow is not how you win.
I think this article fundamentally misunderstands the goal of VC backed companies: Billion dollar exits and paradigm shifting technologies. That's not for every company.
Fast is not how you win either as shown by the recent unicorns. The truth is that sometimes you need to go slow and sometimes you need to go fast. Actually I don't really like the term "slow" because it suggests laziness, bureaucracy, or decision paralysis. I like the term "patience" better. Be diligent and efficient, but not hasty and if you get a bit of good luck (e.g. being a Parse competitor when Parse announces it will shutdown) then move really fast to capitalize on it.
Fast is absolutely how you win - but it matters when you are fast. That's the whole point of Venture money, to go fast aka "Growth Capital". You don't do that in the beginning, you are patient but if you want to grow, you have to grow quickly, otherwise you get taken out by a larger competitor who can get to market faster. Failed unicorns put growth capital before they have a solid market position.
> if you want to grow, you have to grow quickly, otherwise you get taken out by a larger competitor who can get to market faster.
This only applies if you're in the pre-launch phase and you haven't gotten to market yet. For those organizations that are already on the market, how fast your ramp up does not always mean you will win. The inherent risk of VC-fuelled fast growth is that the excessive funding will overshoot the actual value very quickly - and suddenly what was supposed to be a healthy $1B business becomes a "$30B" (on paper) series-J failure with no hope of getting a reasonable exit. In that case, I feel the slow/patient growth to $1B is far better for everyone involved (except VC).
There is a long list of (ex-)startups that make me scratch my head: in what parallel-universe could they possibly be worth $X - which ever way you slice it - their revenue cannot support the exuberant valuations.
That's obviously far too broad of a statement. Lots of extremely successful businesses started slow. It depends on what kind of business you are, what you're selling, what your brand is about and so on.
After 16 years in business, Starbucks had a whopping 17 locations.
After five years in business, Domino's had three locations (12,500 today).
This presumes a lot about entrepreneurial ventures at a vastly generalized level. While this may not be true of the high tech entrepreneurship most at focus on HN, there is a myriad of other entrepreneurial activity (maybe not using the 'startup' marker) where this is a very reasonable statement.
Agreed, the premise for this article is ridiculous. That's three times the amount YC offers. Even the 120k YC offers would be critical for me in letting me take several months of full time work towards my project without worrying about blowing through personal savings.
Even in the most expensive cities like NYC, San Francisco or London that is still a lot of money to have sitting around, enough money that I think qualifies one as rich (if that was all your savings it puts you near the 80th percentile of wealth holders in the U.S., but he likely owns a house, and other assets). And as it turns out they're company is near the dead-center of Pennsylvania, in between Philadelphia and Pittsburgh, where cost of living is pretty low.
Its only about two years living expenses in most major cities. People have mostly forgotten, but traditionally having the ability to survive at your standard of living for a year or so (ie, having some wealth, just not enough to live off exclusively) was defining of the middle class.
Its tangential, but it is very interesting that even in developer circles devs think they are middle class when they make $130-150k a year even if their cost of living is ~100k which means their total savings even after a decade (and something eating into their rainy day fund, including vehicle / home purchases and such) they still don't have two years living expenses saved up, you are still definitively working class.
Very few people today are actual middle class anymore, by reasonable standards of what to define it as, since cost of living has gotten so absurdly high relative to income compared to what it was decades ago.
If you had 350k in savings and decided to quit your job and take a break, you would probably move out of your $2 million NYC apartment.
350k would easily last you a decade in a smaller, low cost of living town. You'll be driving a 2011 Honda Civic, limiting how often you eat out at nice restaurants, and not buying name brand, but you won't exactly be struggling.
Thats a really great point in cal8fornia even 6 figures is poverty the cost of living is incredible. Taxes on singles in california are sky high as well
In Japan, Start Today Co. Ltd. (better known as Zozotown, a popular online apparel retailer) went public this year without having raised any venture capital. $5B mkt cap at this time. Founder also owns way more than 50% of shares and recently bought over $100M USD of modern at at auction.
I have noticed there are a lot more companies on the east coast (including my own company) that are like this. Yeah I won't be a billionaire but I think you can make a pretty darn good living with lifestyle businesses.
I have wondered if it's a cultural thing or just that there is more money/investors/people willing to take/give money in California.
One thing I haven't seen mentioned yet in all the comments (or maybe I just missed it)is that a capital infusion can allow you buy talent and expertise which in turn permits you to grow faster.
In the article Rudzin worked for 20 years within the industry and he surely within that time had accumulated a lot of niche knowledge which helped him succeed.
Say X is a high school teacher with an insight that a better mattress is needed in the marketplace. She follows up on this and goes on to start a company that initially shows traction. X after a while will discover that her lack of knowledge in finance, distribution, negotiation, HR, legal etc (in a general sense, and on an industry-specific level) is a barrier to her companys development. Capital will help solve this problem by allowing her 'buy' and domesticate expertise within the company and and use same for expansion and growth.
I'd like to see more companies bootstrapping with help from their communities they build that see real value in their products. Building a transparent and open product with community feedback around things that work is the core of what we're trying to facilitate with Baqqer (https://baqqer.com/). I believe this builds strong, robust products that aren't built in a silo and launched without an audience.
>When he created Spokeo with three college buddies from Stanford University in 2006, he tried to get equity financing, but was turned down by more than six angel and venture capital investors.
Maybe my perception is warped but is this even _possible_ today, or during the peak a year or two ago?
Unless you're shaking and stuttering during the pitch it would probably be impossible not to get a pre-seed investment with that much Stanford glitter all over you.
“I don’t remember seeing a company going public on the Nasdaq in the last 20 years who arrived at the I.P.O. with only management owning the company,” he said. “It’s almost a rite of passage.”
Why would you sell a business that you owned 100% of that was able to be bootstrapped to $100 million in revenue. What possible business that you could invest the proceeds in that would be better than this?
It can also be about funding growth. (Getting more money to invest in your awesome business)
Let's say you can get to $100mm in recurring revenue, and your company has $95mm in costs. Let's say that you know that every $1 in cash that you invest in Sales will generate $1 in new business every year from here on out. (This is a good business after all!)
If you don't take any VC money, your business will grow as follows: 100M -> 105M (100+100-95) -> 115M (105+115-95) -> 135 (115+115-95)
Now let's say you take $20mm from a VC, or the public markets. You now are investing $25mm in the base year, from which to grow.
Your revenue stream would be 100M -> 125M (100+ 120 - 95) -> 145 (125 + 125 - 95) -> 185 (145 + 145 - 95)
So you have a 185mm revenue company rather than a 135mm company on the back of the investment. If your company trades at a $5x revenue multiple (similar to what Qlik traded at today) you have increased the value by $250mm for the $20mm initial investment.
The math is a little fuzzy, but the general idea is as long as you can use the money smartly to increase your rate of growth faster than the VC (or public market's) required return on capital, it's worthwhile for all parties.
The VC model isn't the only game in town. If the revenue was predictable and stable, you could just as easily obtain a line of credit (debt financing) without giving up any equity a la VCs.
Reasonable point. There are lower cost sources of capital. My impression is that many banks are still nervous about lending to SaaS startups if the GAAP metrics don't look great.
This may be why PE companies are getting into the game lately.
This is a bit fuzzy, indeed. You mention "revenue", yet you are subtracting a $95mm in expenses. Did you mean profit? If so, how can the $95mm costs possibly stay fixed? Your $25mm is going towards sales and marketing expenses. It's not staying in the bank, so that should be accounted for somewhere.
I'm making the oversimplifying assumption that costs are fixed. In SaaS business, a disproportionate amount of the costs tend to be. Look at the SG&A line of Qlik, in the news for their recent sale. [0] SG&A at mature companies can be 20-30% of revenue. At Qlik it's almost all of the revenue. This is ok, because they get the revenue over time.
It's possible to create a more realistic model, but the core idea is "If you have a great company, it still can be ok to get VC money to grow it even faster."
Very off. I didn't want to create a spreadsheet. :-)
But the idea is that $95M of the costs are fixed, so whatever you add goes to growth. So on 100M of revenue you have 5M to invest in growth, which will get you a 5M revenue stream the next year. On 120M you have 25M to invest.
This sounds far-fetched for traditional businesses, but isn't so off for SaaS companies. Once you get through sales, general and administration and fixed R&D costs, the margins on great SaaS companies is very high. It can be 80 or 90%. This is why GAAP metrics can look bad on them for a while (have to get over the fixed cost hurdle, and sales costs can be very high) but once you're profitable, it's a huge cash cow. This is one reason why Salesforce and Bloomberg do so well. They make tons of cash, and any competitor will need to lose money for several years to catch them.
Bootstrapped businesses can be susceptible to price competition from companies using other peoples' money though... when the investor climate supports it. With mattresses it's maybe a little hard, but bookstores were effectively priced out of business by Amazon.
I'm sure Casper gives Saatva very healthy competition -- in fact, it's the only of these companies that I've even heard of until now.
In Amazon's case? I doubt it. The costs associated with starting and scaling a business like Amazon are just too high to bootstrap effectively. But a SaaS company or software product company (i.e. change "bookstore" to something else)? Absolutely.
Amazon was started in a bootstrapish way with about $200k from Bezos, his parent and loans. The code was written in C by Bezos and two other guys in his garage. Once they launched they had to raise money to scale though.
You're right. There should be a another terms for it though because 200k is 200k if you put it in yourself or took it from a VC. The last company I started we had €20 starting capital which we spent on a domain name and a server. Clearly there is a huge difference between those 2 cases as we had to be profitable from day 1.
Interestingly, TV ads are starting to show up for some of these brands. We have a Leesa foam mattress and like it quite a bit and my wife was just mentioning this week she was seeing TV ads for them (not sure the channel).
Spring / traditional mattresses are a bit of a challenge (size), but foam mattresses can be packed up relatively conveniently (Leesa was 2x2x4.5 for a queen) and shipped w/ a decent 90ish day try/return policy.
Different than the days of going to a mattress dealer and having the same manufacturer give different names to the mattress based on dealer so "price comparison" was difficult/impossible.
I've had a billionaire say to my face that his biggest regret is taking other people's money.
He said if he could do one thing differently, it would be to only take money when he felt that opportunity was slipping away, and there was nothing else he could do about it.
But that might be because you can rent, for a surprisingly small amount of your company's ownership in the right circumstances, the advice and backing of near-billionaires who have, you know, a little bit of experience in that IPO thing.
It's true beyond a doubt that if you bootstrapped a $100mm in revenue company that can profitably grow from reinvestment you don't need VC money, and in fact if you want to IPO, you can you do that without giving away any upside at all (until the IPO day that is, when the bankers get their cut).
However, getting to that point might be easier with the aid of some wise and well connected folks.
This is a common dilemma in finance, the key is the possibility of outsized returns made possible with leverage. Let's say you have done well at your bank for the last X years and you have an audited track record somehow and a decent amount of saved bonuses. Time to go work for yourself.
Option 1: hedge fund: take a large amount of outside capital, but also sink enough skin into the fund that your interests appear aligned. If things go well, you can become a billionaire within a decade. If things go badly, you're burnt out of the industry (with famous exceptions) and you've lost a significant part of your net worth.
Option 2: start a prop shop or just trade your own assets, take no outside capital, go more slowly and take less risk (as less hunger for returns) and you might have a lower probability of burning it all, but you can only increase your net worth so much within the same decade. At most a few multiples of what you started with.
If there's a bull market, the first strategy is especially attractive because a. you can level up like crazy because debt is cheap (on top of the investments in your fund which are also coming in cheap) b. everything goes up, so just find the more volatile stocks (e.g. tech) as they go up faster. This strategy has made many people rich but you need to find a way out before the crash, because you'll find the perfect storm of your financing terms tightening suddenly, your high volatility stocks cratering faster than the rest of the market (that's why you selected them!) and your LPs (investors) all wanting out at the same time. There'll be white knights but they'll take their pound of flesh.
The prop shop partner on the other hand can wait out the crisis and buy the bottom or safely trade the volatility. He has comparatively less pressure on all of the above. These are the moments of greatest opportunity.
I always thought the same applied to startups. Eschew massive financing if you can, aim for lower volatility markets, and start the thing in a downturn when you have less competition and people are more sensitive to quality, is a lower upside but higher probability of upside strategy.
Wish I could locate the article but I just saw a quote that only 37% of companies going public had ever accepted venture capital. Now they did say those that did accept VC money got there three times as fast.
I know it's a lot more common for tech companies to take venture capital but there are plenty who do not.
i'm surprised chobani is not listed here as it's one of the most successful story of entrepreneurship with personal funding (+ small business loan) lately.
Venture Capital is needed to establish a ponzi-scheme like escalation in value. Multiple parties agree over a period of time that the company has increased in value, the most recent party making it true by handing over some money at the largest valuation.
