[HN Gopher] Venture backed or bootstrapped? There's a third way:...
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Venture backed or bootstrapped? There's a third way: just raise one
round
Author : rmason
Score : 42 points
Date : 2024-01-18 19:55 UTC (3 hours ago)
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(TXT) w3m dump (www.saastr.com)
| willsmith72 wrote:
| It totally depends on the investors. In the given example of
| raising at 3m and selling at 10, a lot of investors would call
| that a failure and push instead to raise more for a bigger
| eventual exit.
|
| 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.
| reducesuffering wrote:
| But that's the point isn't it? If you only raise one round,
| like the $3m, a round is only like ~15% of the company so they
| don't have the power to dictate whether you attempt a bigger
| exit or not. I also don't understand why this "third way" isn't
| more common because you get the initial big boost of being able
| to hire a team, but you still retain 70-85% of the company
| instead of repeated dilutions where founders end up with 5-10%.
| I know I know, 5% of $1b is more than 85% of $50m but it
| usually seems like you become worse off and just another job
| you don't have control of where someone else is putting their
| thumbs on the scale and you can get ejected from.
| sv123 wrote:
| I think the point is it may be hard to get investors to ever
| give you $3m if you don't have the 100x exit in mind.
| BadCookie wrote:
| Liquidation preferences make a difference to the math here.
| For example, a 3x liquidation preference would guarantee the
| investors the first $9 million of proceeds from any exit in
| the $3 million investment example.
| morgante wrote:
| Liquidation preferences rarely kick in until later rounds.
| Most seed rounds are just 1x.
| xyzzy_plugh wrote:
| I know some late stage startups with multiple rounds
| where _all_ are 1x. Most likely ZIRP but still.
| tptacek wrote:
| Right, but you more or less have to lie to raise money for
| that strategy.
| xyzzy_plugh wrote:
| I think that distinction firmly lies in what founders
| decide to tell themselves.
|
| Imagine, founders _lying_ in their pitch decks.
| tptacek wrote:
| Founders are _wishful_ in their pitch decks, but that 's
| not the same thing as misrepresenting their intentions.
| reducesuffering wrote:
| Really? You might've been in these investor meetings.
| AFAIK, founders are telling investors about the big vision,
| we'll raise money right now and wishfully become very big.
| In what way are investors stipulating, "ok we'll fund your
| seed/A but only so that you can hit certain benchmarks that
| you will definitely be raising a series B in a year or
| two." Is it that direct?
| itslennysfault wrote:
| They can "push" for whatever they want. I think this is the
| trap a lot of founders find themselves in.
|
| 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.
| morgante wrote:
| The VCs won't see a return, but what's the upside for the
| founder there? Paying yourself a "nice salary" is not a win
| considering how hard it is to get a company off the ground.
| brianwawok wrote:
| Who are you to judge what someone picks for their own life?
| morgante wrote:
| It's fine if they're happy with it.
|
| 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.
| willsmith72 wrote:
| to you it would be a failure. to many a sustainable,
| profitable small business is the dream
| gnicholas wrote:
| The decision point isn't when you raise the first round,
| it's when you decide not to raise a second one. You will
| have already spent a lot of time trying to build a big
| company and realized that isn't going to happen. Now it's
| time to figure out whether to convert your previously-
| ambitious startup into a stable, small company. Depending
| on the sector and business model, this may mean you don't
| even have to work that much. If you're selling SaaS and
| have low churn, you could hypothetically take it very easy
| and just pay yourself. VCs would not like this, and if you
| try to raise for a future company, funders would be wary
| for sure.
| msds wrote:
| I don't know about that. Paying yourself a nice salary,
| having a stable job doing something you probably (at least
| at one point) find interesting, and having lots of autonomy
| seems like a pretty nice gig.
| xyzzy_plugh wrote:
| Raising a couple of rounds can reliably render solo
| founders financially independent.
|
| 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.
| bearjaws wrote:
| Seen this several times in my career. It's not all VC hockey
| stick growth, many companies are just profitable, they have
| 10-20 employees and the owner lives a great life style.
| Generally the pay is pretty good and they focus on customers
| like any other company.
|
| It doesn't have to be billion or bust, only once ego is
| involved does it become billions or bust.
| tptacek wrote:
| Right, but it sort of needs to be hockey stick growth for
| the math to work out at the VC firm. So, like, fine, you
| can glide into a steady state of comfortably running a
| company over the long term; that's great! You should do it
| if you can! But you can't go pitch that to investors, since
| you're basically pitching a loss for them.
| ShamelessC wrote:
| It seems others are suggesting you simply take their
| money and ignore all their demands (so long as you aren't
| violating any contract).
| tptacek wrote:
| I'm not saying you're really facing any legal liability
| here but the strategy you're proposing here involves
| defrauding your investors. They're going to make these
| demands explicit before you close the deal!
| xyzzy_plugh wrote:
| What demands are you thinking? That you raise future
| rounds? That has not been my experience.
| stickfigure wrote:
| I don't see this as a strategy so much as just a natural
| consequence of the system. Most companies "fail" from a
| VC perspective; some percentage of those are still
| profitable and keep the founders/employees engaged.
| Everyone wanted the hockey stick but they got something
| else. It's not fraud.
| morgante wrote:
| Right. It's fine/expected if the "failure" comes in this
| category (though many investors would encourage you to
| simply repay them and move onto something with more
| growth potential).
|
| The unethical thing would be pitching a unicorn plan when
| the actual strategy is building something much smaller.
| tptacek wrote:
| It is if you assure your investors you plan to take risks
| to pursue hockey stick growth, but instead you intend to
| keep the money in the bank and putter along.
| ShamelessC wrote:
| > I'm not saying you're really facing any legal liability
|
| 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.
| stonogo wrote:
| That's not a third way, that's just venture backed.
| vecter wrote:
| In a very narrow strict sense, yes. But I would argue it's not
| really venture-backed. For me, venture-backed means that over
| time, the founders collectively own a minority of the shares,
| and the board structure is such that venture capitalists
| collectively hold a majority of the board seats. This means
| that technically the investors could do anything they wanted to
| with the company.
|
| 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.
| troutwine wrote:
| I think your distinction would imply that Facebook/Meta was
| not venture backed, which it is, since Mark Zuckerberg has
| always held a majority stake?
| reducesuffering wrote:
| Mark maneuvered for the best of both worlds with the dual
| class voting shares. He owns the majority of the vote but
| only ~13% of the share capital. From the rumblings I've
| heard, I don't think VC allow this type of Google/Meta
| share class anymore, and/or SP500 don't include new
| entrants, but not super knowledgeable here.
| TotoHorner wrote:
| No, being venture backed implies you're cashflow negative and
| you're relient on funding to live.
|
| 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.
| lgkk wrote:
| Do you think we will see any bootstrapped companies become
| billion dollar corporations? Companies that start close to or are
| profitable from the get go. Obviously small revenues.
|
| 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.
| morgante wrote:
| There have been plenty of bootstrapped billion dollar outcomes.
| Mailchimp ($12B) is one recent example.
| lgkk wrote:
| Oh cool! Wonder why this doesn't show up when I search
| google. I will ask chat gpt lol
| codegeek wrote:
| mailchimp, freshworks, basecamp/37 signals etc are all
| bootstrap and wildly successful.
| lgkk wrote:
| Wowza. I'm really inspired now. I've been working on a
| product after talking and showing the solution to some
| potential customers.
|
| Really want out of the swe ladder race and do my own
| thing. Build something ppl want :D
| fuzztester wrote:
| How is raising just one round different from venture backed, as
| someone else said ?
|
| stonogo said, here:
|
| https://news.ycombinator.com/item?id=39047023
| stcroixx wrote:
| This is exactly what my current employer did. It's also the best
| job I've had in a 25 year career. Business is very stable and
| provides a nice life for the small group that we are. No VC's
| harping at us to do more, more, more. We made a profit the first
| year and have every year since.
| creer wrote:
| How are the original investors getting paid? (That would be a
| useful part of the story, please)
| cj wrote:
| Profitable companies can pay out annual or quarterly
| dividends to shareholders. That could even include employees.
| creer wrote:
| Yes they can. And "traditional investors" might be
| perfectly fine with dividends plus a solidly run company
| (i.e. valuable on its own). It's just unlikely to satisfy
| investors who were promised either a nice exit or a hockey
| stick.
| cj wrote:
| > It's just unlikely to satisfy investors who were
| promised either a nice exit or a hockey stick.
|
| Agreed. In our case we offered to buy them out.
| pdshrader wrote:
| This "third way" is only really possible if you're strategically
| aligned with the "one round" investors you have. It's easy to
| point to a few companies that have gotten buy-in from their
| investors and generated a multiple of 100x returns, but for the
| vast majority of companies that raise one round, their investors
| are still going to push for "swing for the fences" returns -
| which usually means recommending raising more money.
|
| 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.
| Onavo wrote:
| The SAFE note will never vest in this case
| rsingel wrote:
| Even better, raise a round on a SAFE note and you never have to
| convert their dollars to equity if you never raise again.
|
| Just got to pay back what is technically a loan, usually with
| quite low interest.
| gnicholas wrote:
| I was naive when I started out talking to VCs and made the
| mistake of saying that we might only need to raise one round. Of
| course, this is not what any VC wants to hear, since it doesn't
| align with their goals.
|
| 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.
| frankdenbow wrote:
| Have seen this a lot in the conference I run on the topic.
| Sometimes it's on purpose but most times it's just not being able
| to cross the series a chasm. If you have mostly angels this works
| pretty well as it sets you up to make everyone happy in a smaller
| exit.
| CalRobert wrote:
| Related, from yesterday
| https://news.ycombinator.com/item?id=39028979
| obiefernandez wrote:
| I've done this accidentally. Several times!! LOL
| RileyJames wrote:
| This has been our strategy. We bootstrapped as long as we could.
| We got 1 & 1/2 products live. But with a long sales cycle, and
| security certificate requirements, we needed funding to cross
| that chasm. We've raised one round and our goal is to get to
| break even. Our competitor have gone the other route, VC after
| VC, and while it's enabled them to grow, it's left a bad taste in
| their customers mouths (who've effectively been burned and
| churned). It's made it easy to differentiate ourselves, and our
| motivations, and ultimately win their business.
| cj wrote:
| This is what we did with my company. Raised a $1.1m seed in 2015,
| and still running the company today. It's a very profitable
| modest company now with 25 employees.
|
| 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)
| fairity wrote:
| Your story is so similar to mine that I thought you must be my
| co-founder, except for the fact that just one piece of the
| story doesn't align.
|
| 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.
| cj wrote:
| Happy to chat if ya like! Email in profile
| enahs-sf wrote:
| Something I was noodling on is, what happens to SAFEs during
| acquisition? I'm assuming the investor gets cashed out based on
| some share price?
| morgante wrote:
| Yes, an acquisition would trigger SAFE conversion. Investors
| would be paid out according to their converted equity percent.
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