Why I'm coming around to seedstrapping

A common pattern I see: A founder calls me to talk about bootstrapping versus raising money. They say they want to bootstrap all the way (very few founders ever tell me they want to raise tons of $). 

We talk through the pros and cons. They decide to raise a little bit of money to start. 

Then, they see some big growth. Between reading X and talking with their VC friends, they’re convinced to raise $5M at a $25M valuation. 

Then, $20M at a $100M valuation. And sometimes, even $100M at a $500M valuation.

They are worth nine figures on paper. At each round, I encourage them to take secondary, but they wave me off: "That $2M today will be worth $10M next year!"

Then, something in their market changes. Maybe it’s AI. Maybe Google comes in. Maybe they just start hitting some natural growing pains.

They were $20M in ARR going on $50M next year, but growth has stalled.

One year later, they are doing $25M in ARR. Even scarier, next year is looking like it will be flat if they don't do anything!

What's their company worth? Please take a seat first.

It's not uncommon that a good founder with a good story and a business that seems on a trajectory from $20 to $50M (crazy AI companies aside) could be valued at $500M. 

That same company at $25M and not growing is worth… wait for it… $25-50M.

I'm open to arguments, but it’s definitely not worth more than $100M. And, in this example, the founder raised >$125M. Any way you slice it, the founder’s equity is worth zero. 

The founder may spend a year or two in the woods trying to find growth again with capital remaining, but then they will exit. Hopefully, the buyer gives the founder a mil or two for good efforts.

This story is much more common than you might realize.

Should you avoid this path at all costs?

No. If you want to play this game as a founder, then play it!! My caution is always just know what you are signing up for. 

And, even more pointed, realize how intensely valuation multiples collapse for companies that are growing fast on the VC track and then stop growing.

In most founders’ heart of hearts, they know how sustainable or "real" their growth is. I see this issue take place when founders lie to themselves or "kick the can down the road,” i.e., "Let me raise another $50M and then I'll figure it out."

Again, nothing wrong with this, if it’s what you want, but just go in eyes wide open.

This newsletter is literally called Bootstrapped Giants. So the other extreme is: you start with nothing. 

Maybe $50K in personal savings and credit cards. Maybe you source a product to dropship or sell your first client when you are the only employee. 

You rinse and repeat until you have a team of 10 and maybe a few million in revenue.

At that point, you can invest in growth strategies, including people and marketing to help you get to the next level.

At any point, you can get off the treadmill via a sale, and it’s likely to be meaningful to life-changing. In certain instances, you can get it to hundreds of millions or billions!

BUT, after starting six-plus companies now… I'm starting to sour a bit on bootstrapping.

• If it’s your first company and you are young

• If you have 10+ clients ready to start paying

• If you are multiple founders and ready to grind for a bit with little pay

• The business takes off immediately

In some sense, this is me admitting defeat.

We've tried the last few years to bootstrap a bunch of companies and, while it’s overall "worked" on a portfolio basis (GrowthAssistant alone pays for all the fails), it hasn't been fun.

And, maybe, more importantly: it hasn't felt like the right strategy.

It's felt "forced" because Jesse made up a rule, versus looking at each business and giving it an appropriate amount of capital.

This concept has always been around, but it’s gaining in popularity in the AI age.

It’s pretty simple: you raise a "seed" round (think ~$2M) and you never raise again. Two of the most famous companies that have done this are Toptal and Zapier, both worth $1B+! 

Ideally, you raise the right capital, which is either less institutional (think angels/family office), or VCs, who are comfortable with "just" a high eight-figure/low nine-figure outcome. 

There's actually a VC in St. Louis called Cultivation Capital who does this!

Starting a business is already a super difficult undertaking — emotionally, physically, mentally. This amount of $ gives you a few key things to get started:

• Team: I think, to really set up a company for success, it needs at least three people early on.  One leader who does either sales/marketing or product, one product/delivery and one ops/admin. Something like that. That balance goes a long way toward moving things quickly and avoiding burnout.

• Basic infrastructure: I'm not talking Aeron chairs, but maybe a space, some computers, the ability to travel to meet clients or some $ for inventory and marketing (if it’s a DTC biz).

• Shots on goal: This has been one of our biggest challenges. In the cases where we got it right "the first time" (see: GrowthAssistant, Aux), it’s been fine — although we'd still have benefitted from the above. But when we missed the mark (e.g., Unbloat), it really hamstrung us to make obvious changes. I think having enough capital to give yourself two to three years (and maybe around three big swings) is necessary to really find success.

And, of course, $2M (say for 20-40% of the company, depending on a host of factors) is not going to kill you. If the company exits for $10M, you will still be set for life. 

If it exits for anything more, your kids are set. It gives you a HUGE amount of flexibility to build the business with minimal dilution and tons of flexibility.

What do you think?

Am I getting soft? Old? Are you unsubscribing now? Should I change the name of the newsletter?!

Reply and let me know!

jesse