So my tips:
1) If you are going to raise money, decide to do it and go at it hard. Talk to lots of investors, all at once. Until then, I wouldn't meet with any investors. Just thank them for their interest and tell them you'll contact them later if you decide to raise money.
2) To decide whether to raise, start with your goals. Decide what you want to achieve with the company, then analyze your company (business plan, spreadsheets), then choose whether to raise now, later, or maybe never.
What you want to achieve is isn't a simple sort of expected value (EV) question, for a profitable, boot-strapped company. You may prefer to take the option that maximizes the chance of a certain level of return for shareholders, over the option that maximizes the absolute EV. It depends what you want, what your risk tolerance is, what you think your business can achieve, and whether you think VC money helps you get there.
I don't think the dating/marriage analogy holds. If VCs are contacting you because your business is booming, you don't really need much of a relationship.
Now, talking to potential acquirers at any point in the lifecycle of the business is a great use of time, in my opinion. If you are open to the idea of eventually selling your company get close to the companies that might be interested in buying your company and stay close. Partnerships, shared customers, deep understanding of their technology and so forth
While there is a benefit to having relationships and them seeing you execute over time, it's easier to get a meeting if you have great numbers. How many VCs wouldn't take a meeting if your first sentence is, "We have a $150k in MRR and are growing at 20% month-over-month"? Any?
I don't know. Build your company.
Any idea what caused the sudden change?
Why not use debt?
Could someone replicate your product/distribution exactly (which means they have product/market fit) then go raise a ton of money and crush you?
Let's compare VC to Debt for owner capital
Funded via VC:
* Startup Wins Big: You get 30-70% of big money
* Startup Fails: Walk away with a fresh slate
Funded via personal Debt:
* Startup Wins Big: Get 100% of the big money
* Startup Fails: Declare personal bankruptcy, perhaps lose house, perhaps unable to buy a home for 5 or so years, lose any physical assets
I am a big fan of don't get VC if you don't need VC. But for many many normal founders without a huge pile of cash in a trust fund or from a previous exist, the VC debt looks a whole lot nicer than the person debt story.
Small business loans and private lenders exist and are usually accessible if you have profits and/or business assets.
The CEO answered the question for me:
> A company takes investment so that it can grow faster than it can with organic growth.
So, if you're happy with organic growth, avoid outside investment. If you want (or need) to grow faster than you can with organic growth, then you need outside investment, (and the maturity and willingness to adapt as your company changes.)
For what it's worth, this also depends on what kind of business you're in. If it's something that can grow fast, someone might point to your startup to justify demand in your space, take outside investment, and grow so fast that they push you out. (Hopefully your "organic" company could figure out a way to cash out before your customers flee to the well-funded competitor.)
Otherwise, If your business is niche, the market might not be big enough to justify investment, and you can continue to comfortably grow at your own pace without risk of a well-funded competitor eating you for breakfast.
When you take VC funding, you're put onto an 18-month cycle: 12 months to grow your KPI's, then 6 months to raise the next round of funding.
Remember, the VC business model is 9 out of 10 investments fail and the last one makes at least 10x returns. Your probable failure is built into their spreadsheets, and if you don't believe/can't execute your 10x hockey stick story, they're going to cut you out at month 16. 2x growth is failure. 4x growth is an acquihire into another one of their portfolio companies (with the 4x profits going to their liquidation preferences, not to you). 7x growth and maybe they'll toss you a (dilutive) "bridge round" to buy you another 4-6 months.
VC funding is great if you're willing to commit to that game, but make sure rapid growth at all costs is the game you want to play. "Lifestyle business" is often used as a pejorative around here, but the reality is the average founder can make out just as good if not better owning all of a smaller pie than a down-round-diluted large pie.
If you want to play the VC game, understand the constraints and requirements you're committing to. It's a tool, and just like any tool, make sure you're using it for the right job.
Thanks!
As rapidly as possible, I get a revenue stream going. That stream is never really what the business is intending to do in the long run (although is should leverage the same assets -- code, people, etc. as the ultimate goal needs). This can happen in a bunch of different ways. I've done things like licensing libraries of core functionality to other software shops, engaging in consulting services, selling stripped-down "light" versions, etc.
The goal here is to achieve self-sufficiency as rapidly as possible. A huge part of this is to avoid growing expenses too quickly: put off hiring anyone for as long as possible, don't get fancy when it comes to office space and equipment, etc. And don't expect to pay yourself for a long time.
I'm a big believer in startups running on a shoestring. From my observations, it is usually harmful for a business to be too well-funded too quickly.
After that, only grow at the pace that your revenue stream can support. If there's a growth opportunity but you need to go into a lot of debt to take advantage of it, don't do it. There's no such thing as a "once in a lifetime" opportunity.
Debt can't always be avoided, but only take it on if you're going to lose a lot more money if you don't. (Lost opportunity doesn't count as lost money).
Also, take maximal advantage of the primary thing a startup has over an established business: flexibility. Your business will develop its own idea of where it wants to go, and that may be very different than what you had in mind on day one. Listen to it, it's smarter than you are.
Anyway, as I said, this is (scratching the surface of) what works for me. I have no idea of whether or not it would work for anybody else.
So concisely put, yet a few times in life, this concept has saved me from making a huge mistake.
It may also be part of the reason I tend towards being single :/
I was so jealous that I could taste it! I was sure that I had missed a one-in-a-lifetime chance.
Decades went by and I happened to run into him by chance. In catching up, I learned that he wasn't working in the industry at all. I mentioned that job and told him how jealous I had been. He laughed and said that it was one of the worst decisions he ever made, bad enough that it was why he lost interest in programming professionally. (Don't feel too bad for him, he's doing quite well in a different field.)
In the meantime, I'd been lucky enough to have benefited from many opportunities. That one-in-a-lifetime chance that I missed turned out not to be that at all.
Weird things happen. I once had my office flood and was unable to use it until they cleaned it up. I had to take out a loan in order to quickly obtain a temporary work area. Critical equipment can break, critical people can get ill or quit, requiring you to hire a temp to get through a crunch, and so forth. These are rare sorts of events, but they happen. When they do, if you don't have the money in the bank to cover it (and you should never use the money intended for rent, taxes, or payroll to cover these things), a loan can be the best option.
I left out a monetary policy that I think is critical for me, so let me take the opportunity to add it now: avoid fixed recurring expenses as much as possible. This includes buying things on time, or periodic subscription/service fees, etc. It's really, really easy for this sort of thing to get out of control, particularly by stacking up a large number of small monthly expenses.
The main problem with fixed recurring expenses is that they reduce a startup's main advantage of flexibility. If your monthly expenses are low, you are able to be pickier about what business deals you take, or you can afford to cut a problematic customer or supplier loose, and so forth. The better a business can weather lean times, the stronger that business is.
1) Ensure your ACV is greater than $3000
2) Scale out an outbound prospecting inside sales channel
3) Scale paid ads on top of outbound prospecting
4) Create a promotion strategy/mix for your growing email list
5) Scale content on top of paid ads
6) Ensure $1 into the customer acquisition machine spits out $3.
7) Explore channel partners, affiliates, replacing yourself with a professional management team, or raising growth capital on very founder friendly terms, etc. if you'd like
I help B2B SaaS founders scale to $1M ARR and beyond with outbound prospecting inside sales funnels. If you'd like to learn more, happy to discuss harry [at] convopanda.com
Why? Is the assumption that the LTV is spread out over a period of time that such a low ratio would cause a low CAGR?
I'd assume if one's payback period were let's say 2 hours instead of 18 months, one'd be fine with with a LTV/CAC of let's say 1.1. Is my logic correct?
My hunch is it has to do with the opportunity cost of investors. If a startup comes to an investor with a 1.1:1 ratio why would a rational investor invest? They can get that rate of return in less risky asset classes.
As a bootstrapper yes a lower LTV:CAC ratio could in theory be fine. But I would think like an investor. Instead of investing money you are investing your time. It would be better to iterate and tune what you're doing until you're getting a higher return on your time than you would working in a corporate job you could get or, if you do have capital, a higher return than you would get investing in less risky asset classes.
To your point, time to recover CAC is extremely important to bootstrappers. I recommending going after a niche in your market that can afford higher ticket pricing and will jump at annual deals in exchange for (say a 2 month) discount so that CAC is recovered in month 1. This is very doable but requires sales skills which many technical founders don't have. But they are very capable of mastering.
On second thought, my question doesn't make sense. The LTV calculation would have already time-adjusted the revenue. I think the replier's opportunity cost and risk explanation makes more sense
For example, if Google says they'll acquire you or run you out of existence, couldn't you always go to VC (ie. any alternative of Google) and say:
* Google wanted to acquire us because they like our team and/or the idea. You can either buy Google stock, or make an investment in us.
This at least gives you some out between the "take our investment or die."
But maybe this wouldn't work in practice for some reason? I'd be curious to hear. It just seems the market can't reasonably be in equilibrium when everyone is forced to take money _at the mere threat of_ producing (or investing in) a competing product.
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[Edit] It's also important to keep in mind that often cash is much more fungible than the execution of an idea. I can put 1MM into your business, or a business that I think will put _you_ out of business, but if I don't trust that team or they can't execute, that 1MM may as well be toilet paper.
They both have their pros and cons as many people here have said. VCs allow for faster growth, greater risk taking, focus on other things such as culture and team, and sometimes you get tangential benefits such as PR and exposure. However, the downside is dilution, complicated cap table, growth at all costs (including profitability), infighting, differences in opinions and direction, and if you keep going down the VC path, ultimately you might realize you've built a company that doesn't feel like yours anymore. But hey, if you IPO one day at $XB dollars, everyone wins right?
For bootstrapping, the pros are you control your own destiny, work life balance can be great, you get to make all the decisions, you don't have to do anything you don't want to do. The cons are you live and die by your customers, growth can be sloooow, you have to watch every expense, money is always an issue, it's hard to pay employees top dollar.
There are ways to get money without VC, there are many small business loans out there, there's also friends and family which you can also get loans from, it also feels more real to live off of profit - which I think many companies in SV don't know how to do. You can also raise from Angels with non-traditional VC terms such as profit sharing.
As to which I personally prefer, I think there's something great about bootstrapping and living off profits. It's liberating and freeing... but I'd also be lying if I said that VC money doesn't tempt me every now and then. Ultimately I'm lucky in that we're profitable enough to grow at a decent clip without VC dollars so that's the best thing I can ask for... so for me, bootstrapping so far has been pretty great.
For those developing hard technologies, there are also plenty of non-dilutive government grants. SBIRs are a popular funding mechanism that typically start in the $200k-$300k range and can go up to $millions if the technology goals are met. There are also many other government funding mechanisms, especially if your technology is health or defense related. The downside of all these government grants is (1) timing - it usually takes ~>6 months from proposal to $ in bank and (2) inflexible - if your plans change, it is not easy to pivot the use of the $.
(Basically you need to be doing something that people are Googling for.)
For later stage, I would look at Timia Capital. Some of the payment processors that SaaS companies use may also have their own solutions that just look at your MRR and let you borrow an appropriate amount against that automatically.
It's also true that there are other ways of getting the additional expertise a VC can bring. Make use of your local Chamber of Commerce, for instance. Most of them can put you in touch with a lot of expertise.
One thing I advise regardless of the sort of business or financing being used is to be sure to socialize with other business people, and not just executives or the chamber of commerce.
For instance, one of my favorite approaches is to use local suppliers as much as possible, and forge a personal relationship with them. Take them out to lunch every so often. Talk shop (don't just talk about your business -- talk about theirs). You might be surprised how often suppliers can turn into investors, too. If not with cash, then with credit.
* Are you definitely dominant in your niche? If so, how long can you remain so while 'just' reinvesting profits? How big is the niche?
* Presuming you are and can definitely stay the dominant one, are there target areas next to your niche you'd like to go after and can't because of capital?
* Would additional capital let you add revenue through new features / adjacent product enhancement?
If the answer to any of these is that more capital would be helpful, either to make more money, stabilize the business, or grow the value, then you need to figure out how you want to take that money on.
Generally there are three ways businesses get additional capital: equity finance, debt finance and trade partners.
My guess from your question and how you explain your business is that if you sit down and take a cold hard look at where your business is at, then you will conclude you have some real risks, and money will help mitigate those risks.
This is a tough mental game to play as a startup founder, you have to stop thinking product vision for a little bit, and switch it around, and be like "I'm X product manager at Y company / just VC funded / my enemy from junior high who is rich, and I want to fuck us up and drive us out of business. How do I do that?"
Once the business is real, and has real ongoing value, then part of your job is mitigating those risks. Usually the right way to do that is to grow the business into a dominant market position so that you're not vulnerable, and that's (part) of the thinking behind taking money -- so that you can grow rapidly, and get through that risk period where anyone might notice you've got something good here and come take it away from you.
So, how do you figure out debt/equity/trade? Short answer is that trade is almost always preferable if you can get it -- details depend on your product and industry. Between debt and equity, it varies, all the time, and will vary at the stage your company is at.
In brief, though, at its best, you'll bring on real partners with VC money, people who will guide you, kick your ass, help you, and end up with a significant portion of your company in exchange. (At it's worst, it's much, much worse than that). If you bring on strategic investment from the in-house VC teams at your customers, that has a different flavor. If you get big enough to have an interesting stable return rate for Private Equity, that's again a different flavor, with different expectations about your team -- it doesn't sound like you're their yet, BTW. :)
Debt comes in two flavors, recourse and non-recourse, essentially are you going to give them your house if you fuck up -- and they're priced differently, and it's harder to acquire non-recourse financing.
Enjoy where you're at! It's nice to have something working. And, finally, remember you cannot undo an equity round - they lost longer than many marriages - so tread carefully.
Isn't every business at risk, by this definition? This seems like a good way for investors to "scare the pants off" founders by reminding of them of an existential threat, and therefore _only money can solve it_. Not only that - only _a lot of money_ can solve. Convenient!
Couldn't the founder simply re-allocate retained earnings toward mitigating risk? Then you are protecting from the downside at the expense of growth. One could also argue that this is money deployed much more wisely - ie. in a capital efficient way - over known risks than speculative "target niches" or feature creep.
At this point, your only argument is that you _may_ (but not necessarily) be growing less quickly.
And to that, well you can use that argument literally against any business. There is a "threat of a potential well-funded competitor." This doesn't seem very tenable to me.
Growth for growth is usually a short-term game, and it can generate amazing returns quickly, however it is usually a lot riskier and not very sustainable in the long run.
I'll note our own pg says he doesn't really need to understand almost anything about a company, he just needs to eyeball their growth rate to know everything he needs to about a company. And, if you read through the public YC training materials, they hammer this point home, very, very hard for their founders. Weekly compounding growth.
To respond to some of your other questions, I don't really believe in retaining earnings for a company this size -- returns should be deployed somehow, and this deployment should be planned for -- they have certainly not found the end of the list of things they could do with money inside the company that beats some notional outside-the-company returns yet.
I don't know how you would propose to mitigate risk more effectively than growing aggressively, but I would be interested in your perspective -- rapid growth brings its own risks, yes. But it does a few things - it provides an incontrovertible early feedback loop on your continued ability to have product market fit - and it increases your power as you grow your network of stakeholders - and it increases your economic power in that network as you have greater revenue.
In general I'd rather be sitting in the seat of being the largest most influential company in a niche, and being able to acquire or squash competitors (or expand) than finding out I'm up against a deep pocketed competitor with a vastly larger customer portfolio, and if you're starting out organically from scratch the only way to get to that large/influential spot is to put the gas on very fast while you target a small niche, unless you have some extraordinarily special sauce that isn't replicable.
My experience is that generally people are better at thinking about risks from doing things -- risks from growing for instance, risks from taking on capital -- they aren't so good at thinking about risks from inaction -- from doing the same thing they do now.
Finally, I'd say most businesses are vulnerable to well funded competitors; usually though the business they're in isn't juicy enough to really get say the Goldman special situations group interested. You'd better believe if you have juicy at-scale real world returns available to your business then very intelligent very wealthy people are already thinking about how to carve up / acquire those returns.
You're way smarter than me if you can juggle two companies. Grow by focusing on just one?
Checkout Nathan Barry's "15 lessons" article. Particularly lesson #1.
Also what is holding you back right now? (Customer pipeline, custom development needs...)
If you have enough cash, buy a building, then get a mortgage to get your money back. Now you are building a balance sheet and have cash with a low interest rate.
How does that work? You're now paying interest on cash that you used to have.
Does that imply that you need to rent out space within your building to augment your cashflow?
https://steveblank.com/2010/09/13/job-titles-that-can-sink-y...
Don’t accept money just because other people do. Don’t accept money out of fear (i.e. what if competition has money). Don’t rush into a deal without understanding the terms.
If you believe that not having money will be a bottleneck for your venture in the near future, then it is a good idea to accept investment. Since you are in a position of strength, it’s worth finding good investors and structuring a favorable deal. If money will just make things slightly more convenient/comfortable, it will be worth just pushing through without it.
Just my 2 cents.
The value of VC, and investors in general is about more than just capital. If you just value the capital, you're going after a short term goal - and VC probably isn't the way to get there. The relationships, advice, the deep connections - those are all reasons to VC, but not just cash.
This is actually not true. If you have clients and your having enough money to pay yourselves a little bit, ride that wave. Focus on growing your business with more satisfied clients and building a brand. VC money can be useful if you see a small but very lucrative opening that will get you to get 10 to 100 folds more return and your clients cannot advance you money for that. If you’re lean enough and running a tight ship, building only features that have great value for the customers; have great channels to grow your customer base; and are financially sustainable; then why a VC?
And remember, the longer you run your company without external funding, the better the return is later for you and your friends, whether you decide to sell, IPO, or get VC. You will always own more of your company.
But if you’re close to bankruptcy, because of your burn rate , and you’re still growing, then maybe start raising money when you have 6 months or so worth of runway left.
PS: I do have some doubts about the 2 startups though. If you’re running 2 at the same time, then you’re not in any of them 100%... And that’s not in the best interest of your startups
VC's won't corrupt your work, VC's are there to fill in blind spots, gaps, hiring, board, things you probably aren't good at because that's not your focus right now.
You can find incredible VC's who will take your company places you could never have imagined- but right now, if you can afford it- why bother.
Taking on advisors is a great tool though as well as VC's, the equity cost is like percents of a percent for all of them and you get X hrs/month of resources. If you're building tools that require specific regulation requirements, etc.. then you add a regulator as an adviser.
VCs will increase your risk. They will push you to make 10x rather than 2x even if that doubles the chance of you failing.
Remember, they just need a couple of investments in their whole fund to go really well. You absolutely need your one company to work out.
you have to decide, do you want to be beholden to growth, growth, growth and chase a payout? or not.
this is a question that has no answer. if it started as a 'noble pursuit' and not as a personal wealth engine, and you want to keep it that way, just turn them down. sure, it's easier said than done.
keep in mind what both scenarios look like 5-8 years down the road: success and failure.
A couple of other observations:
1. VCs only crowd around trying to invest in you when you don't need the investment. If you actually needed more capital to keep going, they'd be hard to find.
2. they'll make your ownership structure more complex. Read about cap tables, preferred shares, and participating preferred shares, to learn a bit more about this. All the complexity favors them, not you.
A suggestion: if you need an investment in your enterprise business, ask one of your customers to invest, or to pay for some development that benefits them. Enterprise customers do this. And they're far more patient than VCs.
Another suggestion. Think of your businesses as businesses. Unless you're looking for a quick exit, you have more in common (in terms of bookkeeping and finance) with a local bookstore than you do with a typical VC-funded startup.
Ask yourselves these kind of questions:
Are you making enough money to meet your expenses and payroll? Are your customers happy? Do you like making and selling your product / service? Do you want to keep doing it for a few years into the future? If the answer to these questions is "yes" then great.
Looking to the future:
Need for funds: Will you or a partner need to take some money out of the business at some point to pay a big bill or two (college fees for kids and the like)? If so, how will you manage that?
Succession: What if you and/or a partner wants to retire? Are you funding 401Ks for yourselves and your employees?Can you sell the business, or have a younger family member take over?
A final suggestion. There's an outfit called SCORE.org. Use them. They're affiliated with the US Small Business Administration. "Service Corps of Retired Executives." They offer free (yes, really, free) and confidential advice to business owners. You can ask general questions like "here are our books, what do you think?" or specific questions "How can we get new customers in Europe?" "We're growing and need to move, how can we make sure we get treated fairly?" and "We want to sell the business in ten years; how can we prepare for that?"
I've volunteered for SCORE and can vouch for both their cost (0) and their confidentiality. My fellow volunteers were really wise folks; I learned a lot from them. We were NOT ALLOWED invest, or even offer to invest, in the businesses who used us. And the NDA we signed has teeth. It was with the feds; the FBI has been known to go after SCORE people who abuse the trust of their clients.)
A retired executive mentored me through SCORE when I was young. The most valuable part was simply the questions that he asked that I would not have thought of. It was a thoroughly positive experience. I think it is especially valuable if you are young and do not have much business background.
It sounds like you have a nice thing going, there's no need to jump into the deep end if you don't have the ambitions to.
A lot of VCs talk about raising money as 'the big leagues', and the takeaway from that is: success is judged as performance against expected returns. Perform or get out.
If this doesn't sound like what you want, then don't take VC $. If you're ambitious and it sounds like an interesting challenge then maybe it's something to consider!
It's totally fine if you don't but I would work on figuring that out with the team, so that incentives are aligned, before making a decision on fundraising.
Also, I've noticed that there's alternative sources of funding for bootstrappers, that seem to be less demanding in terms of equity/growth/returns that might be more appealing.
As in, if you want to hold on to more equity or grow at your own pace.
A great article that was posted on HN: https://medium.com/swlh/alternative-funding-calculus-a-quant...
And how would anyone's in particular guidance (here) apply anyway? What they are doing is most likely not what your are doing or whatever luck they had or didn't have is not what will happen with you.
> We have been approached already with VC offers, but I am just so hesitant to let someone else in. Sometimes (read: lots and lots and lots of times) something that started as a noble pursuit ends up being corrupted by all of the cooks in the kitchen.
A great big 'it depends'. One thing is for sure in a battle between a well funded company that can afford to experiment and have losses and one that can't (because it's bootstrapped) the well funded company has a super big edge. You know as they say 'all else equal'.
> we do not really need the money or investments as we have some earnings keeping us afloat
Well there you go 'keeping us afloat'. Would you like to not have at least that to worry about?
(My perspective. Back in the day 'pre internet' what I did worked but was not the type of idea that investors would fund. As a result attention had to be paid to every cent spent and every single decision had to be dead on. Was a profitable situation and I sold it. But no doubt having capital and even giving up control would have made things better (but was not possible for a host of reasons). Also today I do various work for startups and I can see the flexibility they have because they can afford to (and this is super important) make mistakes. That is a very very very big advantage that you can't easily do when self funded.
Why is your growth relevant to only Non-VC backed founders?
It may be easier to provide suggestions if you describe your business rather than describe why you don't want VC money. Perhaps I'm misunderstanding.
