6 ms·

The Advantage of No Funding (2011)

91 points by Max_Ehrlich 5y ago

palindrome818 5y ago
There's also the worry of having TOO MUCH funding- Chip Wilson (LuLuLemon founder) had this problem with his second company Kit and Ace. They didn't have the same edge that they had when they started LuLu. The confine of having little to no funding forces you to be agile and creative.
themanmaran 5y ago
> Then they would talk about LOI, ROI, NDAs, IPOs, and all kinds of things that also had nothing to do with actually helping people. Coming from a bootstrap background, I feel that VC backed companies have a tendency to focus way too much on vanity metrics. KPIs that make the buisness look successful, without measuring real conversions. It's like building a business purely to make a nicer looking pitch deck. That, plus way too much emphasis on the financial/equity structure of the startup. Founders are carving out employee option pools before making their first dollar. And this focus on equity/investment/reporting becomes the CEO's full time job, when it should have been dedicated to customers.
- micromacrofoot 5y ago
  That's because VCs need an exit to make their money. They only care if the business is successful insofar that it can be sold or IPO.
  - exdsq 5y ago
    Can VCs not profit share to hedge their bets to get an X multiple on their investment back too? Sure some won't be profitable but if I was to invest I'd want some way of recouping my investment back over time and then the upside of a sale/IPO.
    - micromacrofoot 5y ago
      Generally it's not something VCs are interested in. I'm not an expert so I might not be clear on the why... but as far as I know it only really makes sense to seek out an arrangement like that on smaller investments under <$1mil. Even on a small investment you'd probably be lucky to see a 2-3X return in 5 years.
- picardo 5y ago
  > VC backed companies have a tendency to focus way too much on vanity metrics. Well-run companies focus on the right metrics. Badly run companies focus on vanity metrics. There is some of both everywhere in the business world, not just among VC backed companies.
solatic 5y ago
> Never forget that absolutely everything you do is for your customers. Make every decision — even decisions about whether to expand the business, raise money, or promote someone — according to what’s best for your customers. Right, this isn't really about whether or not you take growth funding. This is about minimalism and focus. The fact that some people who take venture funds see fit to use those funds in a vain way, doesn't mean that you're forced to use that kind of funding in a vain way. Indeed, you're more likely to succeed if you use the funding modestly, with humility, focused on where it can provide the most business growth.
- tnzk 5y ago
  > The fact that some people who take venture funds see fit to use those funds in a vain way, doesn't mean that you're forced to use that kind of funding in a vain way. Most of them force it actually so they believe invested to the right company. The best VCs won't, not all VCs aren't though.
  - horsawlarway 5y ago
    > Most of them force it actually This is my experience. I literally watched the VC board at a previous company get mad at my then CEO for not spending their cash quickly enough. Moreover - he was hardly the most fiscally responsible to begin with - exorbitant class A office space, expensive contractors, fully stocked kitchen and snacks, game systems and bean bag chairs in break rooms. Paying customers? Nah - not so much. But they wanted him to spend FASTER. "you need to adjust spending to be at around a 6 month runway - currently you're at 18. That's too high - spend more!" My thoughts on the process are two-fold 1. A short runway and high expenses offer opportunities for those VCs to double down in the inevitable next round sooner, at rates more favorable to them 2. They are gambling - they want to either hit the jackpot or bust. They do not want to sit at the table all day (for example, by running slow growing self-sustaining company)
    - mattgreenrocks 5y ago
      Admittedly, I don't think about these CEO-type issues much, so my opinion is not worth even two cents here, but that loss of autonomy in how to structure and run what was believed to be one's own business sounds horrible. I understand what VC funding can do, but delegating those decisions to people not completely invested in the outcome would keep me awake at night. It explains the behavior of VC-funded firms well though: they elected to receive VC funding, and they flaunt the results of that funding to justify it to others and themselves. It's part of the game. How will others know that you are successful if you are not showing it over and over?
pier25 5y ago
(2011)
- ojbyrne 5y ago
  Not to mention that the anecdata is from 2000-2001.
rwmj 5y ago
There's also a disadvantage which is that you worry day to day about finding salary at the end of each month. I found at my startup this made it difficult to concentrate on the bigger picture of developing the product.
- anonymouse008 5y ago
  There's an incredible book, 'The Eureka Factor' by John Kounios, that explains this point in detail. A brief note to your point: for many intuitives and creatives, a base net of safety is required to allow your brain to think outside the box. It even goes as far as to say with an abundance in resources, more creative things occur. I've been suffering with you (in kindred spirit) for a few years now and am looking forward to attracting the resources to unleash.
- qiskit 5y ago
  Another disadvantage is you miss out on contacts, industry expertise, etc. If you find the right VC truly interested in helping your startup grow, they can be an incredible source of knowledge and networking.
devops000 5y ago
Totally agree. I think this crazy belief about raising money as a priority was driven by the low interest rate environment and broad acknowledged success of big tech. With lots of money every body wants to find next Google and are willing to invest. At the same time, having a loss company is not anymore a shame, it’s a success because also AMZN was unprofitable. I really hope in next years, with higher interest rate, financial markets downturns will bring attention to profitable and bootstrapped companies.
- truted2 5y ago
  How does a low interest rate affect investment? In the end you still need to return the principle so is the idea that it just offers you smaller loan payments (ie. More time for your investment to succeed)?
  - csa 5y ago
    > How does a low interest rate affect investment? More capital is looking for returns and is effectively willing to take more risk (like funding VC startups) to find those returns since “safe” investments return almost nothing.
karterk 5y ago
My co-founder recently wrote about our deliberations on fund raising as an open source company here: https://typesense.org/blog/why-we-are-not-raising-funds/ https://typesense.org/blog/why-we-are-not-raising-funds/ Ultimately, there is no golden rule. One has to choose what's best for your customers and your stage of growth.
- jlokier 5y ago
  Interesting article and rationale. I was particularly struck by this, which I've seen happen but haven't understood it in these terms until now: > We’ve seen more than a few companies raise millions of dollars in funding, go out and hire an army of people in an attempt to grow faster. However, unlike most other software products, search tech is an inherently hard thing to get right. It requires a lot of tedious R&D iterations over long periods of time and it cannot be parallelized by having X number of people working on it in parallel. > When a large team congregates around work that cannot be parallelized, we’ve observed that new work gets created to keep everyone busy - new nice-to-have features get worked on. This ends up adding complexity to the product. New team routines are invented because there’s bandwidth available. This ends up adding communication overhead and layers between users and builders and slows down the pace of innovation. This sadly becomes a vicious cycle that dilutes the core product. (I'd go further than "diluted" - sometimes the essentials of the core product remain broken for years because all the energy goes to managing those side features, even though they don't work properly with a broken core.)
- daibo 5y ago
  There are just the two of you working on typesense right? Surely having some more people working on the core product (up to five?) should help, no? I'm also building an Algolia alternative, with three engineers including me working on the core engine, and sometimes I wish I had one or two more.
Kalanos 5y ago
simpler cap table, easy acquisition, long runway, people are willing to help you
lbriner 5y ago
I agree with a lot of the spirit in the article but I don't think learning to code from a book because you can't afford a dev is not a great example. How many people lost their crypto-currency because the exchanges were written by people with no experience/training in development (or security specifically). The counter-point is to buy in people who can do better than you can for less money. In other words, if a Developer can build what you need in 1 week for $1000 (in 90s money!) what would otherwise take you 6 weeks, are you saving money or wasting it? We don't always count our own time as money but it is if you could be much better placed to sell or market your business.
- sivers 5y ago
  Depends what you're doing. I was selling CDs from my living room. Making $300 per month. It was the appropriate solution for the situation.
  - fairity 5y ago
    Hi Derek, just wanted to say that your book Anything You Want had an outsized impact on me when I started my entrepreneurial journey many years ago. And, I used your "CD Baby Loves You" open rate learning to great affect many times for my own businesses :). Thank you for being so open and sharing your hard-earned wisdom!
- mediaman 5y ago
  Doing a financial product as a green self-trained dev is not a great idea. But it's also a straw man. There are many great products that don't need to handle millions of users, or are not handling bank connections, that can be bootstrapped by smart people willing to put some work into it. If they are okay with slower growth, those people will learn a lot, may build a viable business, and will not have to deal with the stress of dealing with the board and constantly raising money. There are many, many 5-10 person companies (or less!) that have been bootstrapped, that make a lot of money, and that have very happy founders with happy customers, and whose founders have no pressure to sell out or do things they don't want to do. The main cost is patience and willingness to not be a glitzy success story in the papers. Nobody is paid to encourage you to take this path, except for you.
robertlagrant 5y ago
> their weekly promotion parties Yes! So much free money flowing into startups that it can be hard to trust the rapid-ascent careers of people who just locked into that business early on and are now key, but only for that business.
deltarholamda 5y ago
>the desks were just planks of wood on cinderblocks from the hardware store While used as an example of bootstrapping, I have to say that one of my favorite desks ever was a solid-core door on cinderblocks. You can adjust the height to your specifications with bricks or wood shims; the cinderblocks can become cubbies for holding various bits and bobs; you can paint the door whatever color you want cheaply; it can take a huge load, as I had two giant 20" Radius monitors on it. I even experimented with giving the desk a slight upward angle with shims, which worked pretty well.
- manwe150 5y ago
  Solid-core doors (new) seem to be a bit north of $250 at the lower end: https://www.homedepot.com/p/Masonite-30-in-x-80-in-Roman-Smooth-2-Panel-Round-Top-Solid-Core-Primed-Composite-Interior-Door-Slab-24935/202769008 https://www.homedepot.com/p/Masonite-30-in-x-80-in-Roman-Smo... I think I have seen standing desks for not much more At least the cinder blocks don’t add much cost at $2 each retail
  - askafriend 5y ago
    Seems cheaper and better to just pay $500 for this: https://www.fully.com/standing-desks/jarvis/jarvis-adjustable-height-desk-bamboo.html https://www.fully.com/standing-desks/jarvis/jarvis-adjustabl...
    - showerst 5y ago
      I have a desk that's a set of Jarvis legs with a $20 Ikea hollow core table top that I've had for about 7 years. It cost less than $250 (at the time) and it has held up really well.
  - micromacrofoot 5y ago
    You can usually find them second-hand, though that might get harder as wood prices continue to skyrocket.
  - brianwawok 5y ago
daenz 5y ago
What if you're experiencing rapid growth and not sure if you can afford it? Investment is basically required at this point, no?
- svantana 5y ago
  Not necessarily, you could: 1) get a loan - with good numbers, banks are easy(er) to persuade 2) put up a waitlist for new users (induce FOMO) 3) increase prices Of course, these are antithetical to the VC mantra of maximum growth at all costs. But what's best for them is not always what's best for you.
- truted2 5y ago
  There is also cost cutting. I personally experienced very high hosting bills unexpectedly and then spent a month changing my infrastructure to run for almost free again. I personally prefer these optimization challenges over borrowing money. Self-reliance is important for some people.
- vidarh 5y ago
  Depends. If you have a business model that means new customers becomes profitable for you sufficiently predictably and quickly then funding sudden growth with bank loans is often doable even for quite high-risk businesses. If your bank isn't prepared to and you're struggling to handle the growth and you don't want to find an investor, maybe it's worth considering raising prices for new customers until you find a balance that works for you (or a balance that makes your bank reconsider) One of the tradeoffs of not taking VC funding is often accepting that your growth is likely to be slower for all kinds of reasons, including sometimes being forced to intentionally slow it to a manageable level.
unixbane 5y ago
yep, this is common sense. now the next article we have someone will complain that they dedicated their life to some dumb startup and rejected funding and "their life is ruined" because they didnt take the easy $300K starting salary to make a techspam company.
nunez 5y ago
oh course the rub here is that you need to have money to spend to bootstrap, which implies being able to save enough money to bootstrap, which not everyone can do.
frans 5y ago
VC's invest in 30 companies to find 1 unicorn on average. The profit on that one justifies the investment in the 29 others. Problem is that no one knows which one is going to be the hit in the pack of 30. So VC's push all ceo's to grow as fast as possible to find out as soon as possible who will succeed/fail. Great for the VC, too bad for the 29 unlucky ones. Never be the agenda of someone else, be your own agenda. I never understand why so few people see this.
- truted2 5y ago
  Since the money has already been invested they probably don’t care who succeeds/fails but they want the unicorn to give returns ASAP so they can be spent before they die.
  - frans 5y ago
    You are probably right, but when the money first arrives in the bank you need to 'spend' it asap and may take decisions that are not in the best interest of the company (e.g. hiring to fast, spending a ton in marketing before the product is finished,...)
pl0x 5y ago

91 points by Max_Ehrlich 5y ago

There's also the worry of having TOO MUCH funding- Chip Wilson (LuLuLemon founder) had this problem with his second company Kit and Ace. They didn't have the same edge that they had when they started LuLu. The confine of having little to no funding forces you to be agile and creative.

themanmaran 5y ago

> Then they would talk about LOI, ROI, NDAs, IPOs, and all kinds of things that also had nothing to do with actually helping people. Coming from a bootstrap background, I feel that VC backed companies have a tendency to focus way too much on vanity metrics. KPIs that make the buisness look successful, without measuring real conversions. It's like building a business purely to make a nicer looking pitch deck. That, plus way too much emphasis on the financial/equity structure of the startup. Founders are carving out employee option pools before making their first dollar. And this focus on equity/investment/reporting becomes the CEO's full time job, when it should have been dedicated to customers.

micromacrofoot 5y ago
That's because VCs need an exit to make their money. They only care if the business is successful insofar that it can be sold or IPO.
- exdsq 5y ago
  Can VCs not profit share to hedge their bets to get an X multiple on their investment back too? Sure some won't be profitable but if I was to invest I'd want some way of recouping my investment back over time and then the upside of a sale/IPO.
  - micromacrofoot 5y ago
    Generally it's not something VCs are interested in. I'm not an expert so I might not be clear on the why... but as far as I know it only really makes sense to seek out an arrangement like that on smaller investments under <$1mil. Even on a small investment you'd probably be lucky to see a 2-3X return in 5 years.
picardo 5y ago
> VC backed companies have a tendency to focus way too much on vanity metrics. Well-run companies focus on the right metrics. Badly run companies focus on vanity metrics. There is some of both everywhere in the business world, not just among VC backed companies.

solatic 5y ago

> Never forget that absolutely everything you do is for your customers. Make every decision — even decisions about whether to expand the business, raise money, or promote someone — according to what’s best for your customers. Right, this isn't really about whether or not you take growth funding. This is about minimalism and focus. The fact that some people who take venture funds see fit to use those funds in a vain way, doesn't mean that you're forced to use that kind of funding in a vain way. Indeed, you're more likely to succeed if you use the funding modestly, with humility, focused on where it can provide the most business growth.

tnzk 5y ago
> The fact that some people who take venture funds see fit to use those funds in a vain way, doesn't mean that you're forced to use that kind of funding in a vain way. Most of them force it actually so they believe invested to the right company. The best VCs won't, not all VCs aren't though.
- horsawlarway 5y ago
  > Most of them force it actually This is my experience. I literally watched the VC board at a previous company get mad at my then CEO for not spending their cash quickly enough. Moreover - he was hardly the most fiscally responsible to begin with - exorbitant class A office space, expensive contractors, fully stocked kitchen and snacks, game systems and bean bag chairs in break rooms. Paying customers? Nah - not so much. But they wanted him to spend FASTER. "you need to adjust spending to be at around a 6 month runway - currently you're at 18. That's too high - spend more!" My thoughts on the process are two-fold 1. A short runway and high expenses offer opportunities for those VCs to double down in the inevitable next round sooner, at rates more favorable to them 2. They are gambling - they want to either hit the jackpot or bust. They do not want to sit at the table all day (for example, by running slow growing self-sustaining company)
  - mattgreenrocks 5y ago
    Admittedly, I don't think about these CEO-type issues much, so my opinion is not worth even two cents here, but that loss of autonomy in how to structure and run what was believed to be one's own business sounds horrible. I understand what VC funding can do, but delegating those decisions to people not completely invested in the outcome would keep me awake at night. It explains the behavior of VC-funded firms well though: they elected to receive VC funding, and they flaunt the results of that funding to justify it to others and themselves. It's part of the game. How will others know that you are successful if you are not showing it over and over?

pier25 5y ago

(2011)

ojbyrne 5y ago
Not to mention that the anecdata is from 2000-2001.

rwmj 5y ago

There's also a disadvantage which is that you worry day to day about finding salary at the end of each month. I found at my startup this made it difficult to concentrate on the bigger picture of developing the product.

anonymouse008 5y ago
There's an incredible book, 'The Eureka Factor' by John Kounios, that explains this point in detail. A brief note to your point: for many intuitives and creatives, a base net of safety is required to allow your brain to think outside the box. It even goes as far as to say with an abundance in resources, more creative things occur. I've been suffering with you (in kindred spirit) for a few years now and am looking forward to attracting the resources to unleash.
qiskit 5y ago
Another disadvantage is you miss out on contacts, industry expertise, etc. If you find the right VC truly interested in helping your startup grow, they can be an incredible source of knowledge and networking.

devops000 5y ago

Totally agree. I think this crazy belief about raising money as a priority was driven by the low interest rate environment and broad acknowledged success of big tech. With lots of money every body wants to find next Google and are willing to invest. At the same time, having a loss company is not anymore a shame, it’s a success because also AMZN was unprofitable. I really hope in next years, with higher interest rate, financial markets downturns will bring attention to profitable and bootstrapped companies.

truted2 5y ago
How does a low interest rate affect investment? In the end you still need to return the principle so is the idea that it just offers you smaller loan payments (ie. More time for your investment to succeed)?
- csa 5y ago
  > How does a low interest rate affect investment? More capital is looking for returns and is effectively willing to take more risk (like funding VC startups) to find those returns since “safe” investments return almost nothing.

karterk 5y ago

My co-founder recently wrote about our deliberations on fund raising as an open source company here: https://typesense.org/blog/why-we-are-not-raising-funds/ https://typesense.org/blog/why-we-are-not-raising-funds/ Ultimately, there is no golden rule. One has to choose what's best for your customers and your stage of growth.

jlokier 5y ago
Interesting article and rationale. I was particularly struck by this, which I've seen happen but haven't understood it in these terms until now: > We’ve seen more than a few companies raise millions of dollars in funding, go out and hire an army of people in an attempt to grow faster. However, unlike most other software products, search tech is an inherently hard thing to get right. It requires a lot of tedious R&D iterations over long periods of time and it cannot be parallelized by having X number of people working on it in parallel. > When a large team congregates around work that cannot be parallelized, we’ve observed that new work gets created to keep everyone busy - new nice-to-have features get worked on. This ends up adding complexity to the product. New team routines are invented because there’s bandwidth available. This ends up adding communication overhead and layers between users and builders and slows down the pace of innovation. This sadly becomes a vicious cycle that dilutes the core product. (I'd go further than "diluted" - sometimes the essentials of the core product remain broken for years because all the energy goes to managing those side features, even though they don't work properly with a broken core.)
daibo 5y ago
There are just the two of you working on typesense right? Surely having some more people working on the core product (up to five?) should help, no? I'm also building an Algolia alternative, with three engineers including me working on the core engine, and sometimes I wish I had one or two more.

Kalanos 5y ago

simpler cap table, easy acquisition, long runway, people are willing to help you

lbriner 5y ago

I agree with a lot of the spirit in the article but I don't think learning to code from a book because you can't afford a dev is not a great example. How many people lost their crypto-currency because the exchanges were written by people with no experience/training in development (or security specifically). The counter-point is to buy in people who can do better than you can for less money. In other words, if a Developer can build what you need in 1 week for $1000 (in 90s money!) what would otherwise take you 6 weeks, are you saving money or wasting it? We don't always count our own time as money but it is if you could be much better placed to sell or market your business.

sivers 5y ago
Depends what you're doing. I was selling CDs from my living room. Making $300 per month. It was the appropriate solution for the situation.
- fairity 5y ago
  Hi Derek, just wanted to say that your book Anything You Want had an outsized impact on me when I started my entrepreneurial journey many years ago. And, I used your "CD Baby Loves You" open rate learning to great affect many times for my own businesses :). Thank you for being so open and sharing your hard-earned wisdom!
mediaman 5y ago
Doing a financial product as a green self-trained dev is not a great idea. But it's also a straw man. There are many great products that don't need to handle millions of users, or are not handling bank connections, that can be bootstrapped by smart people willing to put some work into it. If they are okay with slower growth, those people will learn a lot, may build a viable business, and will not have to deal with the stress of dealing with the board and constantly raising money. There are many, many 5-10 person companies (or less!) that have been bootstrapped, that make a lot of money, and that have very happy founders with happy customers, and whose founders have no pressure to sell out or do things they don't want to do. The main cost is patience and willingness to not be a glitzy success story in the papers. Nobody is paid to encourage you to take this path, except for you.

robertlagrant 5y ago

> their weekly promotion parties Yes! So much free money flowing into startups that it can be hard to trust the rapid-ascent careers of people who just locked into that business early on and are now key, but only for that business.

deltarholamda 5y ago

>the desks were just planks of wood on cinderblocks from the hardware store While used as an example of bootstrapping, I have to say that one of my favorite desks ever was a solid-core door on cinderblocks. You can adjust the height to your specifications with bricks or wood shims; the cinderblocks can become cubbies for holding various bits and bobs; you can paint the door whatever color you want cheaply; it can take a huge load, as I had two giant 20" Radius monitors on it. I even experimented with giving the desk a slight upward angle with shims, which worked pretty well.

manwe150 5y ago
Solid-core doors (new) seem to be a bit north of $250 at the lower end: https://www.homedepot.com/p/Masonite-30-in-x-80-in-Roman-Smooth-2-Panel-Round-Top-Solid-Core-Primed-Composite-Interior-Door-Slab-24935/202769008 https://www.homedepot.com/p/Masonite-30-in-x-80-in-Roman-Smo... I think I have seen standing desks for not much more At least the cinder blocks don’t add much cost at $2 each retail
- askafriend 5y ago
  Seems cheaper and better to just pay $500 for this: https://www.fully.com/standing-desks/jarvis/jarvis-adjustable-height-desk-bamboo.html https://www.fully.com/standing-desks/jarvis/jarvis-adjustabl...
  - showerst 5y ago
    I have a desk that's a set of Jarvis legs with a $20 Ikea hollow core table top that I've had for about 7 years. It cost less than $250 (at the time) and it has held up really well.
- micromacrofoot 5y ago
  You can usually find them second-hand, though that might get harder as wood prices continue to skyrocket.
- brianwawok 5y ago

daenz 5y ago

What if you're experiencing rapid growth and not sure if you can afford it? Investment is basically required at this point, no?

svantana 5y ago
Not necessarily, you could: 1) get a loan - with good numbers, banks are easy(er) to persuade 2) put up a waitlist for new users (induce FOMO) 3) increase prices Of course, these are antithetical to the VC mantra of maximum growth at all costs. But what's best for them is not always what's best for you.
truted2 5y ago
There is also cost cutting. I personally experienced very high hosting bills unexpectedly and then spent a month changing my infrastructure to run for almost free again. I personally prefer these optimization challenges over borrowing money. Self-reliance is important for some people.
vidarh 5y ago
Depends. If you have a business model that means new customers becomes profitable for you sufficiently predictably and quickly then funding sudden growth with bank loans is often doable even for quite high-risk businesses. If your bank isn't prepared to and you're struggling to handle the growth and you don't want to find an investor, maybe it's worth considering raising prices for new customers until you find a balance that works for you (or a balance that makes your bank reconsider) One of the tradeoffs of not taking VC funding is often accepting that your growth is likely to be slower for all kinds of reasons, including sometimes being forced to intentionally slow it to a manageable level.

unixbane 5y ago

yep, this is common sense. now the next article we have someone will complain that they dedicated their life to some dumb startup and rejected funding and "their life is ruined" because they didnt take the easy $300K starting salary to make a techspam company.

nunez 5y ago

oh course the rub here is that you need to have money to spend to bootstrap, which implies being able to save enough money to bootstrap, which not everyone can do.

frans 5y ago

VC's invest in 30 companies to find 1 unicorn on average. The profit on that one justifies the investment in the 29 others. Problem is that no one knows which one is going to be the hit in the pack of 30. So VC's push all ceo's to grow as fast as possible to find out as soon as possible who will succeed/fail. Great for the VC, too bad for the 29 unlucky ones. Never be the agenda of someone else, be your own agenda. I never understand why so few people see this.

truted2 5y ago
Since the money has already been invested they probably don’t care who succeeds/fails but they want the unicorn to give returns ASAP so they can be spent before they die.
- frans 5y ago
  You are probably right, but when the money first arrives in the bank you need to 'spend' it asap and may take decisions that are not in the best interest of the company (e.g. hiring to fast, spending a ton in marketing before the product is finished,...)

pl0x 5y ago