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Why a Venture Capital Bubble Is Good for Bootstrapped Entrepreneurs

34 points by joshuacc 15y ago

whenisayUH 15y ago
Sorry but I'm not clear on the point of this. Is it that VC-backed companies cannot pursue smaller markets and so there are nice size opportunities left for bootstrapped startups?
- dshipper 15y ago
  Exactly. And it's not just that there are nice size opportunities left, it's that it's easier to succeed as a bootstrapper with a lot of people funded because there's less competition in the spaces that bootstrappers generally play in.
  - marquis 15y ago
    An added benefit of targeting a sub-section of the market is that these big companies are doing the awareness marketing for you.
- ScotterC 15y ago
  That pretty much sums it up. VCs are looking for the 10x return (depending on what size funds they've raised and their thesis). Those type of opportunities are dwindling (for many reasons), but there are many, many smaller markets which you can carve 2% of the market at and not be a billion dollar business but be a $50 million and own all of your company.
shingen 15y ago
I'm skeptical if this guy understands what he's talking about. He says he doesn't have to build a billion dollar company, he can just build a $50 million dollar company and go home happy. It's probably time for a massive reality check, because that's not a good way to assess your bootstrapped context. I don't know who Dan Shipper is, but I'm hoping he's 19 or 23 years old and just getting started in business. edit: I'm happy to find out he is in fact that young. Good for him, I remember being that naive at his age. He'll learn a lot from doing Airtime no doubt.
- jpdoctor 15y ago
  How much do you think a founder will walk away with if a company goes public, on average? Now compare that to, say 33% ownership of a profitable company doing $50M. You will be surprised at the result.
  - shingen 15y ago
    The issue is the $50 million, whether valuation or sales. I fully understand the math involved, no surprise there.
- dshipper 15y ago
  Hey shingen, saying that I didn't want to build a billion dollar company and instead want to build a $50 million dollar one is more of a tongue in cheek way of saying that as a bootstrapper I can pursue opportunities with a smaller addressable market. Sorry if I came off as young and inexperienced, I am actually 20. I'd love to know if you still think what I'm saying doesn't hold water and more about why. Thanks for the comment
  - shingen 15y ago
    The gist was fine - the notion of the advantages in not taking serious VC backing. My concern in reading the post was how you're gauging opportunity, scale, and competition. The $50 million remark in particular threw me. In my experience and opinion, while legally you may have no other employees or investors right now, you'll benefit from assessing your business as a founder, an investor (your time or money put in), and an employee (CEO of Airtime, LLC or so on). You are all three in one, and I think that's an advantage if you use it. Those perspectives will all help you shape the business and its future. Do you have investors and employees? Yep, you and Patrick. You guys should be the most demanding investors you'll ever deal with. If you're pursuing an idea that can be worth $50 million (in either sales or valuation), some sizable companies, whether venture backed or other, are going to want to eat your lunch. The competition will absolutely be there, and it'll be every bit as fierce at $10 to $50 million as at $1 billion. Clearly you can target a market and not need to make much money for two years (what that might be implying about your product or execution is another matter). I imagine you know that you can buy one or two good servers for $250 to $500 / month, enough for a web server + database setup, plenty strong enough to support a load of tens of thousands of users or more in almost any segment. Financially it's very possible to keep that afloat with zero sales for an indefinite amount of time, particularly with no kids or family to support at 20 years of age. Sometimes products and companies go through crazy iterations and reboots. Point being, definitely don't assume it won't take up to two years to get consistent sales rolling in. It's mostly regurgitated propaganda that you don't have time, the idea that everything is moving at light speed. That's true in a very small subset of Internet segments. There are a lot of web companies out there running $5 to $10 million businesses that took ten years to build up from scratch.
jpdoctor 15y ago
Nice article, but I was amused by this: > If it takes too long to turn a profit, as a bootstrapped company you're dead in the water. I love how it's now an assumption that VC-funded companies will not be profitable until they're flipped. That's a relatively recent invention, for those that weren't around before the internet bubble.
- herval 15y ago
  Given this phrase alone, it only states that bootstrapped companies have to profit FASTER - which is true, anyway...
carsongross 15y ago
Not explicitly mentioned in the article: VC bubbles redirect resources toward flat-out bad ideas (to the point that they brag about how few of their ideas pan out) which sends otherwise competent human capital off on fools errands. So your smarter competition is off building pintrest-for-cats or navel gazing at one of the over-funded tech giants. The bootstrapper doesn't have that luxury: the idea is singular, it has to work. Therefore he or she must get to cashflow quickly, or adopt a secondary business to self-fund the idea. Either way, it isn't Other People's Money, which concentrates the mind.
verelo 15y ago
Some truth to this but i dont know i agree with everything. We're a bootstrapped company too. Very small, just getting our product in good shape for prime time and getting feedback from customers on what it will take to convert them from free to paying customers. Funding for us would save a lot of headaches, give us the ability to spend some money on UI and accelerate our dev cycles...but i'm sure it'll also create just as many. The truth i see in this is where he talks about VC funded companies having high expectations. As a bootstrapped company you can target a very small niche, as someone with a significant amount of funding...you do need to have a little broader horizon...but is that so bad? Maybe not after the first 6-12 months. Personally i think funding is all about timing. Don't take it when you need it, take it when you want it...
dkrich 15y ago
I tend to disagree with the logic here. I think another way to frame this is that companies that don't NEED VC money (I emphasize NEED because we all know there are a lot of companies of late that aggressively go after VC dollars without any real plan for how it is to be spent) are going after a space in which it is probably extraordinarily difficult to build a $100k business, let alone a $50MM business. No matter what, if you don't need a huge amount of money to start, the initial barriers to entry in monetary terms are low. It is certainly not impossible to build a sizable business out of complete obscurity without investment (because money is just one barrier to entry), it is just extremely difficult to do. If it is easy to build, there will be an enormous amount of competition until the ability to make any money is squeezed out. If it is extremely difficult to build, your competition will be very limited. So I actually believe the exact opposite is true- the more investment money you NEED, the less competition you're going to face. It may be tempting to think that if you just go after a very small, niche market, you can corner it really easily because everyone else will ignore it in favor of larger opportunities, but that's just not realistic. Again, not saying there is anything wrong with this approach (I believe bootstrapping is better than trying to get overly aggressive early on in your career), but very few businesses are easily built and sustained for a long period of time.
krausejj 15y ago
i love the airtime for email idea. you should raise a round and get some sales guys to push it!
rdl 15y ago
So VCs bidding up the prices on everything every startup needs (founders, early employees, later stage employees, offices, etc.) is good for bootstrapped companies how, exactly? The only way VC funding helps bootstrapped companies is if the bootstrapped companies are selling to VC funded startups (developer tools, for instance), or if the VC funded companies build infrastructure (great platforms, network infrastructure, etc.) which helps the bootstrapped companies serve other customers in a capital efficient way. Otherwise, it's just more competition, either for factors of production or customers, and not really a good thing. There are some industry segments where being bootstrapped makes a lot of sense (consultancies), others where it makes no sense (huge fiber rollouts), and some where both strategies can coexist. Also, you should be aware of the differences between fully bootstrapped, angel or seed funded (directly to profitability, but with "real" investors), and traditional VC funded. There are a lot of cases where people talk about bootstrapping but really mean using angel or seed funding until deciding later about VC funding for the business.

34 points by joshuacc 15y ago

Sorry but I'm not clear on the point of this. Is it that VC-backed companies cannot pursue smaller markets and so there are nice size opportunities left for bootstrapped startups?

dshipper 15y ago
Exactly. And it's not just that there are nice size opportunities left, it's that it's easier to succeed as a bootstrapper with a lot of people funded because there's less competition in the spaces that bootstrappers generally play in.
- marquis 15y ago
  An added benefit of targeting a sub-section of the market is that these big companies are doing the awareness marketing for you.
ScotterC 15y ago
That pretty much sums it up. VCs are looking for the 10x return (depending on what size funds they've raised and their thesis). Those type of opportunities are dwindling (for many reasons), but there are many, many smaller markets which you can carve 2% of the market at and not be a billion dollar business but be a $50 million and own all of your company.

shingen 15y ago

I'm skeptical if this guy understands what he's talking about. He says he doesn't have to build a billion dollar company, he can just build a $50 million dollar company and go home happy. It's probably time for a massive reality check, because that's not a good way to assess your bootstrapped context. I don't know who Dan Shipper is, but I'm hoping he's 19 or 23 years old and just getting started in business. edit: I'm happy to find out he is in fact that young. Good for him, I remember being that naive at his age. He'll learn a lot from doing Airtime no doubt.

jpdoctor 15y ago
How much do you think a founder will walk away with if a company goes public, on average? Now compare that to, say 33% ownership of a profitable company doing $50M. You will be surprised at the result.
- shingen 15y ago
  The issue is the $50 million, whether valuation or sales. I fully understand the math involved, no surprise there.
dshipper 15y ago
Hey shingen, saying that I didn't want to build a billion dollar company and instead want to build a $50 million dollar one is more of a tongue in cheek way of saying that as a bootstrapper I can pursue opportunities with a smaller addressable market. Sorry if I came off as young and inexperienced, I am actually 20. I'd love to know if you still think what I'm saying doesn't hold water and more about why. Thanks for the comment
- shingen 15y ago
  The gist was fine - the notion of the advantages in not taking serious VC backing. My concern in reading the post was how you're gauging opportunity, scale, and competition. The $50 million remark in particular threw me. In my experience and opinion, while legally you may have no other employees or investors right now, you'll benefit from assessing your business as a founder, an investor (your time or money put in), and an employee (CEO of Airtime, LLC or so on). You are all three in one, and I think that's an advantage if you use it. Those perspectives will all help you shape the business and its future. Do you have investors and employees? Yep, you and Patrick. You guys should be the most demanding investors you'll ever deal with. If you're pursuing an idea that can be worth $50 million (in either sales or valuation), some sizable companies, whether venture backed or other, are going to want to eat your lunch. The competition will absolutely be there, and it'll be every bit as fierce at $10 to $50 million as at $1 billion. Clearly you can target a market and not need to make much money for two years (what that might be implying about your product or execution is another matter). I imagine you know that you can buy one or two good servers for $250 to $500 / month, enough for a web server + database setup, plenty strong enough to support a load of tens of thousands of users or more in almost any segment. Financially it's very possible to keep that afloat with zero sales for an indefinite amount of time, particularly with no kids or family to support at 20 years of age. Sometimes products and companies go through crazy iterations and reboots. Point being, definitely don't assume it won't take up to two years to get consistent sales rolling in. It's mostly regurgitated propaganda that you don't have time, the idea that everything is moving at light speed. That's true in a very small subset of Internet segments. There are a lot of web companies out there running $5 to $10 million businesses that took ten years to build up from scratch.

jpdoctor 15y ago

Nice article, but I was amused by this: > If it takes too long to turn a profit, as a bootstrapped company you're dead in the water. I love how it's now an assumption that VC-funded companies will not be profitable until they're flipped. That's a relatively recent invention, for those that weren't around before the internet bubble.

herval 15y ago
Given this phrase alone, it only states that bootstrapped companies have to profit FASTER - which is true, anyway...

carsongross 15y ago

Not explicitly mentioned in the article: VC bubbles redirect resources toward flat-out bad ideas (to the point that they brag about how few of their ideas pan out) which sends otherwise competent human capital off on fools errands. So your smarter competition is off building pintrest-for-cats or navel gazing at one of the over-funded tech giants. The bootstrapper doesn't have that luxury: the idea is singular, it has to work. Therefore he or she must get to cashflow quickly, or adopt a secondary business to self-fund the idea. Either way, it isn't Other People's Money, which concentrates the mind.

verelo 15y ago

Some truth to this but i dont know i agree with everything. We're a bootstrapped company too. Very small, just getting our product in good shape for prime time and getting feedback from customers on what it will take to convert them from free to paying customers. Funding for us would save a lot of headaches, give us the ability to spend some money on UI and accelerate our dev cycles...but i'm sure it'll also create just as many. The truth i see in this is where he talks about VC funded companies having high expectations. As a bootstrapped company you can target a very small niche, as someone with a significant amount of funding...you do need to have a little broader horizon...but is that so bad? Maybe not after the first 6-12 months. Personally i think funding is all about timing. Don't take it when you need it, take it when you want it...

dkrich 15y ago

I tend to disagree with the logic here. I think another way to frame this is that companies that don't NEED VC money (I emphasize NEED because we all know there are a lot of companies of late that aggressively go after VC dollars without any real plan for how it is to be spent) are going after a space in which it is probably extraordinarily difficult to build a $100k business, let alone a $50MM business. No matter what, if you don't need a huge amount of money to start, the initial barriers to entry in monetary terms are low. It is certainly not impossible to build a sizable business out of complete obscurity without investment (because money is just one barrier to entry), it is just extremely difficult to do. If it is easy to build, there will be an enormous amount of competition until the ability to make any money is squeezed out. If it is extremely difficult to build, your competition will be very limited. So I actually believe the exact opposite is true- the more investment money you NEED, the less competition you're going to face. It may be tempting to think that if you just go after a very small, niche market, you can corner it really easily because everyone else will ignore it in favor of larger opportunities, but that's just not realistic. Again, not saying there is anything wrong with this approach (I believe bootstrapping is better than trying to get overly aggressive early on in your career), but very few businesses are easily built and sustained for a long period of time.

krausejj 15y ago

i love the airtime for email idea. you should raise a round and get some sales guys to push it!

rdl 15y ago

So VCs bidding up the prices on everything every startup needs (founders, early employees, later stage employees, offices, etc.) is good for bootstrapped companies how, exactly? The only way VC funding helps bootstrapped companies is if the bootstrapped companies are selling to VC funded startups (developer tools, for instance), or if the VC funded companies build infrastructure (great platforms, network infrastructure, etc.) which helps the bootstrapped companies serve other customers in a capital efficient way. Otherwise, it's just more competition, either for factors of production or customers, and not really a good thing. There are some industry segments where being bootstrapped makes a lot of sense (consultancies), others where it makes no sense (huge fiber rollouts), and some where both strategies can coexist. Also, you should be aware of the differences between fully bootstrapped, angel or seed funded (directly to profitability, but with "real" investors), and traditional VC funded. There are a lot of cases where people talk about bootstrapping but really mean using angel or seed funding until deciding later about VC funding for the business.