6 ms·

Venture backed or bootstrapped? There's a third way: just raise one round

76 points by rmason 3y ago

willsmith72 3y ago
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 3y ago
  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 3y ago
    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.
    - avisser 3y ago
      The counterpoint is that it's impossible for the seed investor to read minds or force a majority-owning founder to take more funding.
  - BadCookie 3y ago
    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 3y ago
      Liquidation preferences rarely kick in until later rounds. Most seed rounds are just 1x.
      - xyzzy_plugh 3y ago
        I know some late stage startups with multiple rounds where _all_ are 1x. Most likely ZIRP but still.
        siegel 3y ago
        1x IS a liquidation preference. I very, very rarely see in excess of a 1x liquidation preference, regardless of the round.
  - tptacek 3y ago
    Right, but you more or less have to lie to raise money for that strategy.
    - xyzzy_plugh 3y ago
      I think that distinction firmly lies in what founders decide to tell themselves. Imagine, founders _lying_ in their pitch decks.
      - tptacek 3y ago
        Founders are wishful in their pitch decks, but that's not the same thing as misrepresenting their intentions.
    - reducesuffering 3y ago
      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 3y ago
  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 3y ago
    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 3y ago
      Who are you to judge what someone picks for their own life?
      - morgante 3y ago
        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 3y ago
        to you it would be a failure. to many a sustainable, profitable small business is the dream
        cqqxo4zV46cp 3y ago
        It’s fine if they’re happy with it, but you then go on to again state that there’s some sort of objective failure here. There’s not. If you think that there is, you’re living in a bubble.
stonogo 3y ago
That's not a third way, that's just venture backed.
- vecter 3y ago
  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 3y ago
    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 3y ago
      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.
      - siegel 3y ago
        I work with quite a few company with dual class voting common shares. I will never understand the notion of not implementing that at incorporation if you want it. Will you have the leverage to get a VC to agree to let you keep it? Maybe, maybe not. But the worst that happens is you get rid of it, which is virtually costless. Honestly, implementing a 10M share one class common company just to make a VC happy sends horrible signals for negotiating with investors. It shows that you are happy to pre-negotiate against yourself from the get go just to look VC friendly. If you cared about retaining control, why would you do that?
lgkk 3y ago
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 3y ago
  There have been plenty of bootstrapped billion dollar outcomes. Mailchimp ($12B) is one recent example.
  - lgkk 3y ago
    Oh cool! Wonder why this doesn’t show up when I search google. I will ask chat gpt lol
    - codegeek 3y ago
      mailchimp, freshworks, basecamp/37 signals etc are all bootstrap and wildly successful.
      - lgkk 3y ago
        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
        cqqxo4zV46cp 3y ago
        That’s not what you were talking about though. You were talking about having a billion-dollar company. There are plenty of bootstrapped companies that make a nice profit delivering something that people want. Literally look around you. By chasing a billion dollars you are just swapping one largely pointless ladder for another one.
fuzztester 3y ago
How is raising just one round different from venture backed, as someone else said ? stonogo said, here: https://news.ycombinator.com/item?id=39047023 https://news.ycombinator.com/item?id=39047023
stcroixx 3y ago
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 3y ago
  How are the original investors getting paid? (That would be a useful part of the story, please)
  - cj 3y ago
    Profitable companies can pay out annual or quarterly dividends to shareholders. That could even include employees.
    - creer 3y ago
      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 3y ago
        > 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.
deleted 3y ago
[deleted]
pdshrader 3y ago
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.
- reducesuffering 3y ago
  I'm going to guess that the typical VC model of 2% and 20%, only hockey-stick mega-exits, is generic, milked to death, and alpha eliminated. Early Silicon Valley VC got its huge returns being innovative from the typical Wall St. NYC banking firms, at a time when early software projects needed capital for servers and big offices. Now, it's a standardized banking apparatus and the software co. landscape has changed. VC itself will get disrupted by the smarter financiers taking advantage of the alpha here, filling the gap by making more, smarter % return allocations into overlooked software co's that don't need $200m for a software co. in a remote-work cloud infra world.
- siegel 3y ago
  On the last point, that is why it is CRITICAL that you do not give your investors the right to demand registration based on the mere lapse of time. In most rounds I do, I get investors to agree that demand registration only arises after an IPO. It looks like a small point. But it is essential if you want to keep your options open (which is really what the Saastr article is about).
Onavo 3y ago
The SAFE note will never vest in this case
rsingel 3y ago
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 3y ago
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 3y ago
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 3y ago
Related, from yesterday https://news.ycombinator.com/item?id=39028979 https://news.ycombinator.com/item?id=39028979
obiefernandez 3y ago
I’ve done this accidentally. Several times!! LOL
RileyJames 3y ago
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.
- em-bee 3y ago
  i don't see how growing faster leads to burning customers. your competitors must have been doing something else wrong.
  - sirspacey 3y ago
    This is almost always the case. Growth at all costs often means “if it doesn’t win a new customer it doesn’t matter.” It’s takes concerted, continual focus to ensure customers actually solve their problem & renew. If that’s not a priority, you don’t hire the people with the DNA & skillset to deliver it. Many startups are learning that you can’t just pivot your strategy from acquisition to retention. Your product, your team, your culture all have to make major changes to succeed at it. Of course, you don’t have to be bad at fulfillment and retention to win new customers. But you won’t be able to allocate as many resources to acquisition.
cj 3y ago
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 3y ago
  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 3y ago
    Happy to chat if ya like! Email in profile
- cqqxo4zV46cp 3y ago
  Investors have myriad tricks up their sleeve to deceive and take advantage of founders. I’d have absolutely zero ethical issues with clawing something back in that relationship.
enahs-sf 3y ago
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 3y ago
  Yes, an acquisition would trigger SAFE conversion. Investors would be paid out according to their converted equity percent.
  - siegel 3y ago
    Or they would get their money back, in the alternative. Depends on what's better for the SAFE holder.
JohnFen 3y ago
Maybe this is just me getting hung up on semantics, but in my view that "third way" is still being VC-backed. True, it's to a lesser degree and so you sacrifice less for it, but you are still giving some legit control to the VC firm.

76 points by rmason 3y ago

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 3y ago
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 3y ago
  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.
  - avisser 3y ago
    The counterpoint is that it's impossible for the seed investor to read minds or force a majority-owning founder to take more funding.
- BadCookie 3y ago
  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 3y ago
    Liquidation preferences rarely kick in until later rounds. Most seed rounds are just 1x.
    - xyzzy_plugh 3y ago
      I know some late stage startups with multiple rounds where _all_ are 1x. Most likely ZIRP but still.
      - siegel 3y ago
        1x IS a liquidation preference. I very, very rarely see in excess of a 1x liquidation preference, regardless of the round.
- tptacek 3y ago
  Right, but you more or less have to lie to raise money for that strategy.
  - xyzzy_plugh 3y ago
    I think that distinction firmly lies in what founders decide to tell themselves. Imagine, founders _lying_ in their pitch decks.
    - tptacek 3y ago
      Founders are wishful in their pitch decks, but that's not the same thing as misrepresenting their intentions.
  - reducesuffering 3y ago
    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 3y ago
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 3y ago
  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 3y ago
    Who are you to judge what someone picks for their own life?
    - morgante 3y ago
      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 3y ago
        to you it would be a failure. to many a sustainable, profitable small business is the dream
      - cqqxo4zV46cp 3y ago
        It’s fine if they’re happy with it, but you then go on to again state that there’s some sort of objective failure here. There’s not. If you think that there is, you’re living in a bubble.

stonogo 3y ago

That's not a third way, that's just venture backed.

vecter 3y ago
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 3y ago
  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 3y ago
    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.
    - siegel 3y ago
      I work with quite a few company with dual class voting common shares. I will never understand the notion of not implementing that at incorporation if you want it. Will you have the leverage to get a VC to agree to let you keep it? Maybe, maybe not. But the worst that happens is you get rid of it, which is virtually costless. Honestly, implementing a 10M share one class common company just to make a VC happy sends horrible signals for negotiating with investors. It shows that you are happy to pre-negotiate against yourself from the get go just to look VC friendly. If you cared about retaining control, why would you do that?

lgkk 3y ago

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 3y ago
There have been plenty of bootstrapped billion dollar outcomes. Mailchimp ($12B) is one recent example.
- lgkk 3y ago
  Oh cool! Wonder why this doesn’t show up when I search google. I will ask chat gpt lol
  - codegeek 3y ago
    mailchimp, freshworks, basecamp/37 signals etc are all bootstrap and wildly successful.
    - lgkk 3y ago
      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
      - cqqxo4zV46cp 3y ago
        That’s not what you were talking about though. You were talking about having a billion-dollar company. There are plenty of bootstrapped companies that make a nice profit delivering something that people want. Literally look around you. By chasing a billion dollars you are just swapping one largely pointless ladder for another one.

fuzztester 3y ago

How is raising just one round different from venture backed, as someone else said ? stonogo said, here: https://news.ycombinator.com/item?id=39047023 https://news.ycombinator.com/item?id=39047023

stcroixx 3y ago

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 3y ago
How are the original investors getting paid? (That would be a useful part of the story, please)
- cj 3y ago
  Profitable companies can pay out annual or quarterly dividends to shareholders. That could even include employees.
  - creer 3y ago
    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 3y ago
      > 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.

deleted 3y ago

[deleted]

pdshrader 3y ago

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.

reducesuffering 3y ago
I'm going to guess that the typical VC model of 2% and 20%, only hockey-stick mega-exits, is generic, milked to death, and alpha eliminated. Early Silicon Valley VC got its huge returns being innovative from the typical Wall St. NYC banking firms, at a time when early software projects needed capital for servers and big offices. Now, it's a standardized banking apparatus and the software co. landscape has changed. VC itself will get disrupted by the smarter financiers taking advantage of the alpha here, filling the gap by making more, smarter % return allocations into overlooked software co's that don't need $200m for a software co. in a remote-work cloud infra world.
siegel 3y ago
On the last point, that is why it is CRITICAL that you do not give your investors the right to demand registration based on the mere lapse of time. In most rounds I do, I get investors to agree that demand registration only arises after an IPO. It looks like a small point. But it is essential if you want to keep your options open (which is really what the Saastr article is about).

Onavo 3y ago

The SAFE note will never vest in this case

rsingel 3y ago

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 3y ago

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 3y ago

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 3y ago

Related, from yesterday https://news.ycombinator.com/item?id=39028979 https://news.ycombinator.com/item?id=39028979

obiefernandez 3y ago

I’ve done this accidentally. Several times!! LOL

RileyJames 3y ago

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.

em-bee 3y ago
i don't see how growing faster leads to burning customers. your competitors must have been doing something else wrong.
- sirspacey 3y ago
  This is almost always the case. Growth at all costs often means “if it doesn’t win a new customer it doesn’t matter.” It’s takes concerted, continual focus to ensure customers actually solve their problem & renew. If that’s not a priority, you don’t hire the people with the DNA & skillset to deliver it. Many startups are learning that you can’t just pivot your strategy from acquisition to retention. Your product, your team, your culture all have to make major changes to succeed at it. Of course, you don’t have to be bad at fulfillment and retention to win new customers. But you won’t be able to allocate as many resources to acquisition.

cj 3y ago

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 3y ago
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 3y ago
  Happy to chat if ya like! Email in profile
cqqxo4zV46cp 3y ago
Investors have myriad tricks up their sleeve to deceive and take advantage of founders. I’d have absolutely zero ethical issues with clawing something back in that relationship.

enahs-sf 3y ago

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 3y ago
Yes, an acquisition would trigger SAFE conversion. Investors would be paid out according to their converted equity percent.
- siegel 3y ago
  Or they would get their money back, in the alternative. Depends on what's better for the SAFE holder.

JohnFen 3y ago

Maybe this is just me getting hung up on semantics, but in my view that "third way" is still being VC-backed. True, it's to a lesser degree and so you sacrifice less for it, but you are still giving some legit control to the VC firm.