Bootstrapping VS Venture Capital - What Is The Right Move?

0:00so the topic i'm covering today is bootstrapping versus venture capital what's the right move and for those in this community you know that the right move is that it depends right it depends on your your circumstances depends on your goals so first thing i'm going to do is talk about bootstrapping what is it i'm guessing most folks watching this know what it is but it's using your own funds it can often be called self-funding although i would say there's a little bit of a nuance even with self-funding and bootstrapping but it's you maintaining complete control of your company and it's the simplest structure if you don't take outside debt

0:32or outside investment you're bootstrapping and it's how most businesses not just tech businesses you know because i'm going to focus more on sas and startups and high growth but just most businesses are started this way dry cleaners bookstores and frankly it's how most businesses should be funded the reason for that is that once you take on an investor they have an expectation of a return and they may provide a ton of value to you advice you may even become friends with your investor but most investors are writing checks with bootstrap businesses that implies that at some point you either have to you know pull profits out of the

1:06business or you have to sell that business for you know what they call a liquidity event you sell it for a chunk of cash and then that would go to the founders and the investors bootstrapping really is the default and frankly i think bootstrapping should be the default talk about venture capital now you probably know high level that venture capital is cash right it's venture cash it's money that venture capitalists raise from wealthy individuals or institutions and they do it to invest in specifically high-risk high-growth companies it's not considered venture capital if someone raises a fund and buys a bunch of real estate or invests in a bunch of car washes that

1:47can still be a thing but at that point it's usually called well real estate might be a real estate investment trust buying car washes or buying businesses is usually referred to as private equity which is a less risky model so the idea with venture capital is that it's high risk and high growth and they want you to put the pedal to the metal and to go big or to go home some examples of those include sequoia capital andreessen horowitz uh bessemer venture partners those are just three there are literally hundreds of venture capital firms i think i i don't refer to tiny seed as this tiny seed is the the fund and

2:19accelerator that branches out of you know that formed out of microconf but technically we are a venture fund and an accelerator but we're we don't i don't call us that because we are different you know we don't have that same mindset of we expect one in ten companies to be a billion dollar unicorn and expect the rest to fail much like uh venture capital does from an investor side it's interesting to think about venture capital from an investor side and from the people who run the funds why would an investor write a check to a venture capital fund at all couldn't they just buy stocks and bonds the thing is is

2:52some of these wealthy individuals and a lot of these large institutions like endowments right an endowment is a big fund that yale or stanford or harvard have they don't want to be 100 in public stocks and bonds because the stock market is very bumpy right if you have these huge drops 50 drops and they want to even that out in addition they have so much money to deploy billions and billions of dollars that they can and should diversify venture capital from the investor side is restricted to accredited investors if you raise a venture fund in the u.s you have to raise from wealthy individuals last thing i want to cover on that is how do

3:30venture capitalists make money so they make money two ways they make a management fee and they have carried interest or it's also called carry so the management fee it varies on structure but the standard is a two percent management fee per year based on the assets managed then there's carried interest or carry and that is the profit or the gain the net gain on the assets that you invest so let's say you invest that 10 million dollars that you raise into a bunch of startups some of them go out of business and usually in venture it's like six or seven they expect to just go to zero

4:05and then two or three to break even or maybe it's a two or three x return it's a low return for them and then they want one that is like the 100x return but let's say blended across all that you return 20 million dollars so what happens with that 20 is the first 10 goes back to the investors just to pay them back and make them whole of the second 10 million that you made across the companies you get 20 that's your carry or your carried interest so you would take 2 million dollars and then you give the 8 million remaining back to the investors so you know what

4:36bootstrapping is you know what venture capital is the question is bootstrapping versus venture capital what's the right move i'm actually gonna add to that question and i'm gonna say there's bootstrapping i'm gonna say there's venture capital then there's this other kind of funding that i think loosely i'll call indie funding and this is raising from places like tiny seed or angel investors who don't expect nine of the ten to necessarily fail and then there's debt right there's revenue-based financing that is available specifically to sas companies once you hit about fifteen thousand a month you have the option of uh pulling some revenue-based financing which which can be interesting

5:07as well so when is bootstrapping right for you if you want to run your company forever or you really want to be able to decide when to sell it on your own and be in full control like that bootstrapping is what you want to do because if you don't want someone looking over your shoulder asking questions giving advice most of the investors that i know are often they're able to help companies there's actually a benefit beyond the money but there of course is that risk that you might you know get an investor who's a bad apple i've been on both sides i have bootstrapped several companies then i

5:34sold to a funded company so i saw what 38 million in venture capital could buy and now i've started tiny seed where we've raised north of 31 million you know under management that we can invest so i've seen both sides of it and i will say unequivocally that bootstrapping is harder that raising funding makes things easier back in the day i don't know you know i had great little lifestyle businesses there's no reason to raise money if you're gonna build a business to a few hundred thousand dollars in revenue i don't know of any investors who wanna invest in businesses that are that small if you

6:03wanna raise venture capital you're gonna get on that that track we call it the venture track that's if you want to go to the moon in essence you know you want to build that billion dollar unicorn or bust when you raise money when you raise venture you're going to hire fast the game is to burn money and to raise new funding every 18 months at a higher valuation you will have a board of directors you'll have board meetings so this is where it gets more complicated it can be easier because you have all this money to do stuff but the complexity creeps in venture capitalists often are able to block a sale of your

6:34company and especially at low valuation so it's that thing of they want you to go big if you raise venture at a five or 10 million or 20 million valuation and someone says i want to pay you 40 million dollars for this company usually a venture capitalist does not want you to do that even though you'll have a great outcome they don't want you to do that because they want you to go to that billion dollar valuation in addition venture capital funds are to have a 10 year duration and so they want their companies to sell or to go public within 10 years that's the trade-off i think about is that i do

7:05think that raising money is is easier it's you can hire more support you can move faster i'll touch on indie funding which is the in between between bootstrapping and venture funding this is like what tiny seed is if you can find a group of angels who don't necessarily need that unicorn outcome and have all the expectations i just outlined maybe you just want to raise one round of 250 000 or 500 000 to make it easier to get to escape velocity and then you want to become a profitable company or you want to grow to the point where you sell for 20 million you're going to raise a smaller amount of

7:34funding in that lower range usually in the low six figures i would say that this route of indie funding is simpler than venture capital you're not going to have a board you're not going to have someone breathing down your neck and usually you don't have to give up control because that's not what you're agreeing to do you can run your business and pull profits out of it which is not an option with venture funding right they don't want you to pull profits out they want you to go go and then sell or ipo that's the third option and that's something that you know i've seen emerging over the past nine or ten years

8:01and i started writing some angel investment checks myself and then realized that that there were more companies than i had money to fund israeli what it became and that was why we decided to raise that tiny seed fund lastly there is debt i have not done that myself but we have funded some companies who've done it and i think you can borrow about four to six times your mrr and then they take a certain percentage of your top line revenue for two or three years and then they make back whatever it is two or three times their money and that's it and the the nice part about that if you decide to do

8:28it is you don't have to give up equity it's non-dilutive debt financing used to be out of the question but specifically with sas because the revenue and the growth is so predictable about when you hit 15 grand 20 grand a month you can start finding some providers who can do that if you want to learn more about designing a bootstrapped business check out the video in the description of this video so it's called designing the ideal bootstrap business by jason cohen who was given at microcomp several years ago if you're ready to take the leap into building a bootstrap business uh check out the playlist building your first

8:57bootstrap sas the ultimate crash course and that's compiled from talks from the microconf stage thanks so much for joining me today really appreciate it and with that we're gonna wrap this up