Raising money from venture capitalists gets celebrated way too much in the media today.
We see the same headlines over and over: Massive amounts of money being raised at massive valuations for a product or service that is going to massively change the world.
Rinse and repeat.
There is nothing wrong with raising money for your company. For certain ventures, significant capital is necessary to bring the product/service to market.
However, it’s the constant media celebration and obsession with “the fundraise” itself that distorts how most people view the process of starting a company, and this is a problem.
Go talk to any hopeful startup founder. Nine times out of ten, you will hear the story of their amazing idea at length shortly followed by, “and once we close our seed round of X million dollars, we’ll be well on our way!”
The idea of “the fundraise” has been baked into how most people view starting a company.
One plus one equals two, a bear shits in the woods, and you need millions of dollars from a venture capitalist to start a company.
Of course this is completely untrue.
Thanks to the rise of cloud-computing and modern distribution channels, it has never been cheaper to build a software product and get that product in front of your target customer. It has never been cheaper to start a company.
But this doesn’t stop founders from raising money for businesses that are not good fits for venture capital. The founder believes that this is “what founders do.” They’ve read about others who have taken this route thousands of times in the media, so it’s what they do too. Forcing a square peg into a round hole.
The distorted fundraising reality, manufactured by the media and Silicon Valley culture, is the cause of death for countless startups.
If you aren’t careful, you may fall victim to this trap.
So let’s explore this further. Should you bootstrap or raise money for your startup?
Success For a Venture Capitalist
Venture capital firms need big wins. It’s a by-product of the industry they operate in.
A lot has been written about this topic, so I won’t dive too deeply into the mechanics behind why, but it’s important to understand that VC’s have to invest in companies that have the potential to reach hundreds of millions to billions of dollars of valuation.
This matters a lot for you, the founder.
By taking venture money, you are signing up for this world. You are essentially signing up to one day exit for hundreds of millions/ billions of dollars or die trying.
To do this, you need to build a company that is doing high double digit millions to hundreds of millions of dollars in annual revenue. That is very difficult to do, and only a tiny percentage of startups ever make it to this scale.
If you can’t achieve these revenue targets over a short period of time, your company will likely die after it runs out of money and get sold for scraps—even if you’ve built a great product, with a great team, with tons of loyal customers.
Additionally, if you can’t achieve this level of an exit, you (the founder) will not be financially rewarded for your efforts. The money that you manage to sell the company for after failing to achieve the scale that you signed up for will be returned to your investors who have liquidation preferences over you.
Success For a Bootstrapper
A bootstrapper on the other hand can thrive at any level of success so long as revenues are greater than expenses.
A company that failed as a venture company could have likely succeeded as a bootstrapped company.
Bootstrapped companies can thrive in smaller niches that can’t support venture-backed startups.
A bootstrapped company can happily make 3 million dollars in annual revenue and pay the founding team 1 million of that every single year.
If part of your goal for starting your own company was financial, bringing in 1 million dollars every year isn’t a bad outcome.
So Which Route Is Right For Your Company?
The takeaway here is that you have to be brutally honest with yourself when deciding which path makes sense for your company.
Are you building a product in a massive market?
Do you have a path for reaching tens of millions of dollars in revenue within a few years?
Are there enough potential customers of your product to get you to double digit millions?
If your answer for these questions is no, it doesn’t mean you shouldn’t build the company. It just means you should be cautious of building it with venture money!
Be wary of deluding yourself into thinking that your idea can become bigger than it actually can. The streets are filled with blood of those who came before you thinking the same.
My Experience
I have experienced these things first hand while building my cryptocurrency tax software company, CryptoTrader.Tax.
At the onset of the race for building the best cryptocurrency tax software, many of my competitors raised millions of dollars in venture capital. They hired large teams and started burning cash.
We took the bootstrapped approach.
We knew there was a market for the product, but it wasn’t clear to us how big it was (i.e. how many people needed specialized cryptocurrency tax software) or if the company could reach high double-digit millions in the necessary timeframe.
Three years in, our competitors who raised significant amounts of venture money are starting to falter. They are running out of cash and likely won’t be able to reach a Series B round of financing because their growth doesn’t paint the picture of a company that can produce venture returns. It’s clear now that the current crypto tax software market isn’t as large as they thought it would become.
Takeaway
Avoid the media hype. Don’t raise money just because “that’s what other people do”.
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