This post originally went live on Linkedin on 21st February 2022.
Since solo-founding Shake back in 2018, it’s been interesting to witness the reactions when people hear that we’re #bootstrapped – some are impressed, while others think I’m nuts for not raising VC funding. I’ve been to startup events where people literally ask me why I’m there, and others make it their mission to convince me to raise capital. It seems the media has done a solid job in convincing a generation of entrepreneurs that raising is the only way.
This is partly because we as humans love success stories, and having a company raise a fresh round of financing is very exciting for obvious reasons. It often indicates that some very smart people have vetted the company and given it their seal of approval. Making money is sexy to most people, and thus this gets covered a lot. With that said, venture funding is not the only path to success, and can sometimes even be detrimental to a business.
To be clear, this blog post is not a post bashing the VC route. I’m here to share a balanced view on why we haven’t raised, and the pros and cons I see at our scale. Since those early days when I wore every hat in the company, we’re now a team of 23 full-time and a handful of part-time contractors creating the magic that runs Shake.
Below are the reasons we haven’t raised, in no particular order.
Growth at all costs
This one is pretty self explanatory given the current timing in the market – all you have to do is look at all the layoffs happening in the tech industry. It’s an endless list and every day we see more and more companies laying people off, so much so that there’s a website tracking layoffs.
This almost seems endemic to the startup world – startups hire fast to capture a market as fast as possible, and many stumble along the way and have to cut costs equally as fast. The thinking generally goes that they need to double or triple revenue in the next year (see the T2D3 framework) and then raise even more capital, to then go and hire even more people.
The startup world is hyper competitive, and some markets are winner take all which of course justifies raising boatloads of cash and investing it aggressively in the pursuit of growth. There are definitely cases where time to market is critical and having cash is the key: look at Google, Amazon and Docusign as examples. The latter has become synonymous with digital signatures, so much so that most big companies ask you for a “Docusign link” when closing a deal. I’d personally argue that many startups don’t fall in this category, but I can definitely see the case where you’re attacking an enormous market and need speed and cash to do so.
While we’re going after a sizeable market at Shake (I estimate the total addressable market is in the billions), I don’t see it as a winner take all. To quote Daniel Heinemeier Hansson (founder of Basecamp and Hey):
Part of the problem seems to be that nobody these days is content to merely put their dent in the universe. No, they have to fucking own the universe. It’s not enough to be in the market, they have to dominate it. It’s not enough to serve customers, they have to capture them.Source: https://signalvnoise.com/posts/3972-reconsider
At our current growth trajectory at Shake, and keeping compound interest in mind, in 10 years we’ll hit over $100M in revenue per year and join the famous bootstrapped success stories like Mailchimp, Qualtrics and Atlassian. All on our own terms.
It doesn’t have to be crazy at work
So what happens when you’ve raised $10M and need to burn it in 12-18 months? You hire a few hundred people and blitz the market as fast as possible. You end up working 100-hour weeks, in endless meetings, setting unrealistic deadlines and putting out constant fires.
Simply put, this just isn’t a sustainable way of working in the long term and while I’m a proponent of working hard (I had my 18 hour days in the early days of the company), it simply isn’t feasible in the long term. Let’s say that you worked all out for 12 months to prove the next milestone of the company – well surprise, there’s that next round where the stakes just get higher and higher and burn out will be around the corner. On top of this, in many cases these unhealthy expectations are then passed on to the employees who are nowhere near as aligned to the financial outcome as the founders.
Proponents of crazy work hours rightly claim that if you want to change the world, you have to put in the hours. The question goes: Do you think Steve Jobs could have built Apple by working 8 hours a day? Absolutely not. With that said, I’m a big believer that there is a life outside of work, and I’m acutely aware that building a startup is a marathon and not a sprint – both for me and the awesome team at Shake.
On binary outcomes
What some entrepreneurs don’t realize is that venture capitalists are playing the odds game, and you’re a pawn in that game. The business model relies on a small number of investments to drive most of the industry profits, with most companies either dying or turning into zombie companies – there is an insane drive to find those outliers at whatever cost. With this in mind, how attractive is it to spend the next 5 years of your life building a company that eventually dies, or turns into a zombie? That’s the downside for the vast majority of companies that burn all their cash / lifeboats in the pursuit of growth.
What is a zombie company do you ask? When a company doesn’t 100x in valuation, although it may very well be a healthy business that generates millions in revenue, the VC has to make a decision: either they write the investment off, or the more nefarious investors sell off their ownership share to private equity style companies who pool together lots of companies in this situation. You end up as a row in a spreadsheet and they may very well block key decisions that you’re trying to make to grow the business.
What do you think will happen to all those excited employees whom you promised a unicorn outcome to? Naturally they’ll all leave for the next big opportunity, and you’ll end up being the captain of an abandoned ship that could have been healthy should you not have raised.
“Cambridge Associates data shows that out of more than 4,000 yearly investment rounds across over a decade, the top 100 have generated well over 70 percent of all returns.”Source: https://openvc.app/blog/vc-portfolio-construction
If you are one of the 2.5% of startups that is generating 70%+ of returns, kudos to you. You’ve nailed it and should be really proud! For the rest of us, it’s in our interest to create enterprise value before even considering taking on venture capital. There are countless examples of where this model has worked out:
- Hotjar: founded 2014, waited 8 years before exiting
- Clickfunnels: founded 2013, waited 6 years to take funding
- Profitwell: founded 2012, waited 10 years before exiting
- Cloudinary: founded 2011, waited 4 years before taking funding
- Mojang: founded 2009, exited to Microsoft in 2014
- Github: founded 2008, waited 4 years before taking funding
- 1Password: founded 2005, waited 14 years before taking funding
- Pluralsight: founded 2004, waited 9 years before taking funding
- Shopify: founded 2004, waited 6 years before taking funding
- Shutterstock: founded 2003, waited 4 years before taking funding
- Qualtrics: founded 2002, waited 10 years before taking funding
- Atlassian: founded 2002, waited 8 years before taking funding
- Kayako: founded 2001, waited 17 years to exit
- Mailchimp: founded 2000, waited 20 years before exiting
- Surveymonkey: founded 1999, waited ~10 years before taking funding
- Zoho: founded 1996, waited 17 years before taking funding
On expected outcomes
Would you rather have a 50% chance of building a business worth $10M or a 5% chance of a business worth $100M? The expected outcome is the same, yet the path to victory is very very different. Add to this, consider the dilution that you endure to get to that $100M outcome.
Would you want to build a $100M business and walk away with $5M? That’s actually not such a good outcome considering your opportunity cost of lost salary during the many years you’re building the company. On the flip side, if you own most of the business you can walk away with $5M by doing $2M annual recurring revenue.
Granted, some entrepreneurs aren’t only doing it for the money, but rather other reasons like building their credibility and opening doors for future careers. I personally struggle with this case as you’re literally slaving away for 5+ years and ideally you should be rewarded accordingly.
Ultimately I think it comes down to how big your market is: if you think you can exit for $1B or more, the VC route may very well be the only way to attack that problem. Probabilistically speaking, the odds of building a $1B business are very small and comes back to the expected outcome you want to achieve. Remember that there are 1,211 unicorns in the world, and you have a .00006% chance of building one. Good luck!
Living out your faith
I’ve seen first hand what happens to startups who build a business around a constant need for cash, and then suddenly the market turns or they’re simply not sexy anymore: they die. Imagine calling your VC who keeps asking you “How can I be helpful?” and they simply say they can’t write you another cheque. Not very helpful now, are they. Do you really want to put yourself in that position after slaving away for years to build a company? It just doesn’t sound like a prudent thing to do.
Add to this, raising VC is a full-time job that’ll likely take 3-6 months of your time, which is time that you’re not spending with your actual customers and pushing for revenue. I think some entrepreneurs need to keep one thing clear: a sustainable business should raise money from customers, not investors.
If you boil it down to one word, that word is likely optionality. When you bootstrap a business, you have all the options in the world: you can decide how fast/slow you work, your lifestyle, whether to reinvest profits or take them out of the business, whether to raise or not and so on. Once you raise VC, you better be ready to deliver an enormous amount of value, and expectations of fast growth will become more important than most other things in the business.
Quoting Qualtrics co-founder, Ryan Smith:
“Ultimately, choosing to take VC money was the right choice for us because we weren’t using it as a lifeline. We had already nailed our model. That money and the additional $150 million we later raised was used simply to scale a business we already knew how to run. We accepted the money on our terms and entered into a true partnership with our backers. Before term sheets were signed, there was already a mutual respect and implicit trust because my VC partners had seen that we had done very well on our own.”Source: https://fortune.com/2016/06/30/waited-vc-funding/
Potential reasons to raise
With all of the above said, there are reasons I would personally see as valid for raising, with some caveats.
Attracting the best talent
The battle for talent is real, and getting the best talent is often very expensive. However, unless you’re in an extremely complicated space like AI, the truth is that you probably don’t need those mythical 10X engineers who are getting job offers from Google and Facebook.
Similarly, if you were to look outside of the big startup hubs like Silicon Valley, London, Berlin and others, you’ll quickly see that you can find just as amazing talent for more affordable rates. Simply put: you can make it work without shelling out $500k/year to some unicorn engineer. In the longer term you do need to retain and reward this talent and funding does help, although remember you can also hand out generous options packages to retain key employees.
Surrounding yourself with smart people
Besides hiring talent, raising VC is often associated with getting the best mentors and investors. Getting access to that closed club which makes the entire difference for your company.
In my experience, there are other ways to surround yourself with smart people without raising. If you need to give that amazing advisor skin in the game, how about giving them some options in your company, as you’re likely sitting on close to 100% of it if you haven’t raised. VCs will not make your business a success, and often over-sell their value to entrepreneurs.
I’m also a proponent of raising smaller rounds from angel investors in your space, who can add credibility, insights, introductions and more without selling a huge chunk of your company.
Being able to move faster
More money = moving faster, and I’ve definitely endured those tough days where I could see the market demand and couldn’t quite deliver because of limited resources. Things are definitely slower for bootstrapped companies and that’s something you have to live with. One core attribute of a startup is the ability to run experiments and fail fast, and having money and resources does speed up the feedback loop. However I think there are many other benefits and learnings to be had in being more disciplined than just throwing a few million at a problem prematurely. After all, having too much money can also lead to demise, looking at examples like Juicero, Fast and Quibi, the latter of which raised $1.8B and shut down before even launching.
Remember that the longer you delay raising, the higher the potential valuation. Imagine negotiating a deal with a VC with $0 revenue vs $1M annual recurring revenue – you can pretty much dictate the terms in the latter position. If that means moving a bit slower in the beginning, I think it’s definitely worth it financially. Also keep in mind there are other ways of raising capital, including debt which might even be a better financial deal than selling a part of your company.
Gas on the fire
If you someday find yourself in a situation where you have a literal opportunity to print money – for example by putting $x in and getting $10x back out, that might be a good time to raise. The question then is whether selling a portion of your company is sensible, considering that you could also raise debt which could works out much cheaper than giving up a piece of your company.
As a simple example, imagine you raise $5M at a $25M valuation, thus selling 20% of your business. You then go on to sell for $500M, pocketing the investors $100M. What if you raised that $5M in debt instead, and simply paid off the loan over a few years? You’d likely be paying back a lot less than $100M. All of this to say that there are options to throw gasoline on the fire.
In any case, wait the decision out and keep your valuation rising so you can raise on your own terms if and when that time comes. Or simply keep it all to yourself and build a company on your own terms.
Over to you
While we’ve bootstrapped Shake thus far, I’m no stranger to changing my mind as new information comes to the table. Just the other day I got contacted by an old VC contact who has now shifted their entire investment thesis towards “sustainable companies” (aka not hyper growth) in light of the macroeconomic environment. So never say never! With that said, rest assured that if we were ever to raise venture capital it’d certainly be our own terms.
What do you think about the pros and cons of raising? This is a hot topic and I’m really interested in hearing what you think.