In Silicon Valley it’s easy to fall into believing that venture backing is a necessary step in the progression of building a winning technology business. To be clear, in Silicon Valley venture is the default path but it is far from the only path to entrepreneurial nirvana.
Before jumping in, I should say that Dave and I have been operators in two successful venture backed companies (i.e., AvantGo which went public and was later sold to Sybase and KACE which sold to Dell). In both of those instances, we had great venture capital investors and we benefited from both their guidance and their capital. So, thank you Peter, Neil, Rob, Jeff, Pete, Bob, Kevin, Rick, Rod and many others who supported us along the way, we would not have been as successful without you.
With all of that being said, this blog is about a rising tide of entrepreneurs and companies choosing a different path by going it alone without traditional venture capital backing. I’m careful here to clarify that this is a different path, not necessarily an intrinsically better path.
So where’s the bootstrapping evidence?
Many Silicon Valley news sources and startup resources skew toward the venture world which dominates this geographic area. Pundits writing in VentureBeat, The Termsheet, Crunchbase and Saastr infrequently cover stories about the bootstrapped startup world. It’s like reading Sports Illustrated and assuming that almost all basketball happens center stage in the NBA when, in fact, the most baseketball happens in schools, playgrounds and driveways. Nevertheless, now and again even the mainstream media in tech will cover a bootstrapped success as Fortune’s Termsheet did while I was writing this post.
Notwithstanding the mainstream sources, there is a growing list of organizations focused on the emerging trend to bootstrap tech startups including Furious Collective (that's us!), Indie Hackers and Indie VC. There are plenty of others playing on the periphery of this trend like IdeaLab and Zero Point Ventures. Indie Hackers, in particular, has a growing list of founder bootstrapped businesses profiled on its website and podcasts.
Furthermore, there are many larger, well-known companies that either bootstrapped completely or funded a substantial portion of their early success from cash flow from operations and non-venture cash sources. Private equity firms like TA Associates and ThomaBravo have focused on investing or acquiring many of these businesses over the years with great success. Large public and private companies have also emerged with relatively low initial venture investment, examples of this include SAS Institute, Dell Technologies, Quest Software and Alteryx.
When can a bootstrapped model make sense?
There are many reasons a founder might choose to bootstrap a tech company, some examples include:
- Founder Philosophy:
Sometimes the choice to bootstrap is simply a founder preference for control and ownership. Tenacious founders with this mindset find creative ways to build their businesses with little or no outside capital. I met one founder earlier this year who waited tables for a year while getting his software business off the ground 10 years ago. His business is now doing about $20 million in annual revenue.
Friction to Revenue Ratio:
At Furious Collective, we look for opportunities that have low enough friction in the development and sales process that the opportunity can be tackled with only modest up front time and cash investment balanced against an opportunity that is big enough to build a mid-sized software company. Said another way, the investment required to first revenue divided by the market opportunity must be a small number. When that ratio is low, we get interested in bootstrapping in the Furious Collective model or buying a small established business like an engineer’s side project.
Clement Vouillon from Point Nine Capital recently posted a great write up about The Rise of Non “VC compatible” SaaS Companies. It’s a well written article about how some businesses may be great businesses for founders but not be suitable for venture capitalists. Check it out!
Founder Access to Capital:
There are many situations when founders, particularly those based outside of Silicon Valley, don’t have ready access to a network of venture capitalists. We’ve seen companies in Tucson, Salt Lake City, Atlanta, Austin, Madison, Kansas City, Los Angeles, Portland and other locations who have compelling, charismatic founders but have limited reach into traditional venture channels. Consequently, in many cases, they’ve been left with no other choice than to bootstrap their business and many have been successful doing so.
Pros and Cons of the Bootstrap
There are a lot of ways to look at the pros and cons of bootstrapping. The following points summarize some of the key issues:
- Retention of ownership
- No or little dependency on outside funding sources
- Flexibility to distribute cash without selling the business
- Attractive to a broader base of potential acquirers over time if cash flow positive
- Lower bar to clear to have a winning outcome for founding team
- Business must operate lean
- Extended time to scale
- Hard to compete with companies that have a large amount of cash
- Stress of carefully managing cash flow and feeding the business
- Much more difficult to build a large, fast growing business
Venture Production Studio Model
We started Furious Collective earlier to pursue a Venture Production Studio paradigm for starting technology businesses in Silicon Valley. Our primary goal is to launch or acquire multiple businesses that can each become profitable within twelve months of inception and continue to grow profitably with only modest up front capital to get going.
We are about 7 months into our journey now and we are excited about the progress we are making. In that time, we’ve seen so many inspirational examples that we’re more energized than ever. Plus we have made real progress on our own. We have one project in incubation mode at this time that is already generating revenue (albeit not sufficient to cover costs yet) and we are working to close our first acquisition in the near term.
We hope to make an entry to explain these projects in more detail soon!