Venture Capital or Bootstrapped Software? Pros & Cons

 


When you set out to build a software product, there is a fork in the road that we all approach. We have a choice to make: the bootstrapped path or the VC route?  The answer to this question depends on who you are and what your goals are. Most importantly, it depends on the problem you're trying to solve as well. There is also a newer 3rd option that is growing in popularity. I will discuss that later in this podcast. This could be a great option for bootstrappers that want to build long-term sustainable companies but need some funding to do so.  

For me, I obviously went the bootstrapped path. Let me explain my reasoning for why this was the right path for me.

Let me first say that I'm thankful the VC route exists. I realize that some big, pie-in-the-sky business ideas would not be possible without it.  Look at AirBnB, Uber, Spotify . They all took massive capital to build and scale. That's because these products involve network effects, and needed to jump through legal hoops to exist. Network effects require a supply and demand side. It's a classic chicken and egg dilemma. They need both sides from Day 1. Imagine a marketplace without sellers or vice versa a marketplace with no customers. That wouldn't be much good... These products were all disruptive to established industries. This can come with extensive legal cost. Uber and taxi drivers. Spotify (streaming) vs the traditional distribution modal for mp3s. These types of businesses would be impossible to build without outside capital. If your SaaS will take extensive resources to scale, then VC is the right path for you.

My purpose for building is freedom. You can't have freedom if you're a captive to your company, as you would be in a VC rocket ship. I work to live; I don't live to work. I value autonomy and flexibility in my career. I'm striving to build startups with small teams and products that can be automated. This leaves room for a life outside of work. I don't want to have to choose between my career and time with my family.

Today, many SaaS do not require extensive resources to build and scale. Technology is continuously getting cheaper and more accessible.  The funding companies get from VC comes with strings attached. 

The Downsides of the VC Path

When you go the VC route, you're giving up control in exchange for funding. Your VC now owns shares of your baby. They often also have a board seat, and voting rights. It's not just YOUR company anymore. It's theirs too...

VCs want a return on an investment. Sometimes this incentive doesn't align with the founder's vision for their company. It's common for investors to pressure founders into making their companies publicly traded. This is a great way for them to maximize their return on investment. But if you're building for the long-term, your vision for the company will likely conflict with that of your investors.

I decided a long time ago that I don't want to be involved with publicly traded companies. The incentives for publicly traded companies just don't align with my values. When a company becomes public, it loses the ability to plan for the long-term. The focus shifts to quarterly reports. This can make publicly traded companies less resilient over time. Also, publicly traded companies have a shareholder obligation to maximize profits. Sometimes this obligation comes with compromising on ethics and ecological cost. I don't want to build a soulless business that grows just for growth's sake. I'm fine building a business that starts small and grows sustainably.

-- "Expecting those who control massive, monetized corporations to work for long-term, societal prosperity rather than short-term profit,...

is like expecting a dung beetle to leave a pile of manure, climb a flower, and sip nectar. It's the nature of the beast" - Dee Hawk

What he's saying is that publicly traded companies exist to make a profit. That's their incentive. Often this comes at society's expense.

I want to build privately held businesses that are able to make long-term decisions. And I want these decisions to be for the best of society.

Bootstrapped Examples to Learn From

I know it is possible to build sustainable, privately held businesses. There are plenty of models to follow.

  • 37 Signals Founded by Jason Fried, Carlos Segura, and Ernest Kim has been around since 1999. Building software without VC money. They did agree to an investment from Jeff Bezos. But this investment came after they already had leverage from years of profitability. And the investment came under an agreement that they'd never go public and retain control of the company. Don't expect these same terms for your MVP SaaS with no customers.
  • Just look at who's been killing it in the #BuildInPublic community for awhile now. Names like Danny Postma, Arvid Kahl, Pieter Levels, and now recently Marc Louvion. These guys started as solopreneurs. Now some of them have VA's, editors, designers and even ML engineers working for them. This let's them ship more and ship faster. This also allows them to solve more complex problems than a solopreneur is capable of. 
As I said earlier there would be a 3rd option that I'd discuss.

This option just recently came to my attention when Arvid Kahl  took funding for his startup PodScan. This funding didn't come from VC though. This funding came from the Calm Company Fund. Calm Company operates under a different model than VC. When they invest in a company the focus is on sustainable growth. The structure of their Shared Earnings Agreement (SEAL) makes sure that their incentives are aligned with the founder's.

  • Investor gets a percentage of the founder's earnings once they reach a threshold. These shared earnings are capped.

  • No equity, no shares, no board seat, no preferred voting rights.

  • It includes a ratio of Equity Basis/Valuation Cap. This defines a percentage of the company that investors are entitled to in to scenarios. A) Company is sold b) More capital is raised

    • The Equity Basis is reduced over time as Shared Earnings payments are made. But there is a residual Equity Basis that remains after the Shared Earnings Cap is fully repaid. This way investors are still incentivized to help founders keep building the company.

This is a completely different approach than your typical VC. It allows founder's to secure funding for their SaaS without giving up control. It is somewhat of a hybrid approach between the typical bootstrapped path and VC route. It seems to take the best from both worlds. 

They have an impressive track record with the companies they've funded thus far. 

Part of the reason for their success is that they are selective about the companies they fund. Don't expect to bring them an MVP with no customers and get funding. You need an established distribution channel with paying customers to be considered a viable investment opportunity for them. 

I'm excited to see if this approach continues to grow in popularity. It's a path I would consider for myself with the right business.

How Modern Tech Empowers Bootstrappers

Now let's talk about tech. Technology keeps extending the possibilities with bootstrapping. 

Since LLM's came one the scene, the rate of the development for me has 4X'd at least. I used to get stuck problems for weeks at a time because my only resources were Stack Overflow, Google and the docs. Now I have GPT 4 as my coding assistant handling tasks that used to be very time consuming for me. One of the advantages with LLMs is the speed at which they can aggregate information for you. LLMs aren't great for writing code yet though. Don't expect to give them a prompt and "say build me an app". They are limited by their ability to understand extensive context, and hallucinations. They're also limited by the cut-off date of their training data. Today, if you try asking GPT-4 about Next.js App Router or Meta Data API it will not know what that is. It's training data cut off was in 2023 before this tech existed. A big part of the process is knowing when to call LLMs out on their BS. You can't just blindly trust their output. They should only improve from here though. 

Outside of AI, we have quantum computers, and bio engineering on the rise. All will produce very disruptive technologies. When we combine this tech with AI, things start to really get interesting...

I believe the rate of evolution for tech will continue to accelerate. This only unlock more opportunities for founders ready to seize them.  You now how they say, "Opportunity find the prepared mind"... 

With the tech accessible today, the need for larger companies is dwindling. 

Naval had an interesting take on this: "The actual efficient size of a company is shrinking very rapidly and so the future will be almost all startups" 

We no longer need extensive resources to innovate and solve problems. This makes it practical for solopreneurs or small teams to build products that have a massive impact.

The next Google or Facebook will likely be built and sustained by a small team. 

I'm talking teams of around 10 people rather than the 10's of thousands at Facebook. And the well over a 100 thousand plus employees at Google.

We will see less of a need for VC investment as technology continues to evolve. This will empower individuals and give them the edge over large less agile organizations. 

Small companies with big upside...


 



So that's why I choose the bootstrapped path. There is more than one way to cook an egg. Sunny side up or scrambled? There's also multiple approaches to launching a SaaS. Each approach has it's trade-offs. Pick the path that is right for you and the problem you're trying to solve.







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