In Episode 558, Rob Walling chats with Einar Vollset about bootstrapping versus funding and the many options that exist in between. No longer is it a decision between a bootstrapped or venture path. With their unique perspectives, Rob and Einar talk about all of the funding options that exist. They also share some things to consider when deciding whether or not to take on funding and, if you do, how much you should plan on raising.
The topics we cover
[04:24] When funding makes sense for bootstrappers
[11:54] Raising pre-revenue vs raising with revenue
[15:29] Risks of raising as a platform (e.g. Shopify) business
[20:40] Funding options available to bootstrappers
[27:57] Convertible notes & SAFE’s
[29:16] How much should a bootstrapper raise?
Links from the show
- Episode 496 | “The Press Covers Exceptions, Don’t Compare Yourself to Slack or Zoom”
- Episode 411 | Bootstrapping vs. Funding: 19 Questions To Ask
- Einar Vollset (@einarvollset) | Twitter
If you have questions about starting or scaling a software business that you’d like for us to cover, please submit your question for an upcoming episode. We’d love to hear from you!
The fun part about our conversation today is we bat around funding for bootstrappers and really specifically, there’ve been a couple conversations I’ve had over the past couple of months that have got me thinking about talking about this on the show, because obviously this funding has become much more viable for bootstrappers. It’s not just bootstrap or venture paths. There’s this whole thing in the middle that we talk about. TinySeed is obviously part of that. I think there’s still confusion and misconceptions. It’s just amorphous and often hard to understand what’s going on and of some of the realities of it.
We spend this whole episode batting around when should a bootstrapper think about raising funding? When should they not? Why is it a good fit? We talk a little bit about terms and how much founders should think about raising, and just everything we’re seeing. The cool part is he and I have pretty different perspectives. I guess we share perspectives on a lot of things being the cofounders of TinySeed but I also have a lot of experience with other angel investments that I made before TinySeed that are still around, and I see different examples there. He has experience with his Discretion work and even the companies that he started before TinySeed. My hope is that it is helpful in just providing a little more of a level set and some more thoughts on this topic. With that, let’s dive into my conversation with Einar Vollset.
Einar, thanks for joining me once again on Startups for the Rest of Us.
Einar: Good to be on again, Rob.
Rob: We get to talk about funding and thinking through bootstrapping versus funding, or even these days it’s not just two options. It’s not just should I self-fund? Should I bootstrap? Should I raise a venture? There are all these avenues you can go down, whether it’s a TinySeed-like accelerator raising a small angel round for a couple of hundred thousand dollars. To me, my take is it’s gotten more robust and easier for founders who are in the MicroConf, Startups for the Rest of Us–type community and they’re in that situation to raise money on terms that make sense to them. Because 10 years ago, I didn’t know of a single company in our space that could raise money, not from essentially institutional folks who wanted them to become unicorns.
Einar: There’s equity and there are different types of investments too now that weren’t a thing five years ago. Things like non-dilutive revenue based financing, PIPE, that sort of thing.
Rob: Yeah, a lot of options. I know when I did my MicroConf talk in Vegas, it was US growth, maybe it was 2018. It might have been 2019. Who can keep track with Covid? Everything before Covid and everything after. I did a talk and I was talking about the state of bootstrapping and how I saw more companies raising funding not to go venture track but to raise one around maybe two, $200,000–$500,000.
I pointed out customer.io. I’m an angel investor in Churn Buster, WriteMessage, CartHook, LeadFuze, all these folks who are like, we’re not looking at IPO. We’re not going there full weight. As I saw it happening, obviously TinySeed came out of the need, where I only had so much of my own money to be able to put that in. We did TinySeed because there was a need on that side. It was pretty obvious to me that more bootstrap-ish capital-efficient founders want to raise money these days.
Einar: I think so. One of the missions for me, the reason why I love doing TinySeed is because I think that kind of investment and that kind of founder really enables them to quit their day job, and there can be many more founders like that if you have the capital going to these places.
Rob: I want to be clear. Obviously, Startups for the Rest of Us, we’re almost to 560 now. We’ve talked a lot about bootstrapping, but we also talk about funding. Even going back to 2013 or 2014, I talked about fund-strapping with Collin from customer.io. Mike Taber, the co-host emeritus of Startups for the Rest of Us, and I had several episodes on when to think about taking angel investment on funding versus bootstrapping, 19 questions to ask, that was episode 411 back in 2018. It’s not right for everyone. I think that’s one thing we want to talk through today is when does it make sense?
I’m going to be honest, I don’t know if you and I have ever talked about this, but I’ve seen founders who I just thought would just be bootstrappers forever and never raised rounds take funding. They have very good reasons for it and they don’t regret it. Folks like Craig Hewitt with Castos. He was in TinySeed batch one. I just thought he was going to bootstrap everything. Ruben Gamez with Bidsketch, and now Docsketch […] took money from us. He did it to move faster. He did it because it makes some things just a little easier. It hasn’t changed his business other than having more resources to work with.
Einar: I think you mentioned Collin, too. He’s doing incredibly well now. He’s open about his numbers. I think he’s doing $22 million ARR right now.
Rob: But when you talk to him, he’s totally along that line too, like I don’t want to be a unicorn. I want to build a real business, a $22 million ARR SaaS company in the email space. Now, I think they’re doing a crowd fund. I know they’re doing a crowd-funding thing right now to raise money. I believe they’ve raised two smaller rounds before that. The very first round was a couple of hundred thousand dollars. I don’t know if the second round was, but I think it’s probably all in Crunchbase.
But you’re right, it’s founders like that who see it. There’s bootstrapping, there’s VC, and then there’s this whole thing in the middle now. It’s still amorphous, I think. That’s what we’re leaning into obviously with TinySeed. We’re going to cover some topics, like why I raised if you want to.
And again, this podcast is not about raising funding. If you don’t raise funding, you’re not in the club. It’s nothing like that. It’s just another tool in the tool belt. It’s another option, revenue-based financing, this type of funding, whatever, to help you get there faster which has really been a mission of MicroConf, Startups for the Rest of Us, all my writings from day one. How can we help more entrepreneurs succeed, more founders become self-sustaining, and this is another option.
I may have mentioned a few of them already but when you see founders raising these small amounts of money, let’s say through TinySeed or through doing other angel rounds, when is that a good call? When should they think about that? How are they using the money to essentially accelerate their business in the best case?
Einar: I think when we first started, one of the main ways that I thought about it for TinySeed founders would be people who had enough, had some kind of revenue coming in but it wasn’t really enough to make it their main focus. I still think there’s a good chunk of the founders that we backed that are like that. They’re at $3000, $8000 MRR or something like that. Particularly, $8000 MRR or two founders are probably not self-sustaining at that point.
I think taking money in order to effectively pay yourself and say I’m not going to burn through all my life savings or remortgage my house to take this risk. I want basically to offload that risk to someone else who has a higher risk appetite than me. I think that’s one of the better reasons to do it.
I also think one of the most surprising things is how many people are at the point where probably they don’t use the money that we give them to pay themselves but they use it potentially to accelerate the channels that are already working or feel like this gives them the leeway to just be a little bit more experimental with the growth channels they can go after.
If you’re totally bootstrapped and you’re basically just about self-sustaining, how keen are you going to be, like I’m going to hire an STR service and run that for three months for $15,000 and then potentially hire a sales person and try that channel out. Or a re-up, start a Google Ad campaign to try out this new channel. I think it offloads some risk and it enables the founder to take more risks and potentially grow their business substantially faster.
Rob: I like that thing about offloading risk because there have been several founders who I know who have taken money, Derek Reimers is an example. After the Drip acquisition, he has enough money that he could basically angel fund himself. But he took TinySeed money back in batch one and when I talked about it like why did you do that, because you have that much money plus some in the bank. He said it takes some risk off the table. It’s more runway but it’s also less of my personal risk and I don’t give up control. It’s just not a huge loss except for a few points of equity, in essence, which I figure if it’s successful, that’s probably not going to matter in the end.
Rob: I like that idea. That thought of taking some risk off the founder. True bootstrapping, as you said, there’s a ton of risk on you personally and it can be stressful.
Einar: It’s going to be stressful. I also think it is a certain level or privilege to be able to bootstrap a lot of the time. It means that you have a bunch of savings, you made a ton of money doing something else, or a lot of the time your spouse makes enough money so that they can cover the whole household. I think just enabling this kind of funding means that more people who necessarily aren’t already in that situation can take the risk that’s just inherent in starting something like a software business.
Rob: That makes sense. From my end, the folks that I see raising and doing well with the money, they want it to move faster, they want it to decrease risk as you’ve said. Usually, not every time, they want it to make a key hire that they can’t afford.
Actually, these days with a lot of big companies are remote now, talent is more expensive than it used to be. Correct me if you’ve seen other situations, but the main hires I’ve seen are to hire a marketer, somebody to have run DemandGen or an agency to do the marketing. The other one is more development talent, like a senior developer who can technically lead so that the founder can maybe step away, or if it’s a nontechnical founder that they have, that person now who’s running the show. I think those are the two big ones I’ve seen.
Einar: I think it’s telling how different our approach is, the founders that we talk to because that’s not what I see.
Rob: What do you see? That’s why you’re here, right?
Einar: Yeah. I see people mostly hiring a customer success–type person, just to take customer support load off either key engineers or the founders. Then I see people hiring sales. They’re trying to either just STRs in order to fill more of the funnel for the founder to do the close, or for the founder to say I’m ready for an account exec who can do demos so I don’t spend all my time doing demos.
I see a bunch of those things, too, where it’s like they would have gotten there to where they needed to hire (say) customer support or other sales people but maybe that would take another 18 months. Just the fact that they can hire now just means business moves faster.
Rob: I think to look at it from the opposite side, what are the scenarios or the situations where a bootstrap founder probably shouldn’t raise, probably should think about just continuing to bootstrap? I’ll throw it out right from the start. My sentiment is that if you don’t have or are pretty dang close to product/market fit, meaning that you’ve built something people want and are willing to pay for, I think you should keep grinding until you get really close to that.
Now, I’m not saying you have to have a sustainable marketing channel and a bunch of leads coming in and a whole built out funnel, that would be great. It gives you a better valuation. It makes for investors interested. But if you’re at $2000 MRR and you’re getting onesie-twosie people coming in, some people are churning, and it’s an early product still, my sentiment is that’s not something I’m personally interested in investing in and I don’t know a lot of investors who are willing to bet that early. Do you agree or disagree?
Einar: I think there are a lot of investors looking to bet that early. Your story has to be different. If anything, I actually think it’s easier to raise money when you have no revenue, if you have a good story.
Rob: In SaaS? I don’t think in B2B SaaS.
Einar: Well yeah, but even so. We’re going to do this thing. You’re six months in and you have a 20% monthly churn that people can look at. It’s hard to explain. The difference I think is if you’re going to go to market and try to raise with no revenue, just a plan or a vision and stuff, that plan or vision has to be much larger because the kind of investors who are interested in investing at (say) $12 million pre, without a product, and just two or three engineers, because the risk is now so high, it needs to be something that they believe can be a unicorn. You’re in unicorn territory.
If your story isn’t up into the right, they’re going to be like, meh. We see a lot of pitches for people who haven’t proven anything yet. They really have to believe and be excited about the story in a way that if you’re doing $8000 MRR and you’re growing 10%–15% month over month with no churn, it’s a very different thing for people to invest in.
Rob: I don’t know any investors and I’m friends with 12 or 15 angel investors. These are all former founders, so people I met at MicroConf. I don’t know anyone who invests in a SaaS app pre revenue. You know what, there’s a couple.
Einar: […] I know a lot of them.
Rob: See, I think that’s the difference.
Einar: You’re telling me like let’s talk. I know tons of people who will do that. But again it has to be a big vision.
Rob: It has to be a venture scale business.
Einar: Venture scale, IPO, take over the world, changed this. Those kinds of investors typically do well. If anything, I do think it’s sometimes easier to sell the dream rather than trying to explain the numbers in this regard.
Rob: I would agree with that and I will just say, and you and I by the way don’t agree on everything on this podcast. That’s why you’re here, otherwise I could monologue this whole thing and just do a Rob solo adventure.
Einar: We’re just talking about marketing hires and things like that. Nobody’s talking about marketing hires ever.
Rob: When I’m talking to them, it’s like don’t talk to Rob if you’re going to do sales hire. Talk to Einar. My take is with B2B SaaS, if you want to build a $10-, $20-, $30-million business, if you have a really good network—let’s say you’re a second time founder, you’re a Josh Pigford, you’re a Derek Reimer, whatever, anybody, Rand Fishkin—can you raise pre revenue? David Cancel right on his fifth one. I don’t remember how much he raised, but he was $5 million out of $15 million or $20 million valuation with just an idea because it’s David Cancel.
But most of us aren’t that person. Most of us are doing this for the first time. If you don’t have a strong network or some type of in and you’d want to build a B2B SaaS company $10-, $20-, $30-million, I have not seen someone be able to raise around at that point pre revenue.
Einar: Crucially, the thing to think about is I do think you can raise. Like I said, I know several investors who want to do this. You can raise with just an idea, a deck, just a team, or whatever, but then the vision has to be big, and that does usually excludes you or precludes you from actually doing the exit at $20 million or $50 million. Just the mechanics of the way that investments are being made in that case with liquidation preferences, valuations, and rights for investors to block things and things like that, means you’ll end up in a situation where you have to really go for $100 billion, $500 billion exit or nothing. There is very little middle ground there.
Rob: Another type of business that I think should probably not raise is step one business if we think about the stair step approach. Step one businesses are usually oftentimes built on a platform, like a Shopify add on, a Heroku add on, a WordPress plugin. Usually, they plateau at some point that is far below what any investor, even bootstrap-friendly investors want. And there’s platform risk to the, you built something big enough, Shopify comes knocking and bad things happen. You build something big enough, Heroku hasn’t done this as far as I know. But any platform can kill you or just say pay us 20% or 30% of your revenue all of a sudden.
Einar: I do see break up instances on both building platforms. That does happen, but I certainly think the risk is higher. I think investors will be more like what happens here if they build this in house or cut you off in some way, shape, or form.
Rob: We, being TinySeed, have invested at least one and I’d say a few businesses that have platform risk including Rails Autoscale—Adam was on the podcast just a few weeks ago, and that was a conversation we had early on. How does this scale? Because Rails Autoscale be a $5 million or $10 million ARR business as it stands now? Personally, I’m pretty sceptical and Adam is too that the space maybe just isn’t that large. Then we said, how do you reduce platform risk and how do you get to X million in revenue? As long as a founder is thinking about that then at least there’s room to grow there.
Someone asked me on Twitter—maybe it was eight or nine months ago—why is there no TinySeed for info products, or course creators, makers? It was an honest question. I appreciate it. I answered it and basically said, because they don’t scale like SaaS. Because they’re often reliant on a single individual, not all the time, but often rely on a personality or personal brand, and the exit multiples aren’t there. That’s a part of why this works, is that SaaS sells for such a crazy high multiple. Not that everyone has to sell, but that is one driver of returns.
I think another time when founders should probably not raise money is if they want that true four-hour work week lifestyle business, if they want to work part time. I did this. I did this for a couple years with HitTail. It was great. I worked 12 hours a week. Not that suddenly your investors are your boss, because that’s not how it is. I think bootstrappers think investors are probably a lot more involved than they think they are, or managing their time, or like send me your time clock and your timesheet. That’s not how it is.
But I do think if you want to work 10 or 15 hours a week, go bootstrap an amazing business and make it a lifestyle. I’ve had several of those. I think the moment you think about getting external funding from someone else, to me it’s a commitment to no, I’m going to grow this. I’m going to be committed to this business full time. I’m not going to go start other side projects during this time.
Not that you can’t do anything. You could set up a blog, a podcast or whatever. But if I invested in a founder personally and they were doing a SaaS app, and suddenly they started another little side project SaaS app, I would have a conversation about what’s the plan there? Do you plan to focus or do you plan to split time? What’s the deal? Do you agree with that or what do you think?
Einar: There’s always a pivot. I don’t know. Most investors come along, there will be IP assignments and stuff from the company. If you start a company and then you work on those products and then you start a side business, now is your investor part owner of the side business too? Is that a pivot? What is it? There are certain things to think about.
I think you’re right. Running a B2B SaaS business was most of the time we’re talking about. It’s a full time job if you’re planning most of the time. If you’re just planning to do a four-hour work week, then I probably would look at info products or some of the more smaller scale.
Rob: Step one plays are great. I did this with HitTail. But HitTail was like a single feature, almost. It had multiple streams but it was not the place that we’re talking about. It was SEO pure tool. I just had a couple channels that worked mostly on autopilot. It didn’t have to do sales. It was self-service. Churn was high because the price points were low but that didn’t matter. I got up to $25,000–$30,000 a month, a great lifestyle business.
But that would have been dumb for me to then go out and say I’m going to take investment for this. Unless I wanted to then double down to be like, look, I’m going to make this into an SEO suite or a rank track. There are things that can expand the market, but I personally wasn’t interested in doing that in that space.
Einar: In some cases it makes sense to go after the bigger thing after a while. I still remember when PagerDuty launched. I was like PagerDuty, what? Is this a business? What the hell? And now, they’re a publicly listed company. Okay, I was wrong. Sometimes there are things that are bigger than you think (I think) a lot of the time. Early stage investors, despite what some investors will tell you, I think it’s almost impossible to really, really have a good sense of what’s going to work. There’s just a lot more randomness and luck and things in there that accounts for a lot of it.
Rob: Yeah. When I think of funding options for bootstrappers these days, obviously there’s accelerators like TinySeed, there are other funds that do similar stuff. I’ve heard of the Weekend Fund which is from Ryan Hoover who’s the Product Hunt founder. I don’t know if they’re bootstrapper friendly or if they’re venture only. I think that’s a conversation to have with folks. If you’re going to take funding to be like I would sell if I got an offer for $20 million, to be up front about that.
If the investors want to invest then I don’t think you should take the money because you’re going to have this conflict now when you get that offer for $20 million that’s going to change your life, and you push back on it. The investors are going to say no, $100 million or $1 billion, or bust. You have to be on the same page. There are investors out there—I know angel investors—who are willing to take that 3X, 5X, 10X versus the unicorn play.
Einar: I think this boils down to the trade-off in terms of valuation that you take too. I think this is more traditional […]. The higher valuation you can raise the better. Look at us, we raise a $20 million pre or $12 million pre. You raised a $12 million pre and you sell for $20 million, even if you have the right to do so, and you do it, your investors are not going to be happy. That’s not what I wanted. That’s pretty much a failure for people. Just because of the economics of how the investors and their investors operate. That’s the trade-off, really, when it comes to what optionality are you taking off the table by taking a super high valuation and raising a ton of money.
Rob: That’s a really good point. Most of the more bootstrapper-friendly funding sources that I’m familiar with, the valuations are lower than if you went to Sand Hill Road at Silicon Valley and it’s two people in a garage with two laptops, they have a product, they can get whatever—$5 million or $10 million—then coming out of YC, everybody doesn’t get the $10 million thing, whether they’ve launched or not, which is just crazy.
Einar: Last I heard on a pre-product launch, on demo day, it’s like $12–$20 million pre.
Rob: That’s insane.
Einar: But here’s the thing. What has changed (I think) in the last 10 years up in the Valley is because the dark days of 2008 and 2009 and almost nobody was investing, which turned out to have been the best time to be investing in things like Airbnb, Dropbox, and things, fundamentally, I think what has changed is and I think this is debilitating for founders who are struggling with this because you read all these stories about there’s so much money in this space now. You should go out and raise money right now because there’s never been more money in the ecosystem.
If you look at the inflows into venture, that’s true. There’s a ton of money going in but they tend to go after fewer and fewer deals. You end up with a very binary outcome where it’s like I know you’re superhot to the point where venture capital associates are cold calling you on a Friday night or there’s crickets. There’s nothing. That’s very, very tricky to deal with. Particularly if you’re trying to raise a lot of money and you’re in the crickets camp, and then you read all these stories about it’s the easiest time ever to raise money. I’m like, it’s the easiest time to raise money for a particular kind of company, opportunity, and founder. If you don’t want to do that or it’s not what you’re after then it can be very hard.
Rob: I think that’s a really good point to think about. So let’s say today Einar, you had a B2B SaaS app doing $5000–$100,000 a month in MRR and you decided that you did want to raise that round. Obviously, I would love it if you’d come to tinyseed.com and your email address. We are now having open applications. We’re now running two batches per year, so every six months, we open applications. We’d love to chat. We even have a mid-batch application if you’re doing anything north of $5000 MRR. We have those coming through when we’re having conversations so we can fund people as it makes sense for their journey.
But let’s say you were doing $10,000–$20,000 MRR and you decided for whatever reason that you didn’t want to go through a program like TinySeed and you’re going to raise it on your own. You want to raise $200,000–$250,000. In my head you got to work your network. If you don’t have one I’m not sure what to do. When I thought about raising six or seven years ago, I was like, I don’t know who I will talk to or who will give me money.
But I would then look at using a convertible note or a safe. People can Google; we’re not going to define it here. There is a way you don’t have to do a price round now and get stuff on your cap table. That can take more time. There’s more due diligence in that, but a convertible note or a safe is a promise of essentially future equity to investors. Is that the approach you would take?
Einar: Probably so. I’m more pro selling equity, too. I think that’s fine. The problem with selling equity is a lot of the time it ends up. Most investors—people don’t know these either and this is not true for us—will make the founders pay for their legal fees. Part of the reason why safes and convertible notes took off in things is because it’s cheaper on the legal front and that is doubly valuable because most of the time, traditionally at least investors have been like I’m going to have you pay for my lawyer.
If you’re taking $250,000 and it becomes a protracted back and forth with legal views on either side, you could easily be in a position where like, you got $250,000 investment, but now $40,000 $50,000 of that is in legal fees for you and the investor that you both have to pay out of that $250,00. But if you can deal with someone who can very effectively and efficiently do a priced round, then I don’t think there’s a huge downside to that.
Rob: That’s what we do and we do it efficiently, right?
Einar: Yeah, it is. There’s some tax benefit and there is some clarity there (I think) a lot of the time, in terms of who owns what. It’s less of an issue with more of the TinySeed–type companies or bootstrap–type companies where you’re not doing fundraising every 18 months, but some of the challenges with the safe notes and the convertible notes is if you multiple rounds of this and one after the other and some bridge stuff in there, it actually comes quite difficult after a while to figure out how much your company’s left, because they convert at different caps at different times and different triggers and all that stuff.
There is something to be said […] I’m buying equity and valuing your company and if we think it’s worth $2–$3 million and we’ll buy 10% for whatever. I do think there’s a nice sense of that. The challenge, particularly, if you run into unsophisticated investors or maybe investors who are used to larger rounds or later-stage stuff, you can get stuck and blow easily $50,000 in legal fees, which is obviously counter-productive for a $250,000 round.
Rob: To untangle that and I guess my advice there is don’t raise a bunch of different caps and valuations. Keep it simple.
Einar: That’s the problem for people. This is the thing. If you’re going the more traditional venture route, then while you’re raising money, you erase money, so you burn hard. You burn hard, then you’re running out of money, and you have to raise more money, so you can keep burning hard. There are people with 13 safes and they’re like, is there someone with software that can help me figure out or an analyst that can help me figure out how much the company is left?
Rob: Yeah, don’t do that. If you’re a bootstrapper, you’re not going to be raising all the time. My advice would be not to do that. As a bootstrapper, you don’t need to be raising all the time and it’s a distraction. You’re not on a venture treadmill where you need to raise every 18 months. I would chill out a little bit, I’ll keep it simpler.
One last note on safes and convertible notes is that if you truly are thinking maybe this might be my only round, you’re essentially committing to giving equity in the future, usually at the next funding round or if there’s an acquisition. If you do plan to run the company, you want to run it for 10 or 20 years and take a profit, safe and convertible note.
That’s not legal advice. We’re not lawyers like that’s a disclosure. But it’s not the best. I mean it can screw investors. To be honest, it’s top […], I believe, where they raise the money on safes and convertible notes, they never raise another round, they haven’t sold, so all the investors don’t technically own the equity, and the founder can actually literally legally take money out of the company and put it in his own pocket. Him or the other founders, I guess, whoever owns the equity. It’s a weird situation.
I think if you are thinking about doing it longer term, then equity probably makes a bit more sense to think about that. The other thing is there was the pre TinySeed. I did angel investments; wound up working out very well, but the founder used convertible notes. At a certain point, he just said all right, we’re just converting to equity at this rate. We’re just converting this at the cap or something like that. He just decided he wanted everyone on the cap table. He wanted to clean it up and he didn’t want to keep his interest involved in this and that. It was just a decision as a founder he meant that to simplify everything.
Founder thinking about raising money, what do you think the dollar amounts? Where should they land? I guess should is a strong word, but there’s a minimum that makes sense. I don’t think you should go try to raise a $75,000 round because the time and the legal fees alone are not worth it. On the top end, what are your thoughts on small and large?
Einar: It’s a little different if you’re just taking a pre-specified money from us or YC or whatever, it’s like $120,000, $180,000, $200,000 whatever. In general, if you’re going to raise money, it’s probably worse to raise at least $150,000–$200,000 I would say. At least that’s true I think in the US. It becomes one of those things that if you can’t raise that much, is it really worth the pain going through and having investors at $75,000? As an example, just costs. If you were to do special-purpose vehicles, this is one of the ways that you can put a bunch of people on a single line item on your cap table.
AngelList will do that for the investor. On the investor side, it’s going to cost $8000 to do, which is actually reasonably cheap. But if you’re raising $75,000, that’s the material part of the actual investment that comes through. This is pretty significant dilution for the investors to take. I do think that it has become a stage where this doesn’t make any sense. I think that’s probably about $150,000–$200,000 or something like that.
Rob: We should point out that accelerators like TinySeed are different from that. Most founders who get funded by us, I’d say the vast majority is $120,000 to about $250,000 is the general range. But since our process we fund 20 companies at once and we fund the entire round, this is very different from you going and trying to find four investors at $25,000 each and then trying to close a round. There will be a bunch of costs on you and more complexity trying to wrangle them than dealing with a fund like TinySeed.
Einar: I think that’s true. It’s just much more efficient for us and we pay our own legal fees, so we’re incentivized to make it an efficient process instead of something that just drags on and on.
Rob: Then AngelList has an RUV or Roll Up Vehicle. I don’t know so much about it, but I think the idea is it’s a no fee RUV. It’s to help with convertible notes and safes. But I think it’s pretty new. Have you heard about this?
Einar: Yeah. It’s not entirely clear to me. I should probably look at how it’s different from an SPV. At AngelList, the SPV fees are about $8000. RUVs are similar to that. It’s certainly the same deal. The reason why you would have an SPV is because you want to be able to say there are 25 people who want to throw in $10,000 each, but I don’t want 25 people on my cap table for assorted reasons. You put together an SPV and then the SPV is the one that invests. I think a Roll Up Vehicle is the same. It’s entirely unclear to me how they’re technically different.
Rob: Here’s one thing about RUVs is they basically say you have to be a US C-Corp in order to do it. That’s going to cut a lot of folks, bootstrappers who want to stay LLCs want to be in corporate in different states. They basically say if you’re raising safe and equity round, you’re likely eligible for a no fee RUV with zero care for investors. But again, I haven’t dug into it to know how that all works and how AngelList makes the money, or if they’re just doing it out of the kindness of their heart. You think that’s the reason?
Einar: It could be.
Rob: No, I don’t think that. Not that AngelList is bad, It’s just their business, they have to make money on this stuff somewhere. In my head, I agree with you. I think $150,000–$500,000 is the most common. That’s the most common range that I’ve seen across. We have 41 TinySeed investments and between Sharon and I, 18 private angel investments pretty much made before TinySeed. That’s almost 60 companies and that has by far been the range, $150,000 up to $500,000. There are obviously exceptions. There are people who have a really great network, they’re a second time founder, and they can go out and raise $600,000 in their first round. But that has been pretty unusual in my experience.
Einar: Yeah, I think that’s true. There are people who do it. It’s just a matter of what are you trying to do with it? What are the trade-offs in terms of optionality? If you raise $2 million or $3 million, then investors are expecting you to spend it. It’s not like we don’t expect you to spend it. In some cases, we have to tell founders why are you not doing this? It seems expensive. I was like, we will give you money. You should spend it. It seems like a good use of the money. But that’s even more pronounced if you’re raising $2 million or $3 million.
If you’re raising $2 million or $3 million then investors will not be pleased if 12 months later there is $2 million or $3 million in your account. Unless that’s because it’s been growing crazy.
Rob: I think with that in mind the idea is the more you raise, the more of your company you have to sell. It all depends on valuation as well. Valuation is really set by the market, but the market looks at what’s your traction. Oftentimes, what’s your MRR? What’s the story you’re telling? What’s the certainty that people think that you are going to be able to provide a return? What is that return? We’ll get into it.
The second is, is an exit down the line or is it taking profit out of the business? If you say I’m going to be an LLC and I want to take profit out of the business and run this for 10 or 20 years, you will significantly reduce the pool of investors who are willing to invest in you. I’m not saying that’s a good or a bad thing, but just realize that there are far more investors who want you to exit.
Einar: I think fundamentally, one of the things there is if that’s your goal, if your goal is to keep it forever and then pull cash out and distribute cash over time, then honestly what you should be looking at is more likely things like revenue-based financing. The investors who are looking for more dependable cash flows are more likely to be putting their money into those kinds of vehicles. Equity-type investors typically are looking for higher potential upside than what comes from just profit distributions.
The fact that with revenue-based financing–type things, it’s a little bit more determined how this has to work and it’s a bit more predictable in terms of the cash flow that investors can expect versus if you’re taking an equity investment and you’re saying I’m just going to pull profit out and distribute it over time, effectively what you’re saying to the investors is trust me, I’ll do that. Don’t worry. I’ll do it.
But if you take more revenue-based financing, you’re entering into a legal contract to do it. The incentives are slightly different there. Now, the problem of course is the stage we invest, like super, super early, the earliest stage, it’s almost impossible to get revenue-based financing because your revenue is so low.
Rob: I think at this stage we invest which is early, a lot of founders don’t know. They don’t know who if longer term they want to run it and pull profits off. They don’t know if they will get an offer for $5 million or $10 million. When you see that number on a check or in an email, it changes your perspective. I’ll tell you what. You suddenly realize, wait a minute. Let me get this straight. I can pay my house off. I can fund all my kids’ college funds. I could feasibly never have to work again or never have to work in anything I don’t want to again.
That […] changes your whole outlook on life overnight. They may want to go raise a venture round later. That’s where something like TinySeed comes in. That’s one of the reasons we started this. We wanted folks to have that option. To be able to buy themselves some time to build the business to the point where it becomes maybe a little more obvious of where it should go in the direction the founder wants to take it.
Einar: That can work out different ways, too. We have founders who tell us that if I got $10 million, I’d sell it. Now, they’re doing very well and they’re like, no way will I sell for $10 million. It goes both ways. It’s just nice to have that optionality I think. We do have founders who are like, this is a big opportunity. I just want to go and raise a ton of money and go the venture track. I’m like, great. Do that.
Rob: That’s the fun part. That’s what I like about it. Anyone who’s known me, listened, read, or just been involved in any of the content I’ve been putting out for 15 or 16 years now, knows that the bottom line mission for me is to help more founders succeed faster and have a sustainable business of any kind. A sustainable business may mean that they’re able to sell it for millions or tens of millions or enough money. Maybe their life-changing money is $500,000 because that changes your life in the short term and they’re able to go start another business.
But that’s why I love doing this podcast. That’s why I love being part of MicroConf because our community is focused on helping each other. That’s why TinySeed is such a part of the mission, why it was so cool that you and I essentially agreed on that, that this needs to exist in the world.
In 2018, as we were talking about this and figuring out, should we start TinySeed? Does it work? I knew there was a desire on the founder side because of all the people that I had invested in. It was like, all right, I’m out of money in terms of writing more checks to startups. I need to keep my allocations between Bitcoin and Ether and public equities and all that reasonable. What I didn’t know is would investors, in essence, be willing to invest in this asset class? That other side of the market place came together pretty quickly, which has been nice.
Einar: We started seeing that on the buyout side, too, with Discretion Capital. We started seeing that 5 or 10 years ago, it was like, if you had $2 million or $3 million ARR B2B SaaS business growing reasonably well but clearly not going to be the next Airbnb, there weren’t a lot of interests on the buy side, versus that has really changed on the buy side as well.
That makes it more feasible to basically get money from investors who want to come in at the early stage there. Potential exit market and it’s just they see that people are selling for 4, 5, 6, 7, 8, 9, 10 times ARR at $1 million, $2 million, or $3 million. That becomes a viable thing to back at that point.
Rob: What’s good today is if you are building SaaS, it’s so capital-efficient. It can be extremely profitable if you decide to keep it. It can be extremely lucrative if you decide to sell it. If you gain traction, there is money out there. You and I’ve talked a lot about TinySeed here, but we’ve talked about pipe.com, revenue-based financing. There’s a whole world. Just type in RBF or revenue based financing into Google and you’ll see 20 or 30 players in. There are a lot of options out there. Then there are again other funds that are thinking about this stuff.
I just think we live at such an amazing time. If you want to bootstrap, awesome, do that. That’s what I did with all my SaaS apps. But you know what, one of the reasons I started TinySeed is I wanted just the fund to exist for me because during the Drip years, we needed money and we were doing all types of crazy stuff to cut costs and it was super stressful. I wanted to really quickly raise a couple of hundred thousand dollars. It would have been a big difference but I just don’t have the time to do it, and I don’t know if I have the network, which in retrospect I probably did. I don’t know there was all this indecision around it. I think almost de-stigmatizing it or perhaps normalizing it just a bit more I think is helpful in the space.
Einar: I just want to back more founders. I think more people should be doing their own thing—wherever they’re based in the world—rather than feeling like the pinnacle is to go work for Google or something.
Rob: I think that makes a lot of sense. Well sir, I think we’ve covered this pretty well. If folks want to keep up with you, you’re @einarvollset on Twitter. Of course, they can keep up with us at tinyseed.com if they want to hear more about it. You blog prodigiously on your dot-com, don’t you? Do you have one blog post in the past year?
Einar: einarvollset.com? Yeah. It’s a table that shows IRR versus multiple for the […].
Rob: Amazing. Says the guy. I’m not shaming you. I mean, the last time I blogged was probably two or three years ago.
Einar: At least, you put things out. I was thinking about this. I was like if you follow me on Twitter, you’re mostly going to see me complaining about the Giants. Like I said, I’m not the marketing guy side of things here. I’m more the background dude.
Rob: You are headed to the UK. You’re actually going to be in or around London for two or three weeks, four weeks here, sir?
Einar: Four weeks. I will be there through the end of the summer and then come back for the kids’ school to start here. Then I’m probably going to be in around Europe and London throughout the fall, really.
Rob: Part of the reason you’re there is personal, but part of the reason is because we are raising a European TinySeed fund. If you’re an investor, whether you live in Europe or whether you just want to have exposure to essentially assets of early stage B2B SaaS located somewhere in the EU, Europe area, they should reach out to you. They should go to tinyseed.com/invest. There are a few questions there that pings you directly, and you’ll be able to meet in person because you’re fully vaccinated. That is super cool. Awesome. Thanks again for joining me, man.
Einar: Thank you.
Rob: Thanks again for joining me this week. A lot of good ratings. Five-star ratings are rolling. It’s been super cool. I think we’re approaching 920 worldwide ratings. I want to get to four figures. If you haven’t given us a rating or review, I’d appreciate either or both.
We received this great review from Gilmore Golf from the UK. Five-star, refreshingly honest, and relevant. I’m a fairly new listener who’s now working their way to the back catalog of episodes. But I want to leave this review to thank Rob for all the value, insight, and education he shares for free. I now have a renewed energy and inspiration to pursue my entrepreneurial ideas without compromising on the most important things to me, in other words my family. Thank you, Rob. Please keep going.
Thanks again. This is the kind of stuff that makes me want to keep going in and makes the whole team behind Startups for the Rest of Us make us want to keep going. Thanks, Gilmore Golf. If you haven’t left a rating or review, I would really appreciate it. That wraps up for the week. We’ll be back in your ear buds again next Tuesday morning.