In this episode of Startups For The Rest Of Us, Rob and Mike talk about bootstrapping versus funding. It is a common question new entrepreneurs ask themselves and based on an article on the subject, the guys comment and elaborate on some of these questions.
Items mentioned in this episode:
Rob: In this episode of Startups For The Rest Of Us, Mike and I talk about 19 questions to ask when considering bootstrapping versus raising funding. This is Startups For The Rest Of Us episode 411.
Welcome to Startups For The Rest Of Us. The podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products whether you’ve built your first product or you’re just thinking about it. I’m Rob.
Mike: And I’m Mike.
Rob: We’re here to share our experiences to help you avoid the same mistakes we’ve made. Where this week, sir?
Mike: Well, there is a book recommendation that you’ve given awhile ago called, The Hard Thing About Hard Things. I’ve commented it, I’ve bought the book, but I haven’t read it yet. I’ve been kind of diving into that a little bit. I find it fascinating probably more so from a historical perspective because Ben Horowitz, who’s the author, he’s talking about his journey through the startup after he had left PayPal, and running this other company, and they basically only had one customer that was providing 90% of the revenue and basically spun that business off into its own separate entity and got rid of a bunch of assets with it, and talks about he built up the company from there.
What I find fascinating about it is that the new company is called Opsware. I remember back in those days when I was doing sales demos and presentations and stuff, I was actually in some cases, competing against Opsware.
Rob: That’s a trip. That book–it is brutal. Have you finished it?
Mike: I’ve not, no.
Rob: I was so stressed. It’s a good book but I don’t know if I could listen to it again because what he has to go through to grow and keep his company from basically going under and then he sells it for $1 billion or multiple billions of dollars and then he starts Andreessen Horowitz—that part is not in the book but he talks a little bit about it—but he is the Horowitz of Andreessen Horowitz. I remember listening to it and being like, “Yup, I could not have done this. I would have imploded.” It is, The Hard Thing About Hard Things is a good title for it.
Mike: Yeah, definitely. I do not think that I would have wanted to go through all the stuff that he’s gone through especially just the financial challenge of trying to go public at the time that he did, right after the economy kind of cratered. What did he say? Like there was 200 plus IPOs the year before and then there was 6 or 12 or something like that the year that he did it. Wow!
Rob: It’s crazy. He went public, he didn’t get acquired, I forgot what…
Mike: No, he went public first and it was in a bad environment. The reason they went public was because they couldn’t get anymore investment capital from investors. Then it was a bunch of years later, like 2007 or something like that where they ended up selling to HP for, I think, it was $1 or $2 billion.
Rob: Got it. That was my memory, but I have forgotten they went public. It’s agonizing. It really is the shoot for the $1 billion exit. You don’t need to be a several hundred-million-dollar revenue journey raising venture capital and all that stuff. A lot of it just did not sound like something I ever want to experience in my life, even for payout like that. I don’t it’d be worth it.
Mike: How about you? What’s going on this week?
Rob: Well, you and I just had a conversation before this episode started recording. We are evaluating potentially having sponsorships on Startups For The Rest Of Us. If you are a company, whether you’re a startup or if you think that you would be interested in reaching the Startups For The Rest Of Us audience—it’s a lot of bootstrappers but it’s also a lot of people running six and seven figure businesses, drop us a line at questionsforstartupsfortherestofus.com and just put “Sponsor” or “Sponsorship” in the subject line, and we’ll talk about it.
Obviously, as a listener, we’re been doing this for eight years, and we appreciate the trust that you put in Mike and I to produce high-quality content and to deliver value to you. We have no intention of “screwing up” the podcast by adding a bunch of sponsorship roles in the thing and interrupting your flow, but we are at a point where it does cost us money and it does cost us time away from our businesses to do this, so we’re just evaluating it. It’s a preliminary thing, we definitely have not made up our mind about it, but we do want to explore this as an option.
Mike: Again, that email address is questionsforstartupsfortherestofus.com and just put “Sponsorship” or “Sponsor” in the subject line, and we’ll take a look at it. Again, we’ll just kind of evaluate how things go. To reiterate what Rob had said, we appreciate you guys listening and we don’t want to screw up the whole thing. I think like a lot of things that we’ve done at MicroConf every year I think is just kind of a play it safe approach, but at the same time, look for ways to change things to make things better.
Rob: Yeah, we’ve experimented a lot with things at MicroConf over the years. Some have worked, some haven’t. But one thing that I think we’ve done a good job is recognizing when they work and don’t and basically changing it up when things don’t. Even if we try it, if it suddenly becomes a […] or something like that, I could imagine pivoting.
Today, we’re going to be running through an article by a listener and commenter name Don Gooding. The title of his article is Bootstrapping versus Venture Capital: 19 Questions to Ask. But what I find interesting about the article is it’s not just about venture capital, it is about angel investment as well. But before we get there, we have a comment from Adam on episode 406, and 406 was five episodes ago when you and I discussed, “Should bootstrappers raise money?” was the title of the episode. Adam said, “I’m so glad you jumped in, Mike, and said something about Rob hitting 21k MRR saying that it wasn’t a fair comparison.” Because I believe I was saying, “Drip hit 21k MRR quickly and if it took me four years to get there then I would’ve […] it down.” And you said, “Well, that’s not a fair comparison because you’re in a different place and if you’re building something on the side, maybe it is four years.”–to that point.
Back to Adam. He says, “I’m still trying to hit 21k MRR after four year, but I don’t think I’m failing at what I’m doing. Maybe an episode on what you think that growth is, that people should be aiming for, this was a good episode. A follow-up question to Mike would be, why have you or have you not fun strapped Bluetick?”
Mike: Oh, that’s a good question that I don’t have a good answer for.
Rob: It’s something evaluated, no?
Mike: Oh, yeah. I’ve looked at it a couple of times. I had a few conversations privately with people I know who have raised money, and just asked them what their take on it was, what their experiences was after going through it, what were the drawbacks, what would they have done differently. I got a sense that it was going to be rather complicated and time-consuming, and I didn’t have the time to spend on it. I continue to kind of look at it and continue to think about but it’s not something where I’ve said, “Yeah, I definitely want to do that. I’m all in. I’m going to dedicate the next X weeks or months whatever going out and raising funding.”
I’ve probably spent a lot more time working on getting Bluetick to a better place. I think I have been open about the fact that early on, I had hired a bunch of contractors to build a lot of the core infrastructure of Bluetick. Quite frankly, it was not done very well so there’s a lot of things that are generally screwed up and it makes it difficult to make changes. I would prefer to move fast if I can help it, but the problem is a lot of the architecture and the choices that were made at the time make that difficult. I have a hard time pulling away from those things and doing some of the clean-up work to basically make myself be able to move faster.
Because I feel like if I had like a pile of money, I would feel obligated to expand things a lot quicker and maybe even more than I’m possibly comfortable with, and I just know that there are certain parts of the app that if I were to dump 50 or 100 users on it all at once, it’s not going to scale very well. There are certain processes that need to run and it’s just not going to take a large influx of people very well. It can do it, I’d probably have to tweak a couple of settings to make it happen, but I’m not real comfortable doing that. I think it’s partly out of obligation, partly out of complexity and the time that I would have to spend on it.
Rob: You have technical debt already.
Mike: Yes. I think you have technical debt as soon as you write a single line of code.
Rob: Well, not if it’s fully unit tested, though. I think of […] there’s that, I don’t if it’s a joke or it if it’s truly the definition but it’s like, “Legacy code is code that is not highly unit tested.” Yeah, you have a little bit of technical debt but to hear that it’s hard to make changes, that’s a real bummer to hear given how early stage you are, and that you’re a technical founder. That’s the whole point of us being technical founders, that’s our skill set, we shouldn’t have that.
Mike: Maybe I should caveat that a little bit more. It’s not that it’s hard to make changes, it’s that I feel uncomfortable making changes to certain places because they’re not as well unit tested as I would like them to be. The software does a lot. There’s some changes I’ll just push out. It’s just like, “Hey, this is a frontend UI changes, it’s not that big of a deal.” But then when you get into things like, how mailboxes are stored and how the data is synchronized, I’m real hesitant to make changes to those because there is, in one particular case I can think off the top of my head, there was literally no way for me to unit test it whatsoever.
It’s hard to justify going in there and just making whole scale changes that would make things easier because I know that it’s working and if it breaks, it does a lot of work every second, and things could go seriously sideways very, very quickly. The new build server I put in place a couple of weeks ago would actually make rolling back pretty easy, but then I’d have to go through and figure out what in the code broke. Again, it’s not easy to unit tested that piece.
Rob: Yeah, I feel like, “Next time, should we just build, I don’t know, simple project management that just pulls things out of databases. It’s that no connections to any external sources and no queues. I don’t want any queues, I want everything synchronize.
Mike: Honestly, that’s part of it is the queues and stuff that I have to deal with. Queues processing, storing data, being able to filter certain things out and, “Oh, somebody deleted this piece of data.” It kind of sucks to have things moving while you’re also writing the code on it. I’m sure you went through this with Drip. There’s so much…
Rob: That’s SaaS though.
Mike: I know. It’s like open heart surgery–it feels like sometimes.
Rob: Yeah, every time we did anything meaningful to scheduling or, I mean there’s all kinds of stuff that’s so easy to screw up. If you can figure out a way to smoke earn—not smoke test—but to get you in a test on that stuff because the fact that you don’t feel comfortable making changes to a part of your app, that’s going to be a hindrance forever. It’s not going to get better, it’s only going to get worst especially if it grows, if you start hiring people, that’s a big red zone there that I think you need to think about remedying early.
Mike: Yeah. […] is there’s a component that I’m using where to get into the technical details of it, there’s a C# Class and I have to serialize it. In order to do that, in order to store the data. The problem is they’ve marked it as sealed which means I can’t inherit from it, which means I can’t really do anything with it. I’ve been working with them to try and figure out like, “Is there a way I can get an interface for this or something like that so that I can create it?” Because they don’t have a public constructor for it because it’s a sealed class, it’s encapsulated in the assembly, I can’t narrow from it either. I really don’t have any other options other than faking it which is what I’ve done so far. I basically have my own object that very, very closely mimics theirs, but it’s not perfect, and that’s the problem. I’ve found a few edge cases here and there, it’s kind of scary. I’m hoping it will come up with a solution sooner rather than later, but I’ve been working with them for probably six months on it.
Rob: One minute while I update my spreadsheet. Let’s see, apps to not start as an unfunded single founder, email marketing for writer, cold email outreach–the list is getting longer and longer. It’s like, these things don’t seem that complicated when you look at it from the outside. “I want to build an ESP. This is going to be a piece of cake.” said Derek and I before we wrote code.
Mike: I think anything where you have an outside dependency that you don’t completely control or have complete access to, that’s where it gets hard. Or you’re relying on events coming in to the system and you have to do data processing on.
Rob: Alright. Well, let’s keep moving on with this episode. Our second comment on episode 406 was from Don Gooding. He linked over to a few articles he’s written and one of them which we’re going to discuss today. His comment was, “I write a lot about bootstrapping versus venture capital or angel funding. They’re definitely a bunch of issues to consider both early and later. I hope you’ll consider the following posts helpful and not spammy.” and I do consider them helpful. He links to three different articles. His blog is fourcolorsofmoney.com. Don, if you’re listening, register the 4colorsofmoney and also, redirect that over because I tried that as well and it just goes nowhere.
He linked to the first article which is, Bootstrapping Versus Venture Capital: 19 Questions to Ask–we’re going to talk about that today. He also linked to another article called, The Bootstrap to Funding Pivot Playbook which is about bootstrapping first and then raising funding later. He talks about revenue financing in that one. Then his last article is, Revenue-Based Financing: Five Different Options and he walks thru them which is pretty interesting.
His site is called Four Colors of Money because he looks at bootstrapping, he looks at grants, he looks at grant and equity–those are the four colors. He’s obviously—having read through it—pretty knowledgeable about this stuff. Again, we will include those three links in the show notes. You can always go back on those comments on episode 406 if you wanted to see his full comment.
But today, we are going to talk through his article Bootstrapping Versus Venture Capital: 19 Questions to Ask. We won’t have time to go through all 19 question, but the idea here is to think about whether you can and should bootstrap or whether you need to raise funding.
His first question is, “How much of your own capital do you have. Do you have a way to self-fund it?” Self-funding and bootstrapping sound like they’re the same thing, but they’re different. Bootstrapping is truly having almost no money. A few hundred dollars, a thousand dollars, a couple thousand dollars, and then growing a business based purely on its revenue and profits.
Self-funding is if I have $1000 in the bank or $200,000 in the bank, or I had another business that was throwing off money or another income stream that was throwing off money that I could then take and start my next business from.
Self-funding is a lot of what I did. In the early, early days, I bootstrapped everything right out of consulting revenue but spent very little money. Then the more business revenue I had, I stayed consulting during the day full-time, and I took that business revenue and used it to self-fund the next thing, and the next thing, and the next thing, and each of them got bigger and bigger. It took me a long time to get from having .net invoice doing $300 a month, 10 years later, even longer, 11 years later, it’s Drip doing seven figures a year and having exit.
I didn’t have to raise during that time because I self-funded, but it took me a lot longer than if I had come up with an idea and just raised funding early on. That’s kind of how I think about the trade-offs is I believe it takes longer if you’re in a self-fund unless you do have a rich uncle or a trust fund. But his first question to think about is how much capital on your own do you have that you can invest in the business?
Mike: I feel like this is more of a runway question because the money itself, you either have to when the business itself is generating money, how much is left over for you to leave versus how much are you going to be able to put back into the business. If you’re running a business on the side or on nights and weekends and stuff like that, then you presumably have a full-time job, and that is keeping your self alive and your family fed while the business is getting the rest of the profits. But at some point, things are going to transition, and you have to make some choices about like what your future looks like, do you have enough money to be able to spend $1000 on ad words or something like that to test out a market? You may even need that money early on.
That comes down to the fundamental question that he’s got here is, how much of your own capital do you have? Can you afford to run experiments early on? Do you have more time on your hands or do you have more money? This is getting more at the money side of the equation. If you have plenty of time, if your timeline is five years, you can take as long as you want to do most things. Certain industries of course will move very quickly, and competitors will swoop in, not ideal if you’re trying to take five years to do it but certain ones you can do that.
I think Patrick McKenzie, with Bingo Card Creator, he slowly built that up. Nobody else wanted to get into market because there wasn’t a lot there. But he was still able to make a pretty good business out of it. He just took a really long time to do it.
Rob: His next few questions look at ways that if you don’t have the money to self-fund, ways to look around and see if you can essentially raise funds but not from venture capitalists or angels. His second question is, how likely it is you can raise funds from family or friends. Third question is, “Can your product support a Kickstarter style campaign?” which I believe a lot of people overlook. Info products and even some software, not B2B, but have to really be B2C in general can use Kickstarter as well as obviously physical products would be a great way to do it. His fourth one is, “Will customers pay you well in advance of you delivering your product or service?” Can you essentially pre-sell it? His fifth one actually is, “Does it qualify for a grant?” I don’t think that applies to most of our listeners nor any business I’ve ever started, but it is one of the colors of money that he talks about.
Mike: You know, I’ve thought about this kind of crowd funding. I’ve heard people gone down that path, not on Kickstarter, but someplace else, I can’t remember the name of it.
Rob: Like Indiegogo or something?
Mike: I think, yeah, it was Indiegogo. The general consensus was people are much more willing to fund individual ventures and things where there’s a physical product. But when it comes to software, people are not particularly interested. Maybe that’s just because it’s kind of self-selecting where the people who are building those generally are targeting them at businesses versus if you’re going to do something where it’s like, “Oh, this is a way to organize baseball cards,” or something like that, if it’s something that has a wider appeal and it’s a non-business use, you’ll find the hobbyist into that or the people who are prosumers, so to speak, they are going to be into it, and they would probably fund it. But if you’re going to try and create a CRM or something like that, who’s going to fund that? I can’t think of anyone who would want to willingly throw in money unless it was for their own business at which point, it’s not really for the greater good so to speak.
Rob: Totally. When I look back at the 173 Kickstarter projects that I’ve backed. Mike, did you hear what I just said?
Mike: Oh my god.
Rob: Oh, no. That’s the number of successful projects I’ve backed. I’ve 185 Kickstarter projects. Oh, the humanity, Mike. It’s so embarrassing. I just love Kickstarter. But I don’t think I’ve backed a single piece of software. My taste, it’s a lot of graphic novels, it’s a lot of table top games, it’s a lot of little tech gadgets. There was a Kano–the open source computer that I could teach my kids how to put computers together and do that stuff. A lot of it is some learning, some teaching, and some gadgetry and stuff. I think that my gist is that my taste are not uncommon. I do agree that in trying to launch a project in Kickstarter would be hard. But there are a lot of listeners who are not just trying to do B2B software as we’ve talked about.
I’m going to skip over a couple of these questions. But another couple of questions that I think are interesting to ask because they imply that you should probably raise some type of at least angel and potentially go after venture funding. One is, “Do you think it will take more than $100,000 and/or longer than one year to develop your product or service to the point that it is generating revenue?” Another question is, “Does your business have network effects where only one or two companies will end up with 80% or 90% of the market?” because that’s a super protectable. There’s a moat around that product or around that business. That is something that can very likely be fundable.
Another questions is, “Do you have large capital equipment or other fixed investment needs that aren’t debt financeable?” those three would obviously imply that you probably need to raise some kind of funding.
Mike: Well, I look at those things as potential disqualifiers as well because if it’s a network effects type of business where only a couple of companies are going to end up with a large percentage of the market, to me, that’s kind of a disqualifier unless you’re going to go raise money, and which I guess is kind of what he’s saying, but you have no idea if other people are going to answer in there who have a lot more clout than you. That’s why you should probably go raise funding if you’re going to go for something like that. But you’re also going to look at that particular thing and say, “This is a disqualifier for me. I’m not just going to go in that direction because I don’t want to raise money.”
Rob: Another good one I like that he asks is, “Do you have potential customers that will see your small sizes of risks? For example, a potential career–a limiting decision.” In other words, if you’re selling to banks, large institutions, they’re going to require that you have some kind of backing, right? I shouldn’t say require. They’re going to be unlikely to go with a single founder building software out of his/her garage.
I remember talking to someone at Gumroad actually, because Gumroad was kind of bootstrapped early on, and they raised a big round, I believe it was 7 million if my memory serves me right. I was saying, “Why did your raise the round?” He said, “Well, we wanted to become a credit card processor.” And to actually process credit cards, you need a bunch of money in the bank. They just won’t let a bootstrapper do that, or a self-funded company do it. I think that’s definitely a case if you’re trying to start a Stripe or even a Gumroad which seems it could be a bootstrappable company, there maybe a case where you need to pony up and raise a little bit of money.
Mike: That’s just a social proof of creditability factor. You’ve got people who have been willing to invest $7 million in you than it serves to the banks as like, “Oh, these people have convinced these other seemingly smart people to give them $7 million. Clearly, they’re onto something and they know what they’re doing.” Doesn’t mean that that’s true, it just means that that’s what their perception is. You’re really just playing off their perceptions.
I think there’s certainly situations where you can either skirt that or use it to your advantage for a relationship or something like that. If the […] that you’re getting after like you get an introduction into them. That way, you’re not going in completely cold. If you can get those introductions from somebody that they trust, then that’s going to help out a lot. That’s a place where if you go into different reseller channels, and there’s tens of thousands of resellers across the world, that their sole business is to go in and sell software to other businesses.
There’s a bunch of large value-added resellers like Dell and HP, in companies like that where they have entire channel programs set-up such that they’re going to and work with small businesses or they will escort small businesses into a deal in order to provide the credibility, and then everything goes down on their paperwork.
That’s how Dell and HP have, like massive services businesses, it’s because they have all the relationships already, they have sales fields reps, they walk in because they have a relationship or they can just make a phone call and say, “Hey, I’m your Dell rep and I’d like to come in and talk to you.” And then they talk to you and find out what your problems are, and they escort a small partner in the door.
If you can get some of those relationships, you can basically get escorted in. You don’t need to have that $7 million in the bank or you don’t have to hire 300 sales people or call center in order to do outbound cold calling in order to find your leads. You can leverage those partners to help walk you in.
Rob: His last few questions are really surrounding this topic of, “Are you a fit for angels and VCs?” One is, “Will your business support growing sales by 50-100% annually for 5-7 years? Will annual sales reach $15-$50 million with that timeframe?” high-growth, right?
Another question is, “Are you comfortable selling your business in order to provide your investors their return in five to seven years?” or maybe earlier for VCs. “Are you comfortable sharing control of and decision making for your company with investors? Is your team plan and pitched in the top 10 percent of companies seeking financing in your region?” All interesting things to think about.
Mike: I think that a lot of those are hard questions to answer too. I’ll say they’re very personal questions and depending on the time and day that somebody asked you, you might also change your mind. It could be hard to come up with a solid answer that you stick with.
Rob: Yup. I would agree. I think these are good things to think about. I think long time listeners of the podcast will have heard us discuss these types of thought processes before. Well, if you’re new to the podcast, you probably think, “Boy, these guys really talk about funding a lot for a bootstrapping podcast.” because in the past five episodes we’ve talked about it twice.
But I do think that it’s becoming more and more relevant. I don’t expect us to talk about it every five episodes by any stretch, but it does seem to be this emerging trend that is coming into the startups space. I think back to 2007 to 2009 or ’10, and I was using a lot of email marketing in my info products, and then I started bringing them into software products and kind of the startups space, it was definitely this emerging trend that I recognized. I talked about it at BOS.
Split testing was something I had seen in info and people in the startups were not doing that, that also became a trend that took off. There’s a bunch of things that have come from different angles. Even customer development and a lot of lean startups stuff was taken from the automotive. You see these trends coming in.
While startups and software have traditionally been VC funded and the trend that you can I have been a part of is this bootstrapping and self-funding kind of spearheading it, I would say, or I mean at least part of the folks who have really driven it over the past eight plus years. I think we look back and the first time I had said “fun strapping” on the podcast was in 2013 or 2014. It’s becoming just a little bit more common for folks to raise a round and not go institutional, which is another trend that I see, not infiltrating because that sounds like it’s a bad thing, it’s just another trend in the space. I think we’re just continuing the dialogue about it to keep abreast of what we see is happening.
Mike: Yeah. Things just change over time. As time goes on, the entire software space has become more and more competitive. I mean, eight years ago when we started podcasting, it was easier to launch products in terms of getting in front of customers. Now, there’s lots of competitions. You have to have a more polished product, it’s got to be further along, it’s got to solve more of the customer’s problems because they’ve got other things that they can pay attention to.
It just makes it, I’ll say a little bit more challenging to launch a product today than it is yesterday, than with the day before. As time goes on, I think that that trend is just going to continue. I say that the natural evolution is you have to have more resources in order to launch something. It’s kind of where the industry is headed. I’m not going to say that that’s where it will end up and that you’re always going to have to raise funding in the future because I don’t think that’s true. But I do think that there are certain types of businesses where it makes a lot more sense to raise some funds than it is to not, especially with certain life circumstances as well.
Rob: Yup. The good news is that it’s easier, I would say, than it has been in the past to get some type of small amount of funding with a lot fewer strings attached than say, 10 years ago. On the flipside, like you said, I believe there’s always going to be bootstrapping. That’s not going to go away. There’s always going to be folks who are hacking away, launching small software products, getting a lot of learning, getting some revenue. I think that’ll last forever and I think that’s a really great thing.
I’ve said this before, we live at an amazing time in history where even 30, 40 years ago, you couldn’t do any of this, and 100 years ago it’s even worst. But now, someone with some type of technical acumen can basically start a whole side business and really never leave their house and have this thing making money while you sleep. It’s always been the big draw I think for a lot of us. Part of it might eb the adventure and the active creating, I think that’s a big deal, but to be able to literally make money from nothing more than your skill and your computer is just mind-blowing. When I think back to being a kid, I was in junior high in high school and it was like, “Well, I don’t really want to work in a cubicle but were my options?” Right? In the mid to late ‘80s. This stuff was just coming about and I didn’t know much about it but the fact that we live at this age–consider ourselves lucky.
Mike: I think at the end of the day when you’re trying to evaluate whether or not to raise funds, it’s all about that trade-off of time versus money. Do you have money to burn? Burn is probably not the great way to put it, but do you have money to spend in order to learn quickly or are you okay taking a much longer time to do it, and doing things slow and steady based on what your financial situation is like, your personal life, and how much time you have available. That’s going to be different for everyone. That’s what generally governs these types of decisions for most people. I think that about wraps us up for today.
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In this episode of Startups For The Rest Of Us, Rob and Mike answer the question of should bootstrappers raise money? The guys distinguish the difference between venture capital and angel investing and how raising an angel round may be a good fit for some types of entrepreneurs.
Items mentioned in this episode:
Mike: In this episode of Startups For The Rest Of Us, Rob and I are going to be talking about whether bootstrapper should raise money or not. This is Startups For The Rest Of Us episode 406.
Welcome to Startups For The Rest Of Us. The podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products, whether you build your first product or you’re just thinking about it. I’m Mike.
Rob: And I’m Rob.
Mike: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s going on this week, Rob?
Rob: We have new iTunes reviews.
Mike: Oh, cool. What do we got?
Rob: This one from Find Fitness Pros. It says, “This is my go-to podcast every Tuesday morning. Rob and Mike continue to give their insights, not just info on exactly what to do,” and from Nathan Bell, he says, “Great information. I listened to one episode and I’m hooked. It was full of great information I can easily implement. Some of the info was a little bit advanced for me currently, but I’m confident that by selectively listening to more, I will pick up more.”
Those are a couple of new iTunes reviews that we have. I used to keep a worldwide tally of it using CommentCast and when I moved to my new computer, I don’t have the .exe or what is it called, it’s a .app I guess in Mac. I don’t have the executable anymore and you can’t download it anywhere. So I moved over to mypodcastreviews.com but it only gives me reviews, not ratings. We’re up to almost 600 worldwide ratings, I believe. People don’t necessarily need to write sentences or whatever, but I don’t have that tally anymore. Certainly, we’re above 600 at this point.
Now, what I have is I have 347 worldwide reviews and that’s a lesser number. I want to get back to the world’s rating. I think the guy at My Podcast Reviews says that they are going to add ratings but neither here nor there, the more reviews or ratings we get, the more likely people find the show, the more motivation it gives us. If you feel like we’ve given you some value as a listener to the show, it would be awesome if you can open iTunes or Stitcher and just give us a five-star review. Really appreciate it.
Mike: The solution to not having that app that gives you the numbers is just make up a number. So we’re at 3000 reviews I think.
Rob: That’s right. 3422 reviews. That’s great. How about you, man? What’s going on this week?
Mike: Well, this morning, I published a public API for Bluetick. Of course, I say it’s a public API but there’s actually only one person who actually knows about it.
Rob: It’s in beta?
Mike: Yeah, basically.
Rob: Early access, good.
Mike: I had a prospect who wanted to sign on and they’re like, “Yeah, I really need to have a public API that is available for me and Zapier wasn’t going to work for them. Basically as I said, I spun it out because I heard from a bunch of customers that I currently have, and I started talking to them about, “What is it that you need?” and trying to figure out what’s the minimum that I could build that this particular prospect or customer would need to get started. They only needed four things. Build those, put them into it, and then there’s all the infrastructure changes that needed to go into it.
It took a week-and-a-half just to do the infrastructure changes but now the best stuff if all taken cared of. I got that published out there and waiting for them to start using it, and then figure out what needs to change. I already made it very clear upfront, like, “Hey, here are some things that I know we’re going to change, and then over here, based on what you tell me, other things could change, so treat this as an absolute beta. Eventually at some point it will become stable, I guess, and then I’ll start pushing it live to everybody.
Rob: That’s nice. It’s nice to do. You’re basically doing customer development on what is its own little product. You can say it’s a feature but really some entire products are just APIs. You want to get it right from the start, and by start, I mean by the time you publish and people start hooking into it, you can’t change it at that point. I think it’s really good to take this approach of roll it out slowly, roll out one endpoint at a time and really think through how you want to structure it.
I was just on your site trying to guess the URL. I was going to just type in a bunch of stuff so you’re going to see a bunch of 404s in your error logs. Not a hacker, it was me, but I didn’t find it alas.
Mike: No, that sucks. I would tell you if you asked for the right price. Other than that, I also got my first fraudulent charge from Bluetick. It took a lot longer than I expected it to but somebody signed up, then they logged in, and absolutely they didn’t pay any attention to the onboarding emails. Come time when their trial is up, they got charged, and then I forget how long it was later. I was maybe probably three or four days later, I got a notification from Stripe saying, “Hey this charge looks fraudulent,” and I looked at it. I think it’s a debit card too and I was like, “Oh great.” Three hours later though like, “Oh you’ve had a chargeback.” I was like, “Wait, I didn’t even get a chance to decide that to do with this potentially fraudulent charge,” and they already converted it into a chargeback, which cost me an extra $15. Well that sucks, but, oh well.
Rob: Was it a person not using or was it a stolen credit card? Is that what you think? Or do you think that they just went in with the intention that it was their own credit card and they just intended at the whole time?
Mike: I’m not sure. It looks legit. The email address, I couldn’t quite tell whether it was real. I think it was a Gmail email address. I couldn’t really trace it back to a company or anything like that but the name on it seem to match what the email address was. I don’t know. I’m not entirely sure but I think it was from a real estate company or something like that. All right, well, whatever.
Rob: Yeah, that sucks. It’s going to happen. It’s definitely a milestone you don’t want to hit but you’re going to hit it eventually.
Mike: Yup. Certainly not a milestone to celebrate but I definitely hit it.
Rob: Yeah, exactly. Cool. What are we talking about today?
Mike: Today, I thought we would have a discussion about whether or not bootstrapper should be raising money. I guess by definition if you’re raising money, are you no longer a bootstrapper at that point? I think there’s maybe a time during which you are bootstrapping a company and self-funding it. I almost called it self-funding, like should people who are self-funding raise money, but again that would go against it.
The idea came because I saw Justin Jackson had tweeted out a link to an article he wrote over on Indie Hackers called The Bootstrapper’s Paradox. In that article, he shows a graph or what they’re doing for transistor.fm, which is the new startup that he’s working on. Basically it shows a graph of over the course of 60 months was 10% exponential growth and 5% turn. The MRR will get to $21,000. But 60 months is five years of time.
I thought it would be interesting to just have a conversation about this because when I was reading through the tweet that he had put out, there were a bunch of people who chimed in on it, mostly people who were listening to the show would have heard of like Des Traynor, Jason Collin, and Natalie Nagel. They’re giving their thoughts on this stuff and I just thought it would be interesting to talk about it.
Rob: Yeah, that’s for sure. 10% growth every month sounds like an impressive number but when the number starts very small, like $1000 a month, that means you’re growing $100 MRR a month. You just can’t do that early days or if you do, it’s going to take five years. You either need to figure out a way to grow faster or you need to be really patient.
This is a struggle. It’s funny that, Justin called it The Bootstrapper’s Paradox. I don’t know that it’s that as much as this is the reason people raise funding. We know people who are just bootstrapper through and through, you should never raise funding and 37signals used to say that and even mentions it that DHH and Jason Fried took funding from Jeff Bezos two years after launching Basecamp. It wasn’t even funding that went into the company. They took money off the table. If I recall, I think that number is public. I think it’s $10 million that he invested, was my memory and maybe I don’t think I’m making that up. It’s either rumored at that or it was announced.
They had essentially at that point had FU money and it’s really easy to make different decisions or just say, “Hey, we’re going to grow as slow or as fast as we need,” when you have that kind of money in your personal bank account and you’re just running this business day-to-day.
Justin’s article is a bootstrapper’s realization of “Oh Sh*t.” This is why people do raise money. It’s coming to that realization at this point and I think it’s a good thing to call out for sure. I’ve been thinking about this so much so I’m looking forward to today’s episode because in my Microconf talk this year, I talked about things that I learned bootstrapping and then self-funding and then in a venture back company after Leadpages acquired us.
In the last five to seven minutes I did just a little snippet about fundstrapping, which is this term that Colin from customer.io coined, where you’re kind of in-between. You bootstrapped a little bit and you raised a small round. I say it’s between 200,000 and 500,000 and you raise it with the intention of getting to profitability. Without, you’re never going to raise institutional money, or raise it from friends or families or angels, so you don’t give up control, you don’t give up a board seat, you really have the benefits of funding without the institutional chaos of it, the headache.
It wasn’t a throwaway piece but I almost didn’t include it in the talk. That piece has gotten me more emails, more comments, more thoughts, more people came up to me, ask me what that’s like, asked if I would invest or find new people who were doing fundstrapping. It’s just fascinating response to this, this thing that’s been percolating. It’s a long rant on it to start but I just think this is becoming more and more of a viable option and potentially even a necessity as the SaaS market gets more and more crowded.
Mike: Yeah. That’s the part that I think has changed over time, where five or 10 years ago, you could come out with a SaaS and you’d launch it to the public and you would start to grow by virtually the fact that there was nobody else out there or there were very few competitors out there doing what you were doing. Now if you launch anything, you probably got a couple of competitors just right out of the gate. If you don’t, then you probably don’t have a product that’s going to go anywhere. But if you have any competition, it’s probably substantially more competition today than you would’ve had five years ago or 10 years ago. Just by virtue of having launched five or 10 years ago, you were going to be more successful quicker than you would if you did the exact same thing now. It’s going to take longer, which means that you’re going to burn through more runway and it’s just going to be harder.
Rob: Right. Now, five or 10 years ago, there was less competition but the expenses would have been higher, 10 years ago especially because you literally needed a rack server. There was no Amazon EC2. In addition, there was still like when Basecamp first launched on their homepage, they were like, “You don’t have to install any software. No downloads needed.” They were still educating on just the concept of being in the cloud and there were hurdles there.
Mike: That was almost 15 years ago.
Rob: Yeah, that’s true. No, you’re right. That was 2005 or 2006? You’re right, 12 or 13. You’re right. But even with that, say 10 years ago, even with that, it’s still I believe was easier back then. But that doesn’t mean you shouldn’t start something today. It just means you got to house some more, you got to pick a better niche, you got to have more skills, or you need a little more money in the bank.
Whether that means you raise it yourself out of consulting efforts, which is what I did, or if there’s definitely more money being thrown around as funding these days that is, I’m not going to say no strings attached because it’s certainly they take equity, but 10 years ago if you took half-a-million bucks, boy that was typically institutional money, it was a pain in the butt to raise, you are giving up a lot of control, you are giving up a board seat, that is no longer the case. There really is this viable option, this in-between.
Mike: I think if you look at the businesses that, in the past have tried to figure out how to raise capital, one of the things that most people, 15-20 years ago, it was common to say, “Okay, let me go to a bank and get a loan from the bank.” But that is a non-starter for most new businesses. You got SBA loans and things like that where you can use the money to take over an existing business where they’re able to evaluate.
But if you have a business that you’re trying to get off the ground, a bank loan is basically a non-starter, especially when it comes to SaaS because they don’t understand how to calculate how much that business is worth. There isn’t any inventory and with software, it’s going to lag in terms of the revenue over something like a physical goods business, or a coffee shop, or a fitness studio where they know how many people are coming in and they can put a value on the equipment whether it’s the coffee machines or the spin cycles on a fitness studio. Banks are okay with that. They understand that.
But when you got a software business, the expectations today are much higher than they were five or 10 years ago. You have to do a lot more in order to make your product a lot more polished, which means it’s going to take time to do that which burns through your runway. It burns through that money a lot faster today. I guess you wouldn’t burn through it faster. It’s just you burn through more of it than you would have 10 years ago to get to the same point.
Rob: Even if you can get a loan, you have to send a personal guarantee. Now, all your personal assets are on the line. And if you decide to shut the company down, you owe them money. If you borrow $100,000 it’s a big deal. To me, that is more of a risk than I think an entrepreneur should take, unless you’re at the point where you already have, “All right, I’m at $10,000 MRR,” in which case you may or may not need the money, but if you’re at $10,000 MRR, you should raise equity funding anyway.
But if you know the business is going to succeed, that’s fine. When I hear that people charge $50,000 or $100,000 on credit cards to start a SaaS business, I’m like, “Oy vey.” That is going to be catastrophic. That is a really, really stressful way to live and it’s something I would not do, especially when we’re in a space where raising equity capital is relatively inexpensive. Raising a small angel round and selling 10% or even 20% of your company to reduce a lot of stress and to get there faster, I think it’s a pretty reasonable idea these days. It’s not impossible to do, I’ll say.
Mike: I want to talk about that specifically right there. What you just said was raising capital is relatively inexpensive. The reason I like the way that you put that is that when I think of the way I thought about raising funding years ago was that, “Oh, I’m going to have to give up a lot of control, I’m going to have to give up a lot of equity, and I don’t necessarily want to do either of those things.”
But if you’re thinking about putting together a business and you have anybody who’s helping you—a partner or a co-founder, something like that—your immediately giving up 50% of the company anyway, and then there’s a whole lot of difference between doing that and giving up 50% when there’s really nothing there, and yes, it could grow up to be something huge, but you’re giving up 50%.
So there’s like a mental block there of you saying, “Okay, well I’ll raise $250,000 in exchange for 10% of this,” and you don’t want to do that but you’re willing to give up 50% to somebody else when there’s really nothing there that’s being invested except for their time. Do you know what I mean?
Rob: Yeah. It’s cognitive dissonance I believe is the term where two things that don’t agree or paradox, I guess. It’s something in your head you’re rationalizing one way but then you turn around and give away 50% to a co-founder. That’s what you’re saying, It’s like you can give a small amount to get a big chunk of money, or even if it’s a small chunk of money.
Here’s the thing. Let’s say you live in the middle of Minnesota, or the middle of Nebraska, or something and you have an idea and you raised even $100,000 or $150,000 and you paid for your salary for a year or a year-and-a-half. That gives you a year or a year-and-a-half to get to some point of revenue that makes sense. Even if you gave away 15% of your company, you’re valuing it at $1 million right off the bat, or if you give away 20% or $750,000, it still makes your life a lot easier.
I think that’s the realization I’m coming to, is that at Microconf, or through this podcast, or whatever at different conferences, we meet smart people who are trying to launch businesses and something that stands in their way often is that, “I have a wife and kids. I have a house. I can’t do this nights and weekends. But I don’t want to raise funding because it’s really complicated. I don’t know how.”
What’s funny is you outlined this episode and you brought the topic up. But this is something I’ve been thinking a lot about, and there’s a gap here in the space. We do have folks like indie.vc which, if you haven’t heard my interview with Bryce from indie.vc, it’s episode 310 of this podcast, and it’s a more realistic approach to funding. It’s kind of a fundstrapping model. I’d recommend you go listen to that.
In addition, I feel we’re coming to an inflection point where there’s this gap and there’s a level of interest in something, and no one is filling it. No spoilers on what I’m up to next, but I’m starting to feel I might be the person to tackle this, to take it on. I’ve been spreading the word about it. I have been talking about it for years and I’ve been investing in startup like this.
We talk about Churn Buster, LeadFuze, CartHook. These are all small angel investments. I’ve done about 12 angel investments and I think three or four of them were essentially fundstrapped. it’s where they took money from a handful of folks and they never planned to raise a series A. I put my money where my mouth is, but now I’m thinking I only have so much money, how is it that I can take this to the next level in a realistic way. It’s something that’s definitely in the back of my mind and it’s something that I’ve been thinking a lot. Hopefully, we’ll dive into more in the future.
Speaking of that, if you listen to this and your thinking, “Oh, this is an interesting topic,” go to robwalling.com. Enter your email because it’s going to be something that I’m going to be thinking more about in the future as well as on this podcast for sure.
Mike: One of the comments that jumped out of me on the Twitter post that Justin had put out there was from Des Traynor and he said, “I think a second piece people don’t really internalize is that 60 months of the best years of your career is a substantial upfront investment too. Like a seed round but instead of money, it’s your life.”
That’s a fascinating way of looking at this because even back n the day, I would always say, “Oh, well. You know you’re basically trading money for time,” and I don’t think that I really equated time with years of my life. It sounds intuitively obvious. That’s exact same thing. But when you’re in the middle of working on stuff, you don’t think, “Oh, I’m trading five years of my life away of hard toil to get this thing to where it could be a lot sooner if I were just to take some money and trade some of that equity for it.”
Rob: Right. It could feasibly be a lot sooner. It may or may not. Money doesn’t solve all the problems but it certainly makes things, I’ll say less stressful and you having done it with true bootstrapping with basically nothing and doing nights and weekends, to then self-funding with revenue from HitTail going into Drip, and then venture funded. I’ve done all three of these. I will tell you that having that venture money, I didn’t have to raise it and I did attend the board meetings but I didn’t necessarily have to report to the board. My life was less stressful at that point than either of the prior two scenarios.
I think it’s a good point, man. I don’t want to come off. You can tell, I’m coming off kind of pro-raising a small round, and I don’t want to come off too one-sided. We’ve never been anti-funding ever. From the start, Microconf, I think in the original sales letter. It was, we’re not anti-funding. We’re anti everyone thinks the only way to start a software company or a startup is with funding. That maybe from the introduction of my book, actually—Start Small, Stay Small.
Even back then in 2010, I was saying, “Look, raising funding is not evil in and of itself. It’s the things that you have to give up by raising funding. Just know what you’re getting into.” Yes, we have seen founders that get kicked out of their own company. There was, I figure what that app it was. Was it Tinder? Something sold for $460 million. No. It’s FanDuel. It’s sold for $460 million and the founder who started it, and I believe was CEO when it started, he got no money because of liquidation preferences and he’s suing them.
That’s a huge exit. He got I believe it was zero dollars from the exit. There was an article or something that was like, he’s suing them now. If the contract say this is what the liquidation preference is, that’s one thing but he’s suing them because he thinks they screwed with the valuation intentionally and there was fraud or something. He’s not going to win if he just says, “No, that wasn’t the deal,” because he signed the papers. These VCs are not stupid but he’s trying to do that.
Yes, that does happen. But I believe there is a way to do this and I’m seeing it with these smaller SaaS apps. A way to do it without that much stress, without giving up that much equity. Brennan Dunn, RightMessage. That’s another one. I also wrote a check. And Rand Fishkin’s SparkToro. He’s doing the same thing. He’s not calling it fundstrapping, but he said, “Hey, we’re going to raise around, and we’re going to get to profitability, and we don’t want to do institutional money. If you listen to Lost and Founder which is his book, he talks about the perils of all that and you couldn’t read that and say, I can see really they didn’t like – once they raise funding, he really didn’t like it.
You can look and say, “Well, Rand’s anti-funding now.” But no, he’s more anti-institutional money, and there’s a difference. Venture capital is institutional money. These angel rounds tend not to be.
Mike: But I think even back, we’ve talked about it on the podcast before. As you said, we always had the position that, it’s not that we’re anti-funding, we’re anti-this-is-the-only-way-to-do-it. That’s always been my thought behind it. I’ll say the majority of my career and thought process has been like, “Yeah, I really just don’t want to take funding in this more because I don’t want to necessarily give up control.” Back then there weren’t really the options for that. Now, things have changed a lot. It’s not, say, front and center on my radar, but it’s something I’m definitely looking at niche and exploring a little bit more.
I definitely think that—like with Bluetick for example—there’s ways to go further faster, but I just don’t necessarily have the money to be able to do it, which sucks but at the same time, it’s always a trade-off. I think that’s what you always have to consider is, what is the trade-off and what am I going to have to give up in order for me to get X amount of influx and then what are you going to do with that?
You have to have a plan. You can’t just say, “I want to raise money.” You got to have a plan for not just raising money but also what are you going to do with that money when you get it? How are you going to deploy it? How are you going to build the company and how are you going to grow things? You can’t just drop $100,000 in your bank account or $500,000 and say, “Okay great. I’ve raised money. Now what?” They’re not going to give you the money if you don’t have a plan.
Rob: And if you don’t know what you’re doing, money’s not going to fix that. You’re just going to make bigger mistakes. This comes back to the stair-step approach. No chance I would have raised money in 2005-2009 with ,DotNetInvoice, and Wedding Toolbox and just beach towels and stuff. Even if I could have made the case that DotNetInvoice would grow to something, I would have made huge mistakes because I made small ones back then. But I learned and I gained experience and I gained confidence.
By the time I get to HitTail, I remember thinking, “Yeah,” because remember, I bought HitTail for $30,000 and then I grew it up to basically that much MRR per month but end and I value at it. Maybe I should raise a little bit of money in it. It would make this a little easier. But to me, it was the headache of it. I was like, “I do not want to slog around and spend months asking people and the paperwork.” It just felt like a pain in the butt to me. I don’t know if I could have. Did I have the name recognition? Could I have raised enough?
Arguably, yes. By the time I got to Drip, it was definitely like it. If I haven’t had that HitTail money, let’s just say I’d had none of it. I basically used a bunch or revenue from HitTail to fund Drip. If I hadn’t had that? I absolutely would have seriously considered doing what we’re talking about raising a small round. I knew Drip was ambitious, I knew it was going to get big at least by the time we are six or eight months in, and it had a need for that.
That’s what we’re saying here is the words always, never, and should, they’re not helpful words. Don’t say, “I should always raise funding.” “I should never raise funding.” “I should raise funding other people think I should or shouldn’t.” These are not helpful words. Just evaluate things and look at them, and like you said, look at the trade-offs. Pluses and the minuses, and the realities of them, not the FUD. Not the fear, uncertainty, and doubt.
I can tell you the story, “Oh, look. The founder of Fandle. He got screwed by his investors. Therefore, I’m never going to raise investing or I’m never going to raise funds.” That’s dumb. Actually look at the black-and-white of it. I think that’s what we’re talking about today. We;re not saying you should or should not, but it’s look at the reality of it.
Now, you and I talked about this in-depth in episode 211, When To Consider Outside Investment For Your Startup. We went in-depth on what are funds and family round, an angel round, or often called a seed round was. We talked about series A, B, C. Once you get to the serieses, that’s when you get to institutional money, which is when things get way more complicated. Once you raise a series A, it’s the point of no return. It’s implied you’re going to raise a B, a C, and go on to either have this huge exit or an IPO, and it’s growth at all cost for the most part.
But if you’re able to stop before that series A and stick to people who are on board with you, angel investors and such are on board with, “Hey, let’s build a $5 million, $10 million, $15 million company with it, it’ SaaS. Let’s do a 30%, 40%, 50% net margin on this thing.” That’s great. That’s the kind of company I want to build and that’s the kind of company I want to invest in.
But venture capitalists don’t want to invest in that. If that’s not your goal, to go to $100 million and do what it takes to do that, then you don’t want to go down that road. You want to have those expectations clear both in your head upfront, as well as anybody who’s writing you a check.
Mike: Right. The problem with that is that episode 211 when we talked about that, that was four years ago. That’s a long time in internet time.
Rob: I might need to go back and listen to that episode to hear what we said. How much you want to bet? Oh, I’m going to go search it and see if the word fundstrapping if I mentioned it in there.
Mike: I don’t think so. Oh, it is.
Rob: Is it?
Mike: Yup. About 20 minutes in, you said, “I heard the term fundstrapping and I really like it. It was from Colin at customer.io.”
Rob: There it is. In 20 minute then boom. This is 2014, November of 2014 even back then.
Mike: But you were in the middle of Drip at the time, were you?
Mike: Was that right?
Rob: Yup. In the middle of Drip and I was probably already thinking about because at this point, we were growing fast and I was dumping all the money I had into it, both from that revenue and from HitTail, and I was thinking, “Boy, if I had half a million bucks right now, given our growth rate could have raised it. If I had half a million bucks right now, we could grow faster. I can hire more and have more servers and not shut down EC2 instances on the weekend.”
We used to do that to save money that’s insane, that lengths. I remember valuating Wistia versus SproutVideo, and Wistia, for what we need, it was $150 a month and Sprout was $30. It’s a nice tool but now way it was Wistia. I went with SproutVideo because I needed that $120 bucks to pay something else. We had to migrate later and it was a bunch of time and all that stuff. I never would have made that choice if we’d had a little more money in the bank. It’s the luxury of having some investment capital.
Mike: Yeah and unfortunately, you have to make a lot of trade-offs like that. You spend a lot of mental cycles and overhead making those trade-offs and just making the decisions because you don’t have the money, which is a crappy situation to be in. All that said, part of the problem is, you don’t necessarily want to raise money if the idea itself or the business model just simply doesn’t have merit. Maybe that’s partly what those investors are there for is to make sure that they act as something of a filter.
That’s always the problem that I’ve seen with angel investors is that they’re the ones who are in control, not you. Maybe angel investors isn’t the right word, but outside investment where they basically end up getting control of enough of it that you don’t get to make the decisions anymore. They’re the ones who make the decisions whether or not your business is going to succeed based on whether or not you get the money. If you can’t set aside the time, like nights and weekends, to be able to do it, it’s just not going to work out. You need that money in order to make the business work, then it’s going to be a problem for you down the road.
Rob: And that’s the thing is the losing control of your business tends to be if you raised multiple rounds because each round you sell, let’s say, 15%-20% is typical. May 15%-25% and if you do one round, you still have control. You and your co-founder or you if you’re a solo founder still own that 80%. But if you do another round, another right you get two, three rounds in, it’s typically by series C or D where the founders are the minority shareholder and investors now own most of it. If you don’t been on the path, it’s unlikely, or if you just make bad decisions.
I saw someone on Shark Tank where they had no money upfront and they sold 80% of their company to an investor, to an angel investor. Shark Tank was like, “We can’t fund you because you’re working for nothing.” All the work is for the investor. If you make a bad choice, that’s another way to do it too. You do need to educate yourself about it and I think that’s something that some people don’t want to do because it is boring stuff.
I really like the books that Brad Feld does and this one is maybe like venture funding or like a guide to venture funding. I got four chapters in and I just couldn’t stand it because it was all terms. He didn’t write it. It was more of a series that he’s involved in. The terms were just so boring that I stopped. I understand if you don’t want to learn at all. You need to learn enough about it to do it.
I want to flip back to something that Natalie Nagele responded to Justin Jackson and then it was actually just what I was thinking when I saw his graph. It was five years to $21,000 MRR. In all honesty dude, I would shut that business down before I wait it that long. I forget how long it took Drip but it was maybe a year. I don’t think it was even a year from when we launched and it was probably 12-18 months from when we broke around on code, that we had $21,000 MRR.
Drip was admittedly a bit of a Cinderella story. It was fast at growth than most but if you’re growing $100 a month in the beginning and you continue that 10% growth like that, you can’t do that. You need to get it up—
Mike: But I don’t think that’s a fair comparison, though, because if you look at the way Drip was funded into, you said 21 months or so to get to that point? He’s talking about a completed self-funded company versus something where you put money in from HitTail. Those are two entirely different things. I don’t know all about the details of Transistor but my guess is that there’s a huge disparity in terms of the amount of code and the quality of code that needs to go into something like Drip because of the sheer complexity of it versus something like Transistor.
Rob: Yeah, that’s true. I was for the long entrepreneurial journey too, I would say. I had successes that I’ve parlaid into it. You’re right. It’s not a fair comparison. I shouldn’t say with the Drip but…
Mike: I was just arguing about the point of, if it was five years to get to the $20,000 in MRR, should you shut that down? I think it’s a very different answer based on what it is that you’re putting into it. If you’re dumping $200,000 into it, yeah, you probably should shut it down if it’s still going to take you five years to get to that. But if you put nothing into it, or $10,000 into it but it takes five years to get there, it’s like, “Uh, well, I don’t know.” It’s a judgment call.
Rob: It’s interesting and that’s the thing. When I think back in 2005, I started with DotNetInvoice, making a couple of grand a month. It took me until late 2008 to get to where I was making about $100,000 a year, between $100,000-$120,000 a year and that’s when I stopped consulting.
So it took me three and a half years. But again, I did it with no funding and I cobbled it all together myself. That’s the situation we’re talking. I wasn’t doing SaaS. I did it with these multiple products. I think if I was less risk-averse, I’ve could’ve done it faster. I think that’s probably what we’re talking about here. It’s getting a little bit more ambitious and trying to speed things up. How do you do that?
Mike: Part of being more ambitious these days, I think, is because you’re forced to, because of the level of competition that’s out there. You have to do something that’s quite a bit above and beyond what you would have done three or five years ago because the competition is there and people are going to be asking for features that they see in other products that you’re trying to compete against. If you don’t have those features, they’re going to say, “Well, I could pay the same amount of money to you versus this other product and they’ve already got those features so why would I go with you?”
You’re just not able to compete unless you have those features there that you can demonstrate. It’s not even just about the marking. It’s about having the things they need. If you don’t have them, they can’t go with you. It’s not even that they like you. They just won’t do it.
Rob: Yeah and that’s true. Again, funding even the way we’re talking about it, it’s not going to fix all ills. If you pick those markets that’s too small or you don’t build a good product, you’re not going to get to action. Or if it’s a market that people aren’t interested, or you don’t know how to market, you don’t have the experience, you don’t suddenly become an expert startup founder just because you raise funding but if you have the chops and funding is a big piece.
Time is a big piece because you’re only working nights and weekends. You can only put 10 hours a weekend or rather 15 hours. It’s a big difference if you can suddenly go to 40 or 50 hours with two co-founders. It doesn’t fix everything. In addition, does it come with complexity? Yes. You have to report to your investors once a month with an email. You can feel the stress of that.
That was actually something that I asked Justin McGill, Jordan Gal, and Matt Goldman, those are the co-founders of those three businesses that I mentioned earlier, CartHook, LeadFuze, and Churn Buster, and I said, “Hey, do you feel raising this money made things more stressful or less stressful?” They each have their own take on it. If I recall, Justin McGill was like, “It’s more stressful because I feel like if we don’t grow, we’re going to let you guys down.” A lot of the investors he has a lot of respect for. That’s one way it cut through. It can make it more stressful.
I don’t want to put words in people’s mouths but I think Jordan had said, “It’s more stressful but better because it motivates him to succeed.” you got to think about how your personality is and if you feel like it’s going to add more stress, if suddenly five or 10 people that you really respect, that are friends, colleagues, and fellow Microconf attendees write a check to you, how does that make you feel?
Mike: Yeah. I think the answer’s going to be different for every person, especially depending on what your product is like, what the expectations are, how you’ve position it, and how the investor views it. Some investors just say, “Yeah, I may lose all this and that’s totally okay,” and other ones may say, “I have these expectations and you’re not meeting them,” if you miss a deadline or something like that.
There’s a lot of dynamics and complexity there. Some people will thrive in it and some people won’t. I think at the end of the day, I also feel having money has the potential to make the downsides of your product or business model worse. It will just exacerbate some of those issues. If you don’t have a market that you can actually go to, if you think you do but you don’t, and you get a bunch of money in, I think it’s just going to make it worse because yes, you can try a bunch of things and you’ll be able to throw money on it, but then you’re burning more money than you would have otherwise.
Rob: That’s the thing. I know we’re going long on time but really important. I would not raise any type of funding before I have product market fit. That’s a personal thing because (a) your valuation is way last before then, and (b) no one is going to give you money if you don’t have a product, period. You have to have a product these days. You can’t raise money on an idea unless you’re Rand Fishkin, or Jason Cohen, or a founder who’s been there and done that.
You have to have a product, you have to probably be live or at least have beta users, your should have paying customers. That’s a bare minimum to even think about trying to raise funding. You have to get there. You have to write the code, you have to beg, steal and, borrow to get someone to write the code. But the valuation is going to be way less and you’re probably going to burn though a lot of that money just trying to get to product market fit. From the time you launch until you’re part of market fit, I’m going to say it’s 6-12 months if you know what you’re doing.
You see founders like Shawn Ellis, you saw Jason Cohen, you saw me do a Drip. You see people who are pretty good at it and know what they’re doing, and it still takes them six months, and ours still takes 9-12 months to do it. At that point, once you do it and you do kick it in a little bit of that growth mode where it’s like, “Okay people, are really starting to uptick it.” That’s when you pour gasoline on the fire.
But before that, I have seen at least one startup in the last year raise a small round before product market fit, and just burned through it really fast because they staffed up, do a lot of marketing and do a lot of sales, and it just that their churn was so high. That’s typically where you can tell his people aren’t converting to pay it or they aren’t sticking around. There are dangers there. Like a samurai sword, like a said in the past, it’s a weapon that you need to know what you’re doing with to wield well and I think you need to be smart about when you raise.
Mike: Yeah and it sounds like there’s obviously different takes on it. If you want to go down like the VC or angel route, series A funding down the road, I think it’s possible to probably raise money if you have any sort of history or relationship with them, like if you don’t have a product yet. But you’re still also going to get eaten alive in terms of the equity shares and everything.
I think that point that you raised about you have to have a product and you have to have paying customers before you start to go raise money, that’s how you maintain your equity, a fair amount of the equity, enough of the control to be able to what you want, need to with the business, and also be reasonable sure and confident that you’re not going to just waste the investor’s money and burn those relationships. You can use that money for good, and you know what that money will do for you versus you’re still trying to get to product market fit. You don’t know who’s going to but it or who uses it, or why.
Rob: Yeah and the once exception as I’m thinking about it is if you raise a big chunk, let’s say you raise $250,000 or $500,000 and you feel like you need to spend it, and so you staff up but your not part of market fit, you’re going to treat their money. But the exception I can think of, is like I said earlier. What if you just bought yourself 12 months of time and you didn’t staff up but you just worked on it, or 18 months. You didn’t raise this huge amount of money or raise a small amount to just focus on it and work, I could see doing that before product market fit. That would get you to the point where then you can raise that next round.
I’m not trying to be wish-wash but I’m realizing I never said never raise before product market fit but I did say I wouldn’t personally. But I have the resources to get me to product market fit and I could work on a full-time to do that. It’s an exception. If was I doing it nights and weekends, then I would take money before I see I have to think about where the advice is coming from or where the thoughts are coming from. I’m just thinking it through as if I were literally doing this nights and weekends, I would consider taking money as soon as I could. If I was going down this road because going full-time is a game-changer. Being able to focus full-time, being able to leave everything behind is a big deal. It really is and a night and day difference.
Mike: I know there’ll be a range of opinions on it, but I wonder what most investors would think about, somebody saying, “Hey, we got this product. I’ve been working on it and I’d like to get some funding and money in the bank, basically to extend the runway because I got a little bit of something going here, I got partial product in place, I got some customers, but it’s not a lot. I need runway in order to make it work but I don’t know specifically how much runway I necessarily need or how I’m going to get to having $10,000-$20,000 MRR, but I need time to get there. There’s something here but I don’t know what.” I think it’s hard to evaluate for anybody what that looks like.
Rob: Yeah. I don’t know of any investors today that would work with that. I think that’s a good thing to bring up. It’s like, is that a gap in the market then? Could that be a successful funding model of looking at people who essentially have the potential and have, like you said, pre-product market fit but have something to show for it and looking at backing them for a period of time.
Anyway, I love this topic and I think that we’ll probably talking about it again, just soon you’ll be hearing more on it from me, but I feel we might need to wrap this one up today.
Mike: Yeah. Great talk. I like it.
Rob: Me as well. So if you have a question for us about this or any other topic, call our voicemail number 888-801-9690 or email us at email@example.com. Our theme music is an excerpt from We’re Outta Control by MoOt used under Creative Commons. Subscribe to us in iTunes by searching for startups and visit startupsfortherestofus.com for a full transcript of each and every episode. Thanks for listening and we’ll see you next time.
In this episode of Startups For The Rest Of Us, Rob interviews Bryce Roberts of Indie.vc about their unique approach to funding startups and their terms. Rob shares his opinions on raising funding and angel investments.
Items mentioned in this episode:
- Current terms in Github
- Bryce’s Medium post on his learnings and adjustments to their approach
- Ycombinator thread about Indie.vc
Rob [00:00:00]: In this week’s episode of “Startups for the Rest of Us,” I interview Bryce Roberts from Indie.vc. This is “Startups for the Rest of Us,” episode 310.
Rob [00:00:18]: Welcome to “Startups for the Rest of Us,” the podcast that helps developers, designers, and entrepreneurs be awesome at building, launching and growing software products whether you’ve built your first product, or you’re just thinking about it. I’m Rob, and I’ve given Mike the week off this week. I have a very special guest joining me on the show today. His name is Bryce Roberts, from Indie.vc. If you haven’t heard about Indie.vc, they’re taking a really interesting approach to funding companies, and it’s much more around this “fundstrapping” approach that I’ve talked about before. If you recall, fundstrapping, which – Colin from Customer.iO is the first person I ever heard use that term. The idea is to raise a single round of funding to get to profitability, or to help you grow faster, but not to have this implicit series A that you need to raise, as Bryce says during our interview. To be honest, I’ve never been anti-funding. I’ve always been anti people thinking the only way to grow a software business is through funding and then to raise that funding and have it require you to sacrifice your lifestyle, to relocate somewhere, to need to commit to growing a $100 million company with 200 people on the payroll, just all this stuff that never made sense. I always wondered why can’t you just raise a couple hundred thousand dollars to get to that seven-figure revenue mark faster, or get their more efficiently, and then just pay investors back like a normal business does; like when you start a carwash, or a restaurant, or a drycleaner, and you borrow money. You’re not looking for an IPO.
[00:01:33] That’s the approach that I’ve started to take with my angel investments. Last three, I think, have been into companies that I believe will all be seven- or eight-figure SaaS companies; and they’re not planning to raise a round from institutional investors, ever. That’s the premise. They needed some cash to get to growth and to go beyond that. Indie.vc is doing a similar thing. We talked in detail about their exact terms. Of course, they have their terms published on GitHub, which is super cool, because you can look through the docs that I think you’d sign if you were to take money from them. Just a fascinating conversation here with Bryce, who’s really going against the grain of traditional venture capital. I think it’s a good interview. I hope you enjoy it. Thanks so much for joining me today on the show, Bryce.
Bryce [00:02:15]: You bet. Super happy to be here.
Rob [00:02:17]: As I said in the interim, folks just heard you run Indie.vc. I first heard about Indie.vc probably close to two years ago, and it was on Hacker News. There was a big discussion of – at the time, you had a long-form letter at Indie.vc – that’s your URL – and it was basically explaining this new premise, or a new investing ideology. It was about not having to have this $100 million or billion-dollar exit to make money, but that you wanted to fund businesses that could achieve profitability and didn’t need to be a unicorn in order to be profitable for investors. This was really groundbreaking, and at the time, I think it was anonymous. Is that right, the way you published it?
Bryce [00:02:59]: It was anonymous unless you clicked the one – there were two links on that original letter. One of them was to sign up for a slack channel that we’d set up to answer questions. If you clicked on that, it would go to my inbox, so you would see that I was at OATV. Otherwise, there was no messaging, or branding, or anything else like that on it. So, yeah, that created a stir in that Hacker News thread as well.
Rob [00:03:21]: What was your thought process behind doing that anonymously?
Bryce [00:03:24]: Thought process was, just as we laid out in the original letter, that it was an experiment. So, if for any reason that just was a failure, we didn’t get anyone interested in it, no one wanted to apply, that we could have it set up completely separate from OATV. If it didn’t work out, we’d just take the site down, and we’d move on and go back to our day jobs. Wanted a little bit of that abstraction, but also I think it’s a little bit a part of our brand and marketing anyway, which is not intentional. It just is – it feels like you ought to have to do a little bit of work to get to know us and to get to know what we’re trying to do. I think it creates a little bit of scarcity, a little bit of intrigue and that, as a result, it drew people a little more closely in.
Rob [00:04:15]: I remember feeling when I read the letter, because if I recall, it was in Courier font and stuff. It gave me the hacker ethos. It made me feel like the DIY ethic of, “This is really cool. It’s grassroots.” It was just a neat feeling. You’ve mentioned OATV a couple times. For folks who aren’t familiar with that, could you let them know what that is?
Bryce [00:04:32]: To be clear, the DIY is really important to us, that kind of really raw, bare bones. Everything you saw in that first iteration and most of what you see now is still – that’s just me writing, posting. That’s something that’s important to us and always has been. In terms of OATV, OATV is a venture fund that I helped co-found back in 2005 with two partners. One is my partner Mark Jacobsen, and the other is someone who’s pretty well known in technology, my partner Tim O’Reilly. “OATV” stands for “O’Reilly AlphaTech Ventures.” It was a seed fund that Tim and I and Mark started in 2005, when seed investing really didn’t have a name. It wasn’t necessarily a category yet; but we were probably one of the first, I would say, handful – maybe five – institutionalized seed funds that got going back then.
Rob [00:05:27]: Very cool. Could you talk people through the premise? I guess you had the experiment that went out a couple years ago in terms of the letter and vetting people. I know you started with a cohort approach, and I think you’re no longer doing that. I think you had a fixed amount you invested up front, and now you’re more flexible, based on the business. Could you tell people about where you’re at today, just so they have an idea of what is Indie.vc? How is it different than just a traditional venture fund in terms of from the entrepreneur’s perspective?
Bryce [00:05:55]: The history is 2005, we set up a seed fund to introduce a new kind of optionality for entrepreneurs, not necessarily just bridge between seed and VC, but actually create some options for folks looking to run cash efficiently. As you can appreciate, part of the whole premise and the whole opportunity around seed was that the cost for getting these businesses online, up and going was dropping significantly. So, whether it was open-source software, hosted infrastructure – you name it – all of those things were starting to drive costs down and making it more accessible to entrepreneurs, which is kind of conventional wisdom right now, but back then it was just some wild, wild thinking.
[00:06:35] So, part of what Indie.vc was a response to was ten years into running OATV, it had become clear that some of those options that we had hoped seed investing would introduce to folks had kind of fallen by the wayside. Those options, as we saw them, were you could take a small amount of seed funding and then go raise from traditional VCs. That was one option. The other two we thought were just as important for founders were you could raise a little bit of money, make a tremendous amount of progress, and without having to raise more money, without having to take on more of that dilution and oversight from VCs. You could sell relatively early for a smaller acquisition, say, sub-$100 million type of acquisition; and it would still be a meaningful return – likely a life-changing outcome for the founder, but a meaningful return to a small fund, which is what we got started with.
[00:07:29] The third was, given how little capital these types of businesses take to get going, and given how strong and just wide the potential for profit margins are, given how efficient these things are, there ought to be a path where you just raise a little bit of money and then you just run that business as long as you want to, based on your profits and revenue. So, ten years into OATV and this whole seed investing experiment, we were looking back and just saying, “Okay. Part of that promise we’ve delivered on,” and that was filling the gap between angel investors and VCs, but those two other options seemed to have fallen by the wayside as fundraising has become the business model for so many of these companies that are getting started right now. When we started, a seed round was 250k, $500,000. A seed round now can be up to $5 million, whether you include their pre-seed or their post-seed, or their A2, or whatever these things are, right? Fundraising was intended to be a pain reliever, but the way we’ve looked at it is that it’s now become this gateway drug to this larger, unicorn culture that’s been built up around startups. So, Indie.vc in some ways is a response to that to try to capture some of that optionality again.
[00:08:46] I think part of your question was how we get our returns. As you can appreciate, we are still a venture fund. We raise a pool of capital. We put that to work. Our investors expect a return on that investment, and I think the one dimension that was pretty unique to Indie.vc-style investing is that not only can we make a return in the event that a company goes public, or gets bought in an acquisition; we can also make a return if founder decides they want to run that business indefinitely and profitably. We can take our return out in something that we call “distribution.” So, if a founder wants to keep running that business, wants to be paying themselves, really reaping the benefits of running a large, profitable, growing business, we just take our return out in cash as that business continues to grow. That’s kind of – plain vanilla as that sounds, that was at the time, and continues to be, a fairly radical concept, given that the venture-funded model suggests that any dollar you take in you’re reinvesting in growth. The idea that founders would be taking money out to put into their own pockets seems to run counter to so much of what’s already happening in that venture-funded world.
Rob [00:10:04]: Yeah, for sure, and that’s what I liked initially about the Indie.vc model and what you’re still doing today. In a second, I’ll run through your terms, which are published on GitHub. You have the exact terms that you give everyone. I was having a number of conversations right as I started doing a couple angel investments a few years back, and my interest has never been in the unicorns. I would much rather have a smaller business that has a much, much higher chance of success. Typically, right now it’s going to be B-to-B SaaS, because that’s what I know. I want to be able to put a small amount of money to work. You know, “small amount”: 5, 10, 20, 25 grand – whatever gets money in – and not have to swing for the fences and not have to swing for an acquisition. I kept looking for models to do this, and the only one that I stumbled upon was the way that carwashes and brick-and-mortars are funded. Then when I saw that you guys were doing this, my head exploded, like, “Yes! Someone is trying to apply this to startups and software companies.” We know that, if they’re smaller, they can just throw off a ton of cash, you know?
Bryce [00:11:05]: Yeah. It’s interesting, because despite the original letter that was posted – it was actually posted January 1, 2015. That’s when that Indie.vc site went live, but the buildup to that was really probably five or six years of conversations. I remember having a conversation with a friend of mine who’d invested in a couple of restaurants, and I was wrestling with a lot of these ideas and asked how they structured that. Given a local restaurant isn’t likely to IPO, and it’s not likely to be their ambition to IPO or even get bought, I was asking how they structured their return. In having that conversation and a bunch subsequently with other types of businesses, I thought, “Man! The margins in a restaurant business are just so paper-thin, in general. Why couldn’t we be trying this with tech businesses?” where your margins are oftentimes 60, 70, 80 – I’ve even seen 90, 95 percent in the investments that we’ve been looking at.
[00:12:02] It feels like a real opportunity to pursue that model for returns; and, yet, it just runs so counter to the business model of VC investing at this time, that very, very few people would really consider executing that, at least at a fund level, like you said. There are some people who are trying to find those for angel investments, but from a fund level, it hasn’t been necessarily as attractive or as accepted, just because the model hasn’t been proven out just yet.
Rob [00:12:35]: Right. As listeners know, my startup Drip was acquired a few months ago by Lead Pages; and we had hit a point a few months before that where we were really having internal conversations about the possibility of raising a small round, because our growth was being hampered or dampened by the lack of cash. It was the first business I’d ever run where that was the case. All the other ones, I always had ample cash to grow them, because they were smaller businesses. But we were really talking about that, and there was no chance I was going to go down the traditional VC route. It just was not – I never saw Drip – even though it had the market potential to be large, it wasn’t in my interest to be the CEO of some –
Bryce [00:13:12]: Why is that? Why didn’t you think the venture path was the path for you?
Rob [00:13:16]: Because I honestly value my lifestyle a little too much. I didn’t want to have to relocate. I didn’t want – I have my wife and kids, and we have a pretty good life. I didn’t want to feel the constant pressure of, “Get to $1 million.” “You should be hiring more.” “Hire, hire, hire.” My friends who’ve raised VC, that seems to be the thing: you need to get head count up. The idea of running even a 30 – well, 30 was reasonable, but when I started thinking about a 50-person team, it was just not appealing. I think that – I know you don’t necessarily lose control with your first round, but I looked down the line and thought, “Boy, you raise a series A and then a B. If that’s the path, then eventually are you still running your company?” Have you pushed into the center of the table and said, “I need to get to $100 million, or I go bust”?
Bryce [00:14:06]: Well, it’s interesting, because that’s actually a conversation I had recently with a good friend of mine who we spun up our seed funds at roughly the same time. We were talking about this model, and he was expressing frustration around what he termed the “implicit A,” right? Even at a seed round – like you said, you want to believe that that first round of funding really isn’t going to alter your course all that much, but the reality is there’s an implicit A as soon as you take that seed round these days. Most of the advice and most of the effort and most of the incentives around that seed round of funding end up pushing you towards another round of funding and another round of funding. So, as harmless as it may feel like it is, it’s really become, like I said, this implicit A at the tail end of any round of funding; and that’s something we wanted to be a counter to. We wanted to, hopefully, present a different set of options for a founder.
[00:15:02] And it’s something we’re seeing now. That same situation you found yourself in at Drip, we’re finding there’s a large number of companies who have grown. They could really unlock a lot of value in their business with an extra $250k, or $500k, or whatever it is. There’s a couple of hires they can’t make out of cash flow; or, there’s a new line of business they can’t fund out of cash flow; or, there’s a new product that’s additive to what they’re already doing that they want, but they can’t fund it out of cash flow. It’s within that group of founders we really found a lot of resonance and, for us, a lot of potential investment opportunities. I think what we can offer to them is – it’s funny. We just had one of our quarterly retreats in Chicago this last weekend, and one of the founders who’s a part of the Indie.vc group of companies said something along the lines of, “This is just enough VC b.s.” It’s like we haven’t bought all of it, but there’s still a level of accountability. You still have a partner in the business that isn’t with you day to day. There’s still a much broader network for folks who maybe aren’t in the Bay Area that we can provide to them, that they can access.
[00:16:10] That’s really what we’re trying to provide: just enough of that VC oversight without necessarily the levers that so many VCs have, which are voting rights. They become shareholders, but they become shareholders of a preferred class of stock. There’s a lot of layers of control that you give up and also optionality that you take off the table when you go that route. Hopefully, what we’ve tried to do in structuring the terms of Indie.vc is address those in a hard-coded way, where everybody’s playing all their cards face-up so that we can offer to an entrepreneur a certain level of service and a certain level of capital, and they can play their cards up in terms of what it is they’re trying to build. As your audience my appreciate, when you go out to pitch that round of funding to investors, even – you’d mentioned you really value your lifestyle. You mentioned that you may not be the right CEO to be running a 50+ person team. If you walk into an office of an investor and make that presentation, you can’t honestly tell them that, right? You have to tell them about how this is going to become a multi-hundreds-of-millions-of-dollars business.
[00:17:24] We think that’s a real opportunity for us, and we think that the more founders are empowered to build the business they’re best suited to build, and that we can support in doing that, we think that those returns for us will still be every bit as compelling as the returns we’d be seeing in the traditional seed investments that we’ve been making.
Rob [00:17:43]: Yeah, that makes sense. That’s the key, is something you just touched on, which is there’re a lot of businesses that are really great businesses that I think raise funding and get run into the ground because they would be great 5, 10, 15, $20 million ARR businesses, but highly profitable; and they just go for the $100 million thing, and then they implode because they just can’t get there for whatever reason.
Bryce [00:18:05]: There was a fascinating post written – I think it was last week – by a VC, saying, “Here’s how you end up in a bad position with your board.” The scenario he gave was a founder who’d raised two or three rounds of funding. Their business was doing about $5 million a month. The founder couldn’t raise any more money. The founder couldn’t sell the business. Now they’re locked horns with their VCs. I think most people who aren’t in that unicorn echo chamber would say, “Wow. If I had the opportunity to run a $5 million-a-month software business? Sign me up for that!” right? But it’s that type of misalignment with the kinds of companies some founders are best suited to build and the things that oftentimes – I think the other disconnect, too, is just timelines, right? There may be a timeline in which that entrepreneur, if given that opportunity, could grow from $5 million a month and become that massive outcome, but not on the timeline that a VC really needs it to happen in, which is typically five years. So, they would much rather see that founder crash and burn and sell that business for parts, because for every month or quarter that goes by that they have to sit on that board and that business is consuming its time, it’s time that’s taken away from the potential unicorns that are already in their portfolio – if that makes sense.
Rob [00:19:23]: It does, yeah. I want to switch it up just a little bit here and dig deeper into the specifics of how you guys work. I’m on GitHub right now, and I’m going to link your website. You have a [medium?] post, and you have the GitHub repo, where you have all your docs. My understanding is that you invest typically between $100,000 and $500,000 into each startup, and you don’t actually take equity in the business up front. It’s only upon an acquisition that that would happen. Then the repayment – and this is where you’re based more on cash flow than on exit or liquidity [event?]. The repayment is 80 percent of distributions until you’re paid back two times your investment. Then it flips to – what does it flip to after that? Does it flip 20-80?
Bryce [00:20:08]: Yeah, 20-80. That’s right.
Rob [00:20:10]: Okay, perfect. So, that’s 80-20 to your fund until you get 2X back. Then it goes 20-80 to your fund versus the founders, and that’s up until 5X your investment. Then it stops. Is that correct?
Bryce [00:20:22]: That’s correct.
Rob [00:20:23]: Okay. So, the idea is if someone – there’s a bunch of Hacker News threads if folks search it, but there’s a conversation where you actually address specifically – someone says, “What if a founder comes on, and then they just raise their salary up to a bazillion dollars or whatever instead of taking out dividends?” Because it’s when the dividends are distributed when the 80-20 stuff kicks in. You have clauses that help with that, right? They can only raise their salary up to a certain amount, or by a certain percentage, based on from when you guys invest.
Bryce [00:20:47]: That’s right. There’s a bunch of different models that people have tried out around how to trigger these types of distributions. Several of those have been – they’ll tie it to profitability. They’ll tie it to revenue. There’s a whole industry that’s forming now around revenue-based financing, where they immediately start to take a percentage of the revenue that comes in every month, and they get paid back up to a certain return as well. What we tried to do was tie it to incentives, right? So, as you mentioned, when we make an investment, we aren’t a shareholder in your business. It’s structured essentially as a loan with no maturity date, so there isn’t an interest accruing, and there isn’t a date at which that note will be called back. The unique element to the one we’ve structured, as you touch on, our repayment is really tied to the incentives of the founder. If the founder wants to start taking a significant amount of cash out of the business, we share in that. We tie it to total compensation. If a founder’s total comp – let’s say it’s $100,000 when we make the investment. We allow them to continue, we want them to continue to grow and to pay themselves and be able to reap the rewards of growing their business. So, we say up to 150 percent of that initial baseline that we set, that’s yours. Once you start to pay yourself above and beyond that, that’s what we consider a distribution. That’s when the splitting, the 80-20 and then flipping to 20-80 occurs, is once they’ve decided that maybe they do want more of a cash-flow lifestyle business. We are fully in line or aligned with them around them being able to grow and run that kind of business. We just want to be able to share as that cash flow starts coming out of the business.
[00:22:26] In the case where we do become a shareholder, there’s really only two scenarios where that happens. One, the founder decides to raise a more traditional round of VC funding. If someone is running the business profitably for years, but they decide to end up going and raising an additional – bringing on VCs to really scale up because they now see their outsized opportunity, we just convert in as part of that round at a pre agreed-upon percentage of whatever that is. Then if they sell anywhere in there, we convert into common shares and go through as part of that acquisition.
Rob [00:23:00]: Very cool. There’s a comment on Hacker News from someone who is obviously an Indie.vc portfolio company, and he says – there’s a whole discussion of it, but he says, “This is why I enjoyed being part of Indie.vc: zero emphasis on pitching or raising the next round, no demo day. All the focus was on growing a real business.”
Bryce [00:23:19]: It’s like I said. We just did a meet-up in Chicago this last week. What we’re doing now is – we did our first cohort last year, where we invested $100,000 into eight companies, and each quarter we would get together with those eight companies and not work on their pitches, but actually work on their business. We would bring in subject matter experts for things that they were wanting to build expertise around. At the end of that year, we said, “We can continue to do this or not.” It was unanimous within the group that they’d like to continue to have these meet-ups, so this was our first opportunity to start folding in new members, new investments that we’d been making since the beginning of the year. The response from a lot of the new folks was really positive. They were really taken back by what it meant to just focus on revenue and growth and profitability.
[00:24:09] One comment I remember from the weekend was someone lead off their answer to a question by saying, “Back when I used to think raising money was cool, I did X,” right? At its most basic, part of what we wanted to really see is this idea that you become who you hang around, right? So, you have a group of companies now who all are focused on fundraising, and you plug into that group, guess what you’re going to start focusing on? You’re going to start focusing on fundraising. You’re going to start solving your problems with going and raising another round. What we’re seeing now within the group – and, knock on wood, a year and-a-half in, all of those eight companies are all still in business. Some of those have gone from standing starts to profitable. We’re seeing that there’s real value in having a group of like-minded founders who want to build their company in the same way that you’re trying to build yours, so that’s support in that network. So, we think that’s a pretty – it seems subtle, but as the Hacker News commenter mentioned, it’s actually a pretty powerful undertone to create within a group. In fact, we’ve now done five of these, and I can count on one hand the number of times we’ve ever even talked about investor presentations, or talking to VCs.
Rob [00:25:21]: That’s super cool. It does become an amazing sight now when I go to – I grew up in the Bay Area. I grew up in the East Bay, so the Silicon Valley culture was very much part of me, growing up. But when I go back now – I haven’t lived there for 20 years, almost. When I go back now, when I go to a conference or whatever, I’m struck by just the one-track mind. Everyone is just talking about the pitching and talking about the raising and talking about raising money. I keep thinking, “People are focusing on building slide decks rather than building businesses.” That’s kind of been my quote.
Bryce [00:25:54]: No, exactly. Like I said, fundraising is the business model of this new, unicorn-obsessed, startup cohort. I think there’s a real opportunity for us. We have some investments in the Bay Area, but I tried living in the Bay Area, and I know live in Salt Lake City, Utah. We aren’t geographically focused. We don’t just invest in the Bay Area. We don’t make people move to the Bay Area to be a part of what it is we’re doing. I think a line that really resonated in that original piece that I wrote at Indy.vc was, “Bloom where you’re planted.” We try to embody that both in the support we provide for our companies, but like I mentioned, we did our last retreat in Chicago. We try to expose our companies – one, visit the companies in their local markets and support them there – we have a couple companies that are in Chicago – but also give exposure to people who aren’t from Chicago to the way local founders, [the] local start-up community there works so they can see that it’s different from their home states, but it’s also different from how the Valley works as well.
Rob [00:26:55]: Yeah, yeah. I like the idea from your perspective as someone running a fund that you then have diversification across geographies, right? All of your eggs are not in the Bay Area basket and all not pulling from the same talent pool and all not getting in the same group thing. I think there’s advantage to the diversity you have there.
Bryce [00:27:13]: It’s been great, and it was fun because one of the folks who came to a dinner we hosted while we were in Chicago tweeted out after they’d left – this is a person who’d done the VC-funded startup thing. They’re a pretty well-known name in the startup community, and they’re just totally burned out after their last venture-fueled startup experience. They tweeted out after the dinner how energized they were, that it was so refreshing to be around these kinds of founders who’re actually building real businesses and how that reinvigorated them to be thinking and working towards their next company. I think there really is something to that. I think there’s a group of people who really want to have an impact, who want to build something that doesn’t necessarily rely on getting permission from an investor to be able to have it exist and have it to impact people in the world in a meaningful way. So, I love that that person at the dinner picked up on the energy, and we hope that there’s a lot more of that energy we can help unlock through Indie.vc.
Rob [00:28:13]: Sounds great. Well, thanks again, Bryce, for coming on the show. I really want to be mindful of your time today. If folks want to learn more about Indie.vc, they can obviously go to www.indie.vc. If folks want to keep up with you, is it maybe Twitter? What’s the best place?
Bryce [00:28:28]: Yeah, indie.vc is the best place. It’s kind of a jumping-off point, and you’ll also see a unicorn that’s burning, and so you might enjoy seeing that. For me, I’m @Bryce on Twitter. You can add-reply me. We also have a Twitter account that’s pretty active for Indie.vc @Indievc – one word – on Twitter. I’m not great at email, but if you want to email me, I will definitely see it. If it’s interesting, there’s a high likelihood I will reply to it. I’m just Bryce, B-R-Y-C-E, @OATV.com.
Rob [00:29:01]: Sounds great. Thanks again for coming on the show.
Bryce [00:29:03]: Thank you, Rob.
Rob [00:29:04]: If you have a question for us, call our voicemail number at 888.801.9690; or, email us at firstname.lastname@example.org. Our theme music is an excerpt from “We’re Outta Control” by MoOt. It’s used under Creative Commons. Subscribe to us on iTunes by searching for “startups” and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening, and we’ll see you next time.
In this episode of Startups For The Rest Of Us, Rob and Mike discuss work-work balance, living a processed based life, angel investing, and answer more listener questions. Mike also gives an in depth update on his progress with BlueTick, and Rob helps define angel investing and shares some ways to make a possible return on your investment.
Items mentioned in this episode:
Rob [00:00]: In this episode of Startups for the Rest of Us, Mike and I discuss work/work balance, living a process-based life, [angel?] investing, and more listener questions. This is Startups for the Rest of Us, episode #308. [THEME MUSIC] Welcome to Startups for the Rest of Us, the podcast that helps developers, designers, and entrepreneurs be awesome at launching software products. Whether you’ve built your first product or you’re just thinking about it. I’m Rob.
Mike [00:28]: And I’m Mike.
Rob [00:29]: And we’re here to share our experiences to help you avoid the same mistakes that we made. Wait a minute, was that the right thing? I wasn’t reading it.
Mike [00:36]: I don’t know. You tell me. I wasn’t listening [laughter].
Rob [00:38]: Yeah, I think – what is going on this week, sir?
Mike [00:42]: Well, I started rolling out the latest updates at Blue Tick, and this is kind of a massive release that I’ve been working on for a while now. But the core functionality of it is that it allows the application to download the actual contents of mail messages from somebody’s mailbox. The difficult thing behind it was actually that, depending on which type of mail server you use, there could be a lot of duplication in the mail messages that are behind it. So whenever you move a message from one folder to another on a mail server, it doesn’t move references around. It actually copies all of the data as well. So I basically had to run through this process of downloading the messages, and trying to find out if they’re unique or not, and storing them. It was kind of a mess. I don’t think I’ve ever written so much test code in my life for one specific function. Or for one feature, to be honest. Because there’s just so much involved in it.
Rob [01:35]: Yeah, it sounds like it. Why is this important for Blue Tick to have as a feature?
Mike [01:39]: People have been asking me to basically be able to surface just the content of the emails inside of the application, because they want to be able to log in, and when they’re sending emails through Blue Tick, they want to be able to see the replies, and what previous messages have been sent to the person. The only way to get that is to download them from their mailbox. So it makes it difficult to be able to surface that. I can show pretty easily the emails that I have sent, because I keep copies of those, but I don’t have any other way to show them emails that have been sent prior to them signing up for Blue Tick, unless I go into their mailbox and download them.
Rob [02:15]: Alright.
Mike [02:16]: So it basically provides them with a better history of all the different conversations. It gets more important in a team situation, because if you have multiple people who are on a team and User One sends an email to Sally, and then User Two sends a different email to Sally, you’ll be able to see those things in aggregate, so you can see what the team communication is with a particular person as opposed to just your own personal communication with that person.
Rob [02:39]: True. The bummer is that you had to build it yourself from scratch. I have to imagine that there’s not as much – well I guess with .net there isn’t as much open source stuff out there to do this. I know that when we tried to do stuff like this – we haven’t done this exact task, but when we have done stuff like this, like parsing RSS feeds, or just stuff that’s semi-standard but it’s a little [cloogy?]. There’s bits of [Ruby Jam?] written to do that and that we were able to use. Were there no components out there that did take care of this?
Mike [03:07]: Well, there’s components out there that allow you to interact with a mail server and download the stuff, but there’s nothing that says “Okay here’s this back-end storage system, and it’s a very generic thing, we’re just going to treat it like a database or something like that.” And you can wire up those pieces, but there’s nothing out there that directly translates a copy of the contents of a mail server into some generic back-end storage system. Because the back-end storage footwork can be pretty much anything. It can be a database, it can be a [nosequel?], it can be a file system. It can be a variety of different things. And all of the components that I used to get the messages are all of the shelf, but the back-end storage of it – depending on how you index things and how you want to surface the data, and what specific pieces you want to actually store, those are the pieces that I had to build. Anywhere where there’s questions about how do you search it, or index it, or anything like that? Those are the things that I had to also build. And then making sure that there’s tools in place that we can verify, “Okay, yes. We got this message, and we were able to get the contents. We built all the [indices?] and everything else.” And later on, my message might get deleted. So if a message gets deleted, then all that stuff needs to be updated. And then we had to build tools to make sure that everything got deleted. There’s no orphan data laying around, etcetera. It gets ugly very, very fast.
Rob [04:27]: This does not sound like fun at all.
Mike [04:29]: It is not. It was not.
Rob [04:32]: So, on my side, I wanted to call out a forthcoming e-book from MicroConf’s very own Kristoff Englehardt. And his e-book is SassEmailMarketing.Net and he’s obviously writing it for Sass Companies. He’s teaching about email marketing. And he did a video interview with me today. I’m assuming that he’ll include it as a bonus or something like that. So if you’re interested in that topic, SassEmailMarketing.Net, on another note, did you notice that our last two episodes went live almost two weeks late?
Mike [05:01]: That’s not technically true. [Crosstalk] They were out there.
Rob [05:06]: Right. That’s true. That is technically true. I got on Downcast, which is what I use on my iPhone a couple weeks ago on a Tuesday, and the episode didn’t come out. I thought, “that’s weird.” So I went to the website and, sure enough, it was live on the website. Well, I was thinking that maybe iTunes and Downcast got out of sync. Because Downcast – I think it must scrape iTunes or something like that. It wasn’t showing up. So it was several days later and you and I finally dug into Feed Burner, which is something we’ve used to for subscriber counts. Feed Burner got acquired by Google four or five years ago and they have just let it languish. So sure enough, something in there just snapped. Nobody cares, or was willing to fix it. I posted to their forums, I tried to email them, but there’s no help email address at all, support bounced, support@ bounced back to me. So I posted on their forums and it was like crickets. So we had to go nuclear on it and just switch everything over to a bare WordPress feed. The redirect is going, so hopefully everyone who is hearing this episode, it came up properly in your pod-catcher. But if someone is experiencing issues, feel free to get in contact and we’ll see if there’s any edge-cases that we’ve missed.
Mike [06:16]: Well, the problem is that if they’re hearing this episode then, obviously, they’re past the issue.
Rob [06:21]: Perhaps.
Mike [06:22]: [laughter] So it almost doesn’t matter.
Rob [06:22]: Although, a bunch of people were saying that they didn’t notice because they listened to the episodes on the website. Can you believe that?
Mike [06:28]: Oh, that’s interesting.
Rob [06:29]: I know. I would never have thought to do that. It just doesn’t – I mean, they’re on the website but it’s more for posterity, right? I guess the main consumption driver is really a pod-catcher. And I think 80% maybe of our downloads – because that was the cool thing. Feed Burner would tell you what percentage came from iTunes versus the Google downloads. It just had all these different divisions of your downloads. It was like 10-20% web and everything else was podcast apps. And of that, I think it was 80% or 90% iTunes. It was a huge consumption. Although, wait. That’s not true because Google had at least – they had the Android thing and it was like 20-some%. Anyways, I don’t remember the exact numbers, but it was nice to know. And we’re basically not going to have any of that data now. I mean, we do still use Blueberry I think it’s called. It gives us download data per episode, but the metrics in there are not very good. I guess we’ll just continue to fly blind.
Mike [07:20]: Yeah, that’s one of the downsides for podcasts in general. The statistics behind them that allow you to see kind of what’s going on, and what your listenership levels are. It’s atrocious. I’ve looked around a little bit, and talked to Craig Hewitt a little bit about it – he’s from Podcast Motor. And they’ve looked into potentially developing a product around providing statistics. I don’t know if they ever went anywhere with that, but the problem is that in order to get anywhere with those statistics you really need to kind of know – or at least be hooked into whatever the application or the platform is that the people are playing the podcast through. Because there’s a difference between a download and a play. You know, it could be thousands – it’s just like RSS feeds. There could be thousands of hits to the RSS feed, but is anyone actually reading it? And you really just don’t have any good way of knowing. That’s a very hard problem to solve, I think.
Rob [08:09]: Yeah, that’s kind of left out. I mean, since podcasting was bolted on RSS, and RSS by itself doesn’t have any type of analytics built into it, right? It just simply passes you a URL of a file. In this case, typically an MP3 file. And so what you’re saying is that when someone hits your RSS feed and then goes and downloads the MP3 file, your web server has no idea where that came from. It doesn’t know that it came from iTunes, it doesn’t know that it came from a pod-catcher or if it was played on the web and was just accessing it. So the cat’s out of the bag on that one and there’s not really much we can do to put it back in. But I guess that’s just the state of things. We can deal with it.
Mike [08:46]: The other funny part about this is that Feed Burner has kind of been on autopilot for Google since I think 2011 or 2012. So here it is like four years later and we finally decided to switch off of it.
Rob [08:57]: I know. Well, you know if things aren’t broken, you’re not going to spend the time and risk losing subscribers and risk potentially breaking anything. Any time I mess with this stuff I always feel like DNS propagation. You know that it’s probably going to work, but you’re not really 100% sure until it does. And there’s really nothing you can do to test it. You just have to do it. You just have to click the button and hope that everything redirects. And if it doesn’t and things start breaking it can kind of suck. So we have some listener questions that we’re going to run through today. I think that this cleans out – I don’t think we have any more listener questions in the queue, which kind of makes me feel good. We’ve had some of these listener questions in here since 2014. I’m sorry about that. It also makes me feel a little bad because people aren’t asking us questions. I feel like we should get these conferences filled again. So if you have a question for us that you’d like us to answer on the air, please send your questions to StartupsForTheRestOfUs.Com. So our first couple of questions are from Anders. Anders Peterson, who comes to many MicroConfs, you’ve heard us mention him on here before, said “One question I have is, do you have anyone in your life that continually asks you the hard business questions? Those questions you don’t want to hear but probably need to. If you do, how do you find those people?”
Mike [10:03]: I would say that I probably use my mastermind group for this kind of thing. When I have questions or problems I will bring them to them. But I also feel like in a mastermind group you have to be a little bit cognizant that over time you become good friends with people, so it can more difficult for them to essentially challenge you on the things that you’re doing, and really put your feet to the fire and say, “Look, you’re going in the wrong direction here. You haven’t made progress on this in a very long time, what’s going on?” They tend to be more intimately involved in the things that you’re doing, so they’re not as objective. That’s not to say there’s no value in having made a mastermind group, because I think there’s a ton of value. But I also think that because they are much closer to the situation – obviously you’re that kind of first tier where you’re very close to it and it can be very difficult for you to see the forest through the trees, so to speak. In addition to that, your mastermind group tends to be people who are also only one step removed. And then if you have a business coach or something like that, they’reprobably a little more removed from that, or even if you have just people that you meet at a meet-up or entrepreneurs that you meet a conference. Those people are even another step removed. I think as you get further removed, it’s probably easier to be more objective about things. And the conversation you’ll have, you’ll probably focus in on a few key issues versus the people who you are very familiar with who you’ve been talking about, they won’t necessarily question come of the assumptions because they’ve been there with you while you were making some of the decisions about those assumptions.
Rob [11:28]: I think for me it’s the same story. The mastermind people are going to be the people you feel comfortable enough with, or they feel comfortable enough with you to be willing to do this. Because if you don’t know someone very well and they ask you those hard questions, it kind of pisses you off. It’s like, “Who are you to ask me those questions?” But if you know that someone has your best interest at hand and they’re not trolling you on Twitter with a hard business question, but they’re actually asking it to help you maybe face up to some shortcomings or to face up to a decision you’re having or to call out bad decisions that you’re making or thoughts that aren’t valid. I think that’s helpful. So it has to be someone that you have a good relationship with. That you trust that they have your best interest at hand and that they’re not going to be a jerk and always ask the hard questions. Because if that’s all someone does, it’s going to get irritating to. You have to have a relationship beyond that. So I would say, yes, mastermind group. The other one is my wife. Sherri may not be inside the business and be able to ask the detailed business questions, but she does ask, as she’s hearing me talk about the same thing over and over over the course of a month or two months, she says “How are you going to fix that one? Why aren’t you fixing it? What can you do?” And starts prodding in there. And of course we have the relationship where we’re able to do that. The question of how you find those people, we’ve talked about finding folks for a mastermind. You’ve got to build those relationships slowly, build them over time, meet them at MicroConf, that kind of stuff. This is a good question. I think more people need to think about this topic. Who is it that is asking these hard questions, who has your best interest at mind and who knows enough about your business to know that it’s the right question to ask you? Thanks for sending that question along, Anders. Anders had a couple questions, actually. He said, “I’d like to hear more about how you handle work/work balance. I’ve talked a little bit with Rob last MicroConf Europe about how much time he spends on fun work and how much time he spends on crap work. What do you do to notice when the balance is off and how do you rectify it?”
Mike [13:19]: I like the phrase “work/work.”
Rob [13:22]: Work/work balance is cool.
Mike [13:23]: Yeah.
Rob [13:23]: I really like that idea of – it’s basically saying that not everything you do is going to be awesome every day, or fun every day. It’s like fun work versus crap work balance. Work/work balance is a clever way to say that.
Mike [13:34]: Yeah, but I can also see it coming from a large enterprise 500 company where they’re like, “Oh, there’s work that you do for us that you do here, at your desk, and then there’s work that you do at home while you’re not at your desk for us.” I guess for this type of thing I would say that if you look at the things that you’re doing and you’re finding yourself easily distracted from them and procrastinating them, then those are things that you probably need to figure out how to address. Is it something that you just need to power through? Is it a short term thing? Or is it something that you need to basically give to somebody else because it’s frustrating to you, you don’t understand it, or you don’t have the experience and expertise in order to do it? And I think that just being cognizant of what those things are and how you’re feeling about the work that you’re doing is important. It’s one thing to just say, “be more aware of it.” I don’t think that that’s the answer because it’s very difficult to become aware of it if you’re not already setting aside time to review those things. What I find is helpful is setting aside specific times at either the end of the day or the end of each week, depending on what you think the appropriate cycle is, to review what you’ve been doing and where you’ve been spending your time, and try and figure out if that’s the best use of your time. So it depends on what type of iteration cycle that you’re interested in achieving. If you’re trying to avoid those things where you’re stuck doing the same thing for several days on end, you might want to do a daily review. Even if it’s just five minutes set aside, a scheduled time, put a reminder in your calendar or do some journaling or something like that. If you’re okay with longer time periods where it might be a couple of days or a week or two, then you can space it out and say, “I’m going to do a review once a week, Friday at 3:00 P.M. or 4:00 or something like that.” When your week is especially winding down, put something in your calendar that says, “Let me come back and review what I’ve done over the past week.” So again, it depends on what that iteration cycle is, but the really important piece is making sure you set aside time to consciously review that as opposed to letting it be something that creeps in and then is a problem for days, weeks, or months on end and then suddenly you realize, “I need to do something about this.”
Rob [15:44]: I think that’s a really nice way to attack it – is to just review daily or weekly. Personally, I notice because I start losing motivation and I start not liking my job. I mean, that’s what it is. I’m the co-founder of the company and when I stop liking my job for weeks on end I realize I’m doing too much crap work and I need to figure out what it is. Then I start keeping notes at work. What did I do today that sucked? And I’ll do it as I’m going through. I don’t do it reflectively. I’ll realize as I’m sitting here in my inbox for five hours, okay, I need to figure that out. I mentioned this in several year-end reviews that I need to do less emails. That was something that was always there. Legal and administrative stuff and H.R. – there was a bunch of things that I was noticing would creep up as we were growing DRIP. So it’s work that had to get done, but it was work that I didn’t enjoy. Typically I’ll pick up on it because I’ll notice that I’m not enjoying stuff and then instantly the way I try to rectify it is I’ll identify, make a list, and then I’ll say, “Who can I hire to do this instead?” Like a specialist who is really good with administrative or really good with H.R. Because most of the things that you consider crap work is a job for someone else and it’s a thing that they enjoy. It’s just about finding the right person to do that for you.
Mike [16:56]: One thing that you mentioned in there that I think is probably not inherently obvious to everyone is that when you’re building your own business and you’re running it, you’d think that it would be like “this is going to be great, I have a job that I love because I built this job in order for me to enjoy it.” But the reality is that there are going to be aspects of running a business that you don’t enjoy. I think it’s just important to keep that in mind. Not everything about the business is going to be something that you enjoy. There are some thing you’ll just have to power through and there are other things where you’re going to want find someone else to do them.
Rob [17:26]: And then Anders’ last question was, “Have you ever noticed how most ‘normal’ people” – and actually, I like that phrase, “normals versus technologists” is a phrase that I’ve heard, but he says, “Have you ever noticed how most ‘normal’ people live an event based life? When I when the lotto, then I will become happy. When I get a new car, then I will be happy. Whereas it feels like most successful entrepreneurs live a process based life. I work on my business because it makes me happy, and because long term it will pay off. What is your take on this and where are you?”
Mike [17:53]: I would have to agree with that general assessment that a lot of people do live their lives that way, and they are always working towards these goals, but and they don’t always enjoy the process. They’re looking specifically for achieving that goal, but they don’t really look at anything beyond that. And they will make any number of sacrifices during that process thinking that the “I have arrived” fallacy that you kind of mentioned here on the podcast here before – the question is “what’s next?” What do you do from there? And if you don’t have an answer to that, it becomes very difficult to go on to the next thing, regardless of whether or not you were successful with the previous one or not. So you really have to think of a lot longer term than that. I don’t think that probably matters so much for people who are non-entrepreneurs because they have a 9-5 job, they go into work every day, and at the end of the day they go home and work on their hobbies and spend time with their families and it doesn’t matter. Because no matter what happens, they still have to go back to work the next day. That’s probably less of a problem for those types of people than it is for entrepreneurs in that situation where you could have a life-altering event – which is much more likely to happen, such as selling your business or selling your product, than win the lottery.
Rob [19:03]: Yeah. By its very nature, entrepreneurship is a constant state of forgoing present gains for potential future rewards, right? Your present day gains are things like you go out to Happy Hour, you could hang out and watch a movie, you could spend time with your family. There’s a ton of things you could do that are fun, but instead of that tonight you’re going to spend three or four hours writing code, building your business, doing some marketing. And over the weekend you’re not going to go out of town and go to the beach, you’re going to spend it writing sales copy and thinking through your pricing. That kind of stuff. That’s pretty much a perpetual state of affairs as far as I’m concerned as an entrepreneur. I think, Anders, you’ve made some generalizations here that I think are fairly accurate. I think that people who are drawn to entrepreneurship, they have to know they’re investing for something better in the future. So I do think there is that mix of – I think you can have the arrival fallacy as an entrepreneur because you can say, “Once I quit my job, then I’ll be happy. Once I sell my app, then I’ll be happy.” It’s easy to slip into that, but I do think the healthier and the long term entrepreneurs who make this more of a sustainable lifestyle realize that at a certain point you just have to be in it for the process. You have to find something in it that gives you the dopamine rush, right? And for some people that’s – Derek and I have talked about this – for some people it’s shipping a feature. It’s pushing a feature into production. And that’s the rush you need. And so you’ve got to find that and make that more of a part of your day. For other people it’s doing launches. Then figuring out what you’re going to do. An e-book launch, every other month for marketing? Could I do a video launch? Even if you have a Sass app, if what you really want to do is launch little products, because that’s where you get the rush from, then figure out how to do that. If you really love building a high-performing team, and working with them to solve problems, then figure out how to do that. That’s what it is, I think. Becoming happy and fulfilled by engineering a business rather than going for the end result. The end result – I mean, we talked about this with the Bill Walsh episode, right? Where he basically says to put your best effort in, be the best you can, and the score will take care of itself. That’s how I view this. It’s like the more you can make sure you’re happy and you’re keeping those around you happy, and making this a sustainable lifestyle, I think that good things will come of it eventually. Our next question comes from Kevin from Viper.io and he said, “I just wanted to jump in on a question. I love the show. I’ve been listening religiously and it’s overtaken all of my other podcasts. I have a question for you and hopefully you’ll have a chance to answer it. Rob, you say you do [angel?] investing in these fun startups. How do you make a return on those? I know some investors take a percentage of profits every month or something like that. Is that the structure you work with? Or are you banking on an exit? Have you made a return yet on any of those investments?” The fun strapping is where someone is basically trying to raise a small round. It’s typically between 50k and maybe 200,000/300,000 and it’s to get to profitability. So they’re not looking to raise a series A, B, and a C, they’re really just kind of raising a small round to grow quicker but to get to profitability. Last question is, “Have you made a return on any of these investments?” And the answer is no. I wouldn’t have. My first [angel?] investment was maybe three or four years ago. That was WP Engine and it’s now worth a bazillion dollars. I think their most recent round is public info. The most recent round was over a year ago and I think that they were valued at 120 million. So, certainly, my investments on paper are worth substantially more than when I first invested. That would be the business that’s the furthest along and there’s been no liquidity event or anything like that. Another part of his question is how am I going to make a return on these? Some of the investments are in big startups like WP Engine that are either going to get acquired or they’re going to IPO. I mean, there’s going to be a big liquidity event, as they call it. A chunk of mine – and it’s kind of what I’m focused on now because it just fits more with who I am and the business I believe have a reasonable evaluations are the ones that are going to be profitable businesses. These are not these moon-shot businesses. They’re businesses like Jordan [?]’s Hook and Justin McGill’s Lead Fuse and [?] from Matt and Joel – I’m an [angel?] investors in each of those. These are businesses that, I believe, they all absolutely have the potential to get to seven figures and maybe even eight figures in revenue. They’re going to be businesses that just spit out cash. They’re Sass businesses. And so gross profit on Sass apps can be something between 50% and 80%, and net profit can be between 20% and 70% depending on how you’re running it and how fast you’re growing all this stuff. So there’s a lot of money – a lot of cash – that can come out of these. So the deal typically is structured – and this is the same kind of deal that you’ll see at Indie.VC – is the money goes in and as long as the money is used to take care of the business, nobody takes money out. But as soon as dividends come out, a certain percentage goes to the investors. Some of the deals say that once the investors are paid back 3X, then things revert to a smaller amount that goes back to the investors. Sometimes investors get completely paid off, and are paid out at 5X. I think that’s how Indie.VC works. If they’re paid 5X then they’re own zero of the company anymore. And it’s only if the company were acquired before then that .VC would get it. I think that’s how it works. Don’t quote me on that. But that’s the idea. And each is a little different. I don’t want to speak specifically about the investments because the payment works private. The idea is, yes, while it used for the business nobody is making money. The founders are taking a salary, but there’s no dividends coming out to anyone. And then once they start taking that, a certain percentage which is negotiable – and it’s a different setup on each deal. Sometimes it’s based on how much you actually own. If you own 1% of the company, you get 1% of the dividends. In the others the investors are favored more upfront until they get paid back their initial investment, 1-2X. And then it flips. That’s the basic structure.
Mike [24:33]: I like the Indie.VC model, and I don’t know whether they pioneered that or if they’re responsible for pushing that, or if they were the first or whatever, but I like that idea better than the .VC model just because it’s more in favor of the entrepreneurs who are building it. I don’t think that you need this massive exit in order for it to be work it. I don’t know what your feeling or take on this is, but in many cases it’s not necessarily because you want to have this giant payout, but you want to see somebody be successful. You don’t want it to be a go-big-or-go-home, you want it to be something that somebody can grow into a viable and profitable business.
Rob [25:11]: That’s right. And those are the kind of businesses that I believe in anyway. Those are the businesses that I want to see succeed and that’s why I’ve started doing this model. And Indie.VC, I have seen their investor deck for people who become LP’s in their fund, the people that actually give money to .VC to invest. And they’re doing well with it. There’s definitely returns to be had in this fashion. This is also all modeled after brick-and-mortar businesses. If you want to start a restaurant or a car wash and you went to investors, a typical structure for that is investors do put up the money and you take a salary as you run it. Then as profits are generated and there are dividends, more goes to the investor. It’s often 80/20, 80% goes to the investors until they’re paid back either 1 or 2x, and then 20% goes out to the founders. It flips at a certain point. Sometimes there’s a maximum payout. Again, with Indie.VC 3x or 5x is I think where it maxes out. Where with brick-and-mortars, I’m not sure if it ever maxes out or how that goes. I think it’s more about a business that generates revenue, not this liquidity event. Right? In that sense, it’s funny – an app like Drip who’s long term play is become a profitable business has almost more in common than a dry cleaner or a car wash in terms of the business model, than it does with Facebook or Twitter where they really need to get massive or they’re just going to self-destruct. Our last question of the day comes from Jordie [Coski?] from TapFun.com. He says, “Hey guys, I’m a big fan of the show. I’m wondering how you would structure a salary for a lead developer on a Sass app. Would you build in any kind of performance structure related to revenue and revenue growth of the service?”
Mike [26:49]: I think that when you’re looking at this type of question, there’s two different ways that you can view it, or two different perspectives you can have. The first one is what role does that developer actually have in the development of the product? Are they a W2 employee? Or are they an external, third-party contractor? I think that depending on the answer to that, it’s going to heavily impact how you treat that person in terms of the compensation. So, for a W2 employee, obviously, you’re going to give them a salary. And this is really where the questions come in about giving them additional compensation or performance structure. If they’re an external contractor or third party that you just hired off of UpWork or LinkedIn or something like that, chances are really good that there’s not going to be any performance bonuses or anything like that. You’ve kind of negotiated whatever the contract rate is with them, and that’s what you pay them. It doesn’t really matter what their performance is, that’s what you’re going to pay them. If they’re a W2 employee, chances are this is where those questions will come in. And I think that in the case of developers, the vast majority of developers, there’s not going to be any performance bonuses, because it’s going to be very difficult to map the things that they bring to the table to the growth of the products. It’s very easy to write tens of thousands of lines of code that don’t really contribute to the bottom line in any measurable way. It’s very difficult to map those lines of code back to the performance of the product. You can write tens of thousands of lines of code that have zero to do with the product’s growth. That’s really what sales reps are for, that’s what the compensation record is for, compensation reps, people like that, that’s what they do. It’s to help them promote the product and incentivize them to grow the product. And they will do anything they can in order to do that. But with the developer, those mappings are much more nebulous. It’s very difficult to derive the impact on the product based on what it is that they do. So those are probably my general thoughts on it, in terms of offering equity or a stock plan or anything like that. Those things are all really negotiable. It kind of depends on what your relationship is with the developer and what the company culture is and how much money the app is making. You could do profit sharing or revenue sharing, those types of things. There’s lots of different way to go, but it’s also very situationally dependent. And I don’t think these are things you have to look at or really need to consider on day one when someone comes in. If you have a team or five or ten people, then maybe it’s something to think about. But for your first develop or two, I wouldn’t worry about it at all.
Rob [29:16]: Yeah, I agree. I mean, you have to think about A, motivation, and B, what’s kind of the standard and why has that arisen? And the standard is not to give anybody but sales people a cut of profits. I mean, that’s typically the thing. Even people in marketing, as a rule at startups, they’re not getting a percentage. You know, they may get a bonus at some point or they may get stock options, but they don’t get a cut of the profits. Because you need those profits to grow. Especially at a small Sass app, you really want that money. I think something like stock options, which is really good for retention, because they invest in it over the years, I think that’s cool. Because then everyone feels like they have ownership. Also think about motivation. Are developers motivated by money? I mean, some, yeah, maybe. But developers are much more motivated by having really cool problems to solve, and working in an environment that’s fun, and being able to ship a lot of code quickly. There’s certain things that are just more valuable than a few thousand dollar bonuses that they’re going to receive each quarter or each year. So that’s not something I’ve seen done, and it’s not something I would particularly recommend. Giving people bonuses at some time during the year, or doing profit sharing, or setting up some plan later on down the line I think totally makes sense. You want to take care of your people. If your business is making money, you should share it with them. And giving people stock ownership is cool, there’s lot of different options. But up front, having that be part of the deal, I think is really tough. You could easily give away more than you need to or want to because you just don’t know what the business is going to look like. Get farther down the road, get this thing live, and when things start happening then make that call.
Mike [30:41]: As you mentioned kind of early on in that answer, it also depends on what their motivations are. So, just thinking about giving them equity, some people might not care about equity at all. So you have to understand what their motivations are for that kind of thing. It might not impact their productivity in any way, shape, or form, and you just gave away part of the company. You have to keep those things in mind as well. I think those things take time and it’s not something you will want to necessarily decide on day one. So I think that about wraps us up for the day. If you have a question for us, call it into our voicemail number at 1-888-801-9690, or email it to us at Questions@StartUpsForTheRestOfUs.com. Our theme music is an excerpt from “We’re Out of Control,” by MoOt used under creative commons. Subscribe to us in iTunes by searching startups and selecting StartupsForTheRestOfUs.com for a full transcript of each episode. Thanks for listening and we’ll see you next time.