By April Pedersen
Read any of the tech news over the past couple of years and you’d think the only path to building a successful tech business was to drop out of college, learn to code (or find a technical co-founder), raise millions from VCs and then get acquired based on number of eyeballs or something other than revenue and/or profits.
Read many of the tech start-up blogs – both from investors and entrepreneurs – and you’ll also find oodles of information on raising money, growth-hacking, getting press and exposure and all the glittery things that supposedly come with being a start-up.
While I told myself that I’d refrain from using our company blog to post start-up advice, I just can’t help myself. I have some vital wisdom to impart!
Dear Tech Entrepreneurs: it is possible to start (and even grow) your business by bootstrapping.
In fact, it’s even easier today than it was 10 years ago when Chris and I started our first tech company known today as Salsa Labs. Back then, we had major infrastructure costs to support a SaaS business. What once cost $40K/mo, now costs $40 thanks to Cloud technologies. Technologies like Node.js also didn’t exist 10 years ago, there was no such thing as JSON and APIs were in their infancy.
We started “lean” before “Lean” was a thing because that’s all we knew at the ripe old age of 27 with no MBA between us. For us, it was all about the product and our vision/mission for what it could achieve for our clients. As far as we were concerned, there was no other way but to build a business the old-fashioned way: Acquiring and supporting clients, quickly iterating on the platform, growing staff as cash-flow allowed and steadily increase profit margins all while staying in the black.
In fact, that’s precisely what we did from 2004-2011. We had nearly 30 straight quarters of growth at a rate of 30-40% year-over-year. We bootstrapped (taking no salaries for a year) to nearly 70 employees, 2K clients and $6M in revenue. We did this with virtually no press or focus on ourselves. It was incredibly rewarding knowing that our success was due entirely to our hard work and that of the team we assembled.
It was only when we got caught up in the euphoria and hype of VC that things started to take a turn. Our assumption was that raising money for a successful company that didn’t need to raise money to succeed would A) be easy; B) propel meteor-like growth; and C) raise our profile to help us beat our tech-inferior competitors.
All three of these assumptions were wrong and many mistakes resulted, chief among them believing that experienced VCs would have a better idea about how to grow our company than we did. After all, we didn’t have MBAs, successful exits, or even grey hairs to show for our success thus far.
Raising money wasn’t easy despite what we thought from reading too much TechCrunch and seeing mere ideas being funded to the tune of $10M. It took a ridiculous amount of time away from building the business for countless pitches across the country, endless meetings, rejections, negotiating, legal, due diligence – all before the check was signed!
We loved growing our business, we hated raising money. (On a personal note, I was more often than not the only female in the room, which made me detest the process even more. In fact, our final pitch meeting was around a very large boardroom table with approximately 15 men – mostly over 50 – and NO women. Nobody acknowledged this except me).
Our second assumption about pouring our $5M raise into marketing and sales to achieve meteoric growth was also disproved. Growing primarily through word of mouth, we’d never had much of a marketing budget. Because we didn’t have a marketing program, we didn’t have any way to prove that adding fuel to the fire would help us grow faster. At the behest of our investors, we were pressured into hiring both a new VP of Sales and VP of Marketing quickly (from their pool of candidates). The result? $3M down the drain within 1.5 years with no discernible difference in lead generation, client acquisition or growth.
Despite years of experience and success, old marketing tactics didn’t work in our space. Old sales tactics didn’t either. Just because something worked for another company, doesn’t mean it will for yours. That is where domain/sector expertise and knowledge becomes not only necessary, but critical. And that is one thing bootstrapped founders typically have in spades.
This is also one of the many reasons we decided to start a new company in the marketing technology space. Marketers absolutely must have a way to measure their effectiveness and their ROI across channels in near real-time. For some businesses, marketing is just gravy, but for others it is everything. It’s no longer acceptable for CMOs to say they’re going to spend hundreds of thousands of dollars on any given campaign without some proof that the approach will work.
Our third assumption about using the investment round to raise our profile enough to beat out competition with inferior products was quickly proved false (and quite naïve). We’d have needed a lot more than $5M in order to do that. The competitors – some publicly traded – would always have more money to throw at marketing and sales than we would.
The only way to possibly beat them was to continue to out-innovate and innovation came to a screeching halt once we had investors and spent all of our time pouring over financial spreadsheets and KPIs to give us insight into our business.
I’ll save other lessons learned for another time, but here are the top three reasons to bootstrap your business until you really need to and are fully prepared to wisely spend the money:
This, of course, is the biggie. Bootstrapping gives you the flexibility to make mistakes along the way without the fear of your VCs pulling the plug or replacing you.
Want to be your own boss? Don’t expect that to be the case if you take on investors. A VC gives you money; you report to them. For us, we gave away too much control (Board seats) for too little and it ultimately cost us everything – including friendships.
The most precious resource isn’t money. It’s time. When you are bootstrapping, you must have a laser-focus on creating value for your customers because it’s the only way to keep the lights on and your employees taken care of.
We’ve seen this first hand: fundraising is addictive to some. There are CEOs who get a taste of it and start to develop strategies that revolve around raising more instead of focusing on building a sustainable business.
When you have to make dozens of important decisions everyday around hiring, firing, product dev, pricing, partnering, legal, etc., at some point you learn to trust your instincts, react quickly and pivot quickly when needed. Bootstrapping gives a level of importance to each decision, allowing CEOs to see what is worth their time and resources.
Bootstrapped companies are generally more effective at iterating, carefully honing the business model and building a strong foundation for consistent, sustainable growth. It encourages creativity and resourcefulness that every business owner should have.
Chris and I were obsessed with consistently making the product better for our clients, knowing that ultimately it was our deep connections to them and their needs that would continue to help us grow and that product vision shouldn’t be left to a VP of Engineering who had never met a single client.
You can’t build a business by staring at spreadsheets all day in preparation for the next Board meeting or by simply tweaking your marketing mix. Your finger must be firmly on the pulse of your employees, your users and your market. Bootstrapping ensures this.
Successful founders have a clear vision of what they want their company to be. They approach it from a place of purpose and passion. With each additional stakeholder, someone else’s vision, motivations, and experience are inevitably absorbed.
When we went from having meetings about long-term strategy, community building and product development to obsessing over quarterly numbers is precisely when I (and many of our employees) started to lose interest.
Taking investment money also resulted in a shift in our organizational culture that didn’t represent our values or the values of many of our employees who came to work for a company whose mission was based on helping progressive organizations make a difference in the world. Most of the new senior hires that were made had no experience in our sector.
Culture, purpose, passion and determination to succeed aren’t easily replaceable qualities and once they’re gone it can spell disaster for your company.
With all that said, you may be wondering if we’re going to bootstrap our new company, Frakture. We are not. With this company, in a crowded and growing market, there is a significant opportunity cost if we do not.
We did decide to put raising a seed round on the back burner for the past year as we set out to build the product, the company, ensure product-market fit and get it to a place where it’s a no-brainer for investors. That is where we are now and we’re going to wade cautiously back into the process to raise $1M – taking all of our experience and wisdom with us.
We are looking for investors who believe in the makers, the technology, the vision. More than someone who can simply write a check, someone who will provide access, open networks and provide mentorship in a non-dictatorial manner and are all-around good people – the kind we’d want to have a beer with. At this stage in the game, we wouldn’t settle for less.