The Advantage of No Funding (2011)

by Max_Ehrlich • 4 years ago

91 55 4 years ago

Then they would talk about LOI, ROI, NDAs, IPOs, and all kinds of things that also had nothing to do with actually helping people.

Coming from a bootstrap background, I feel that VC backed companies have a tendency to focus way too much on vanity metrics. KPIs that make the buisness look successful, without measuring real conversions. It's like building a business purely to make a nicer looking pitch deck.

That, plus way too much emphasis on the financial/equity structure of the startup. Founders are carving out employee option pools before making their first dollar. And this focus on equity/investment/reporting becomes the CEO's full time job, when it should have been dedicated to customers.

micromacrofoot3• 4 years ago

That's because VCs need an exit to make their money. They only care if the business is successful insofar that it can be sold or IPO.

exdsq2• 4 years ago

Can VCs not profit share to hedge their bets to get an X multiple on their investment back too? Sure some won't be profitable but if I was to invest I'd want some way of recouping my investment back over time and then the upside of a sale/IPO.

picardo• 4 years ago

VC backed companies have a tendency to focus way too much on vanity metrics.

Well-run companies focus on the right metrics. Badly run companies focus on vanity metrics. There is some of both everywhere in the business world, not just among VC backed companies.

solatic2• 4 years ago

Never forget that absolutely everything you do is for your customers. Make every decision — even decisions about whether to expand the business, raise money, or promote someone — according to what’s best for your customers.

Right, this isn't really about whether or not you take growth funding. This is about minimalism and focus.

The fact that some people who take venture funds see fit to use those funds in a vain way, doesn't mean that you're forced to use that kind of funding in a vain way. Indeed, you're more likely to succeed if you use the funding modestly, with humility, focused on where it can provide the most business growth.

tnzk• 4 years ago

The fact that some people who take venture funds see fit to use those funds in a vain way, doesn't mean that you're forced to use that kind of funding in a vain way.

Most of them force it actually so they believe invested to the right company. The best VCs won't, not all VCs aren't though.

horsawlarway2• 4 years ago

Most of them force it actually

This is my experience. I literally watched the VC board at a previous company get mad at my then CEO for not spending their cash quickly enough.

Moreover - he was hardly the most fiscally responsible to begin with - exorbitant class A office space, expensive contractors, fully stocked kitchen and snacks, game systems and bean bag chairs in break rooms. Paying customers? Nah - not so much.

But they wanted him to spend FASTER. "you need to adjust spending to be at around a 6 month runway - currently you're at 18. That's too high - spend more!"

My thoughts on the process are two-fold

1. A short runway and high expenses offer opportunities for those VCs to double down in the inevitable next round sooner, at rates more favorable to them

2. They are gambling - they want to either hit the jackpot or bust. They do not want to sit at the table all day (for example, by running slow growing self-sustaining company)

ilamont2• 4 years ago

Never forget that absolutely everything you do is for your customers

Hard disagree. I certainly want to keep my customers satisfied and provide them with value, and they (along with employees and partners) are absolutely necessary to the success and continuation of the business.

But the number one consideration in any business are the needs of the owner(s), which may include financial, a desire to grow the business, family considerations, physical health, mental health, and many intangibles related to self worth, discovery, personal growth, creativity, and community.

If you can't find a balance, the business ends or gets sold. Or, the owner suffers damage, sometimes irreparable.

bryans2• 4 years ago

Hard disagree. I certainly want to keep my customers satisfied and provide them with value, and they (along with employees and partners) are absolutely necessary to the success and continuation of the business.

If your customers are only satisfied, that means you end up spending significantly more on acquisition and retention, because nobody is going to be rabidly loyal enough to your business to extol its virtues to their friends and family and colleagues and on social media. That hobbles your growth and virtually eliminates the potential for word-of-mouth. People don't tweet about how a product "is satisfactory and provides an adequate amount of value."

I'd recommend checking out an amazing talk on exceeding customer expectations[1] by a Seattle business coach named Brad Worthley. And I get it, anybody (other than John Madden) with "coach" in their title is almost universally someone to avoid, particularly when they start their talk by mentioning the books they've written, but this guy really does understand how those customer dynamics work. He ELI5s the whole topic, along with excellent anecdotes to show each of the concepts in action.

And I assure you, things work exactly how he describes. If you bend over backward for them, your customers will take care of you. But if you treat them as a "necessity for the continuation of the business," they're not going to care about you at all, which means they'll leave you the minute something better or cheaper comes along -- or the first time you make a mistake.

[1] https://www.youtube.com/watch?v=40eyo7cgJ7w&t=4m30s

pier25• 4 years ago

(2011)

ojbyrne• 4 years ago

Not to mention that the anecdata is from 2000-2001.

palindrome818• 4 years ago

There's also the worry of having TOO MUCH funding- Chip Wilson (LuLuLemon founder) had this problem with his second company Kit and Ace. They didn't have the same edge that they had when they started LuLu.

The confine of having little to no funding forces you to be agile and creative.

rwmj• 4 years ago

There's also a disadvantage which is that you worry day to day about finding salary at the end of each month. I found at my startup this made it difficult to concentrate on the bigger picture of developing the product.

anonymouse008• 4 years ago

There's an incredible book, 'The Eureka Factor' by John Kounios, that explains this point in detail.

A brief note to your point: for many intuitives and creatives, a base net of safety is required to allow your brain to think outside the box. It even goes as far as to say with an abundance in resources, more creative things occur.

I've been suffering with you (in kindred spirit) for a few years now and am looking forward to attracting the resources to unleash.

qiskit• 4 years ago

Another disadvantage is you miss out on contacts, industry expertise, etc. If you find the right VC truly interested in helping your startup grow, they can be an incredible source of knowledge and networking.

devops000• 4 years ago

Totally agree. I think this crazy belief about raising money as a priority was driven by the low interest rate environment and broad acknowledged success of big tech. With lots of money every body wants to find next Google and are willing to invest. At the same time, having a loss company is not anymore a shame, it’s a success because also AMZN was unprofitable.

I really hope in next years, with higher interest rate, financial markets downturns will bring attention to profitable and bootstrapped companies.

truted24• 4 years ago

How does a low interest rate affect investment? In the end you still need to return the principle so is the idea that it just offers you smaller loan payments (ie. More time for your investment to succeed)?

csa• 4 years ago

How does a low interest rate affect investment?

More capital is looking for returns and is effectively willing to take more risk (like funding VC startups) to find those returns since “safe” investments return almost nothing.

karterk• 4 years ago

My co-founder recently wrote about our deliberations on fund raising as an open source company here: https://typesense.org/blog/why-we-are-not-raising-funds/

Ultimately, there is no golden rule. One has to choose what's best for your customers and your stage of growth.

jlokier• 4 years ago

Interesting article and rationale. I was particularly struck by this, which I've seen happen but haven't understood it in these terms until now:

We’ve seen more than a few companies raise millions of dollars in funding, go out and hire an army of people in an attempt to grow faster. However, unlike most other software products, search tech is an inherently hard thing to get right. It requires a lot of tedious R&D iterations over long periods of time and it cannot be parallelized by having X number of people working on it in parallel.
When a large team congregates around work that cannot be parallelized, we’ve observed that new work gets created to keep everyone busy - new nice-to-have features get worked on. This ends up adding complexity to the product. New team routines are invented because there’s bandwidth available. This ends up adding communication overhead and layers between users and builders and slows down the pace of innovation. This sadly becomes a vicious cycle that dilutes the core product.

(I'd go further than "diluted" - sometimes the essentials of the core product remain broken for years because all the energy goes to managing those side features, even though they don't work properly with a broken core.)

daibo• 4 years ago

There are just the two of you working on typesense right? Surely having some more people working on the core product (up to five?) should help, no? I'm also building an Algolia alternative, with three engineers including me working on the core engine, and sometimes I wish I had one or two more.

Kalanos• 4 years ago

simpler cap table, easy acquisition, long runway, people are willing to help you

lbriner• 4 years ago

I agree with a lot of the spirit in the article but I don't think learning to code from a book because you can't afford a dev is not a great example.

How many people lost their crypto-currency because the exchanges were written by people with no experience/training in development (or security specifically).

The counter-point is to buy in people who can do better than you can for less money. In other words, if a Developer can build what you need in 1 week for $1000 (in 90s money!) what would otherwise take you 6 weeks, are you saving money or wasting it? We don't always count our own time as money but it is if you could be much better placed to sell or market your business.

sivers• 4 years ago

Depends what you're doing.

I was selling CDs from my living room. Making $300 per month.

It was the appropriate solution for the situation.

fairity• 4 years ago

Hi Derek, just wanted to say that your book Anything You Want had an outsized impact on me when I started my entrepreneurial journey many years ago. And, I used your "CD Baby Loves You" open rate learning to great affect many times for my own businesses :). Thank you for being so open and sharing your hard-earned wisdom!

mediaman• 4 years ago

Doing a financial product as a green self-trained dev is not a great idea. But it's also a straw man. There are many great products that don't need to handle millions of users, or are not handling bank connections, that can be bootstrapped by smart people willing to put some work into it.

If they are okay with slower growth, those people will learn a lot, may build a viable business, and will not have to deal with the stress of dealing with the board and constantly raising money.

There are many, many 5-10 person companies (or less!) that have been bootstrapped, that make a lot of money, and that have very happy founders with happy customers, and whose founders have no pressure to sell out or do things they don't want to do. The main cost is patience and willingness to not be a glitzy success story in the papers. Nobody is paid to encourage you to take this path, except for you.

robertlagrant• 4 years ago

their weekly promotion parties

Yes! So much free money flowing into startups that it can be hard to trust the rapid-ascent careers of people who just locked into that business early on and are now key, but only for that business.

deltarholamda2• 4 years ago

the desks were just planks of wood on cinderblocks from the hardware store

While used as an example of bootstrapping, I have to say that one of my favorite desks ever was a solid-core door on cinderblocks.

You can adjust the height to your specifications with bricks or wood shims; the cinderblocks can become cubbies for holding various bits and bobs; you can paint the door whatever color you want cheaply; it can take a huge load, as I had two giant 20" Radius monitors on it.

I even experimented with giving the desk a slight upward angle with shims, which worked pretty well.

manwe150• 4 years ago

Solid-core doors (new) seem to be a bit north of $250 at the lower end: https://www.homedepot.com/p/Masonite-30-in-x-80-in-Roman-Smo...

I think I have seen standing desks for not much more

At least the cinder blocks don’t add much cost at $2 each retail

askafriend• 4 years ago

Seems cheaper and better to just pay $500 for this: https://www.fully.com/standing-desks/jarvis/jarvis-adjustabl...

brianwawok• 4 years ago

You can get doors from a salvage store for a few 10s of dollars

micromacrofoot3• 4 years ago

You can usually find them second-hand, though that might get harder as wood prices continue to skyrocket.

deltarholamda2• 4 years ago

This was something like 25 years ago, so the economics were different.

Since you don't have to support giant CRT monitors anymore, unless you're one of those people, a hollow-core door does just as well now. Not that they're much cheaper. Nowadays, you have to haunt building demo sites and go dumpster-diving.

jasonwatkinspdx• 4 years ago

When a company I was a part of did the door desk thing, we got them from a place that trades in reclaimed building materials. I wouldn't be surprised if Derek went to the exact same place in Portland actually.

exdsq2• 4 years ago

I don't understand these prices - 28x80 is more expensive than 30x80 but cheaper than 32x80

truted24• 4 years ago

You forgot to mention the door knob hole is perfect for cable management.

thoraway77f• 4 years ago

In 2011 I bought $300 in various lengths of 1/2” plumbing pipe, couplers, and flanges, and one sheet of smooth plywood.

From it I made a standing desk, and a seated desk, both on four legs.

In my current home the same desks are now supported by two legs in front, with the back edge screwed to 2x4 mounted on the wall.

Moving again this year and will take the pipe but replace the plywood as it has a lot of screw holes, ugly holes for cables I made in a rush. Maybe, we’ll see. Seems like I’d have issues securing it since the holes are in just the right places already, but I might have a go in order to keep my desk budget at $300 in 2011 dollars.

The pipe is so sturdy I expect to never need to replace one piece of that.

nkozyra• 4 years ago

I used the door + two filing cabinets system for years.

I've since found the next best thing, which is the Malskytt solid birch table top on top of their $15 solid pine trestles.

It's a visual upgrade. I have two, giving me ~ 9ft of solid wood workspace for ~ $200.

I've also made my own custom desks but I got obsessive about them and built every feature known to man into them. The only thing I've done with these is drilled grommets for the cables. In reality all I need is a solid workspace that will last.

munificent• 4 years ago

I did a similar DIY solution:

1. Bought two long butcher block countertops from Home Depot. Stained and sealed them myself.

2. Bought some IKEA bookcases and desk legs.

Finishing the wood was a lot of work. I ended up doing about six coats on each piece. But for a very good price, I know have an enormous 8'x8' L-shaped desk that looks gorgeous. I wish it was a little deeper since countertops aren't quite as deep as most desks (24" versus 30"), but it's mostly fine.

Pic: https://imgur.com/FFBpMAc

daenz• 4 years ago

What if you're experiencing rapid growth and not sure if you can afford it? Investment is basically required at this point, no?

svantana• 4 years ago

Not necessarily, you could:

1) get a loan - with good numbers, banks are easy(er) to persuade

2) put up a waitlist for new users (induce FOMO)

3) increase prices

Of course, these are antithetical to the VC mantra of maximum growth at all costs. But what's best for them is not always what's best for you.

truted24• 4 years ago

There is also cost cutting. I personally experienced very high hosting bills unexpectedly and then spent a month changing my infrastructure to run for almost free again. I personally prefer these optimization challenges over borrowing money. Self-reliance is important for some people.

vidarh• 4 years ago

Depends. If you have a business model that means new customers becomes profitable for you sufficiently predictably and quickly then funding sudden growth with bank loans is often doable even for quite high-risk businesses.

If your bank isn't prepared to and you're struggling to handle the growth and you don't want to find an investor, maybe it's worth considering raising prices for new customers until you find a balance that works for you (or a balance that makes your bank reconsider)

One of the tradeoffs of not taking VC funding is often accepting that your growth is likely to be slower for all kinds of reasons, including sometimes being forced to intentionally slow it to a manageable level.

unixbane• 4 years ago

yep, this is common sense. now the next article we have someone will complain that they dedicated their life to some dumb startup and rejected funding and "their life is ruined" because they didnt take the easy $300K starting salary to make a techspam company.

nunez• 4 years ago

oh course the rub here is that you need to have money to spend to bootstrap, which implies being able to save enough money to bootstrap, which not everyone can do.

frans2• 4 years ago

VC's invest in 30 companies to find 1 unicorn on average. The profit on that one justifies the investment in the 29 others.

Problem is that no one knows which one is going to be the hit in the pack of 30. So VC's push all ceo's to grow as fast as possible to find out as soon as possible who will succeed/fail.

Great for the VC, too bad for the 29 unlucky ones.

Never be the agenda of someone else, be your own agenda.

I never understand why so few people see this.

truted24• 4 years ago

Since the money has already been invested they probably don’t care who succeeds/fails but they want the unicorn to give returns ASAP so they can be spent before they die.

frans2• 4 years ago

You are probably right, but when the money first arrives in the bank you need to 'spend' it asap and may take decisions that are not in the best interest of the company (e.g. hiring to fast, spending a ton in marketing before the product is finished,...)

The Advantage of No Funding (2011)

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