Bootstrap or VC? [video]

https://www.youtube.com/watch?v=D81y-kh11oI

by todsacerdoti • 2 years ago

79 63 2 years ago

youtube.com

nivertech• 2 years ago

Missing link to video:

https://www.youtube.com/watch?v=D81y-kh11oI

dang4• 2 years ago

Changed to that from https://www.ycombinator.com/blog/bootstrap-or-vc/ above. Thanks!

mattjaynes• 2 years ago

On this question, David Heinemeier Hansson's talk at YC's Startup School 2008 still holds up great today. Was the first time I heard of the concept of the Fortune 5,000,000

Video: https://www.youtube.com/watch?v=0CDXJ6bMkMY Transcript: https://indiefounder.substack.com/p/full-transcript-of-dhhs-...

robocat2• 2 years ago

On bootstrapping, I think Jason Cohen's talk is gold: https://m.youtube.com/watch?v=otbnC2zE2rw

This is fairly honest about the risks of VC: https://siliconhillslawyer.com/2017/08/01/not-building-unico... and the rest of his articles are amazingly insightful too - read em all if you want to be a founder.

mempko• 2 years ago

Yeah, but DHH really went off the deep end. https://world.hey.com/dhh/where-next-for-dei-0dc866b4

I used to use their HEY email service until HEY decided to ban all societal and political discussions for employees. Which sparked a huge exit of talented people from their service.

And now DHH went "anti-woke" and it's sad.

candiddevmike• 2 years ago

This is interesting to see put out after YC was looking for more startups to apply in the last batch after the deadline...

danjl• 2 years ago

Their view is so biased by being VCs. They really believe they are there to help founders. And they do! At least for first-time founders. But they are completely unaware of the damage caused by VCs and have no understanding of WHY many experienced founders prefer bootstrapping. Once you take investment, your goal shifts ever so slightly from "making a great product" to "getting the next round of investment". Your target customer shifts from your product's customers to your investors. The real question is not whether a lawn maintenance company or restaurant wants VC investment. The change that is happening now is that SaaS, mobile app and other "traditionally VC-funded" companies are finally realizing that VC funding is not a good model for building a long-term viable business.

dang4• 2 years ago

your goal shifts ever so slightly from "making a great product" to "getting the next round of investment"

FWIW, at the last YC event I intended, the partners were talking about how it's their job to get founders to stop thinking that way, and to think instead about making a great product, as you say.

hobofan• 2 years ago

I think YC can say/do that, as with the YC stamp of approval you are already on the A-tier track of VCs. So for their portfolio companies having a shoddy product will be the main reason of not getting follow up funding.

Meanwhile, if you started out with a "lesser tier" accelerator/incubator, you'll have to prove that you have a good product _plus_ you have to fight an uphill battle and convince A tier VCs to even take a look at you.

pmontra• 2 years ago

Maybe the goals of founders and of VCs are sometimes misaligned. If founders start with the idea of working super hard for a few years (counted on the fingers of one or at most two hands), get an exit and retire, then why build a product that outlasts the end of venture capital? They could just try the VC roulette pivot after pivot and hopefully win an exit. This is not necessarily what happens in reality, hence some VC's focus on solid products, but it's a tempting, possibly naive, idea.

sanderjd• 2 years ago

Sure, but the road to hell is paved with good intentions overwhelmed by the reality of incentive structures. This is like the venture capitalism version of "real communism has never been tried".

Both of these things are true: founders (and leaders of VC-funded businesses in general) have an incentive to focus on investment rounds and runway, and VCs have an incentive to tell them not to do that.

I think this mismatch is fundamentally due to the asymmetrical cost of failure. For VCs, it's a bummer if the goals of the current round are not met, leading to the company folding or an acquisition on disappointing terms, but it's arguably even worse for the company to sputter along, barely staying afloat from round to round, but never really catching fire, because they have to keep funds tied up in it, without ever getting the return multiple they're looking for.

But the people who actually work at the company have a much more concentrated investment in it simply staying alive, even at the price of short-termism.

It's just fundamentally different risk profiles!

Maybe VCs should gift founders enough wealth up-front to be financially independent. This would go a long way to align their risk profile :)

vinnyvichy3• 2 years ago

Problem is, by that point YC have already filtered out the founder who is naturally inclined towards product over ponzi. Yes, it's still not entirely a gamble but remember that a person who has enough self-awareness of her product potential will still prefer to bootstrap over getting into YC, so one might suspect that's not inherently a low bar. (Or else the partners would not have such a distracting job in the first place) What should YC do then? I'd say, demonstrate to a producteer how willing and able YC are to help her explore side markets, a bit like HN's commitment to curiosity :)

synergy202• 2 years ago

There are something in the middle called crowdfunding though, and private angel funds.

dustingetz3• 2 years ago

A bootstrapper's primary goal is to survive another year and will do anything to survive, including accept any investment offered. Beggars do not turn down money. In a way, "bootstrapper" is a euphamism for "can't raise yet". (I initially wrote "unable to raise", but that's an unfair frame, because raising is 98% networking and has very little to do with "ability". Capital flows through trust networks.)

AnotherGoodName2• 2 years ago

This is an odd view as a bootstrapped founder because i simply never needed funding apart from a small amount for business registration and initial hardware purchases but that's 1000's. I was working another job while bootstrapping so wasn't going to starve no matter what. We ended up with a product clients were knocking on the door for (remote telemetry for railways/mines/environmental monitoring). The business has huge recurring revenue to this day and we decided to talk to VCs after making it. They had nothing to offer us and the amount they were willing to give made no sense and was in the realm of giving them money (imagine valueing a company at half of its annual earnings).

I'm very very negative on VC to this day except if you have a capital+time intensive barrier to break (most companies don't have this). 'You can't do it without our guidance' they'll say but the honest truth is they don't have much to offer apart from the money. VCs are not altruistic. They do the maths and figure out how to get returns regardless of how it will impact your stake. You'd be an absolute fool to take VC money without asking if it's actually a long term positive for you. There's always a better deal and giving them a significant share of your company on extremely generous terms for the promise of 'guidance' is going to be foolish IMHO. Bootstrapping is not some desperate scramble for money. The whole idea is to run the first phase off a shoestring so it has no real risks (apart from your own time and effort).

gumby3• 2 years ago

Rubbish. We started Cygnus as a bootstrap and were continuously profitable and reached over 160 people before considering taking outside money to change the growth curve.

ak217• 2 years ago

Your understanding of the term "bootstrapped" is warped by the environment you are operating in.

The traditional understanding is "building a business without taking on dilutive funding". This has always been hard, but in many ways it's easier now than before.

metacritic123• 2 years ago

Yup, VCs are desperate for founders to create VC-backable businesses.

This video argues that if you want to be a trillion dollar company, you need VC funding. But they don't emphasize aiming to be a trillion dollar company has a tiny (<1%) chance of succeeding, requiring certain lifestyles (investment chasing). It's not for people looking to build fun products, live a relatively wealthy (but not outrageous) lifestyle, etc.

It is literally for founders who want to go the biggest or go home. Think carefully if that is you.

paulddraper2• 2 years ago

More like a ~billion dollar company.

The # of unicorn technology companies without venture funding is very small.

paulddraper2• 2 years ago

VC funding is not a good model for building a long-term viable business

VC funding a good model for rapid growth.

It may or may not bring "long-term viability," happiness, or weight loss. Those are mostly independent considerations.

erikerikson• 2 years ago

The video seemed pretty straightforward that the VCs are there to take advantage of the founders need for more capital than they have access to in order to cross a funding gap of high initial costs.

"We give you money, you give us much more back"

My father in law had an agriculture business (pollen). They had customers and a product but they needed a three month loan to pay laborers to harvest the product so that they could use it for customers and then invoice and collect. The labor was well paid due to urgency dynamics, the farms they serviced had yields paying more (or avoid loss greater) than the cost of services, and there was profit left over for the banker's share plus his own business. As a side effect the food supply was both more stable and abundant. Without the capital less excess (or greater losses) would have existed.

This is effectively what VCs are hoping to find except at a far higher level of scale.

synergy202• 2 years ago

So, assuming I apply and got accepted, am I getting the 500K, or just the 125K, or nothing until something further happened?

I thought about applying but honestly 125K was not exciting enough for me :), now I just went to re-read the terms, it seems to be 500k(split for 7% etc) instead, which will be enough to make me applying, question is, how will I get them if I am accepted? first day, a few weeks later, or what.

tfehring• 2 years ago

You get the full $500k upfront. In exchange, YC gets 7% equity upfront (for the first $125k), plus a proportional share of equity in your next funding round (for the next $375k).

Joel_Mckay2• 2 years ago

That is around 5 months operating capital in a small company.

Most would laugh you out their office asking for 7% of equity.

I often wonder if people understand why 1:23 companies survive the startup cycle.

Best regards =)

jagged-chisel• 2 years ago

I’m at a point in life where gambling doesn’t appeal to me. I could take VC, earn a (temporary) steady salary, and then, having given up controlling interest in my company, be at the back of the line for an exit while the VCs, who put no sweat equity into the company, get a huge payday.

Or, I can bootstrap, have less stability, all the control to hire just who I need and when … and less stress.

I’ve worked at two companies that took VC. In both cases, investors didn’t care about anything except whatever metric showed “growth” so they could exit larger than they entered - the tech didn’t matter, the team didn’t matter. Based on this sample size and so many stories from SV about how founders and employees are treated, I have a hard time seeing VCs as anything but leeches.

VBprogrammer• 2 years ago

I think taking VC money is great if you are in a capture the flag type market. Social networks, taxi market places etc.

If it's something which has value with a modest number of customers, not a significant fraction of the addressable market, then maybe less so.

wslh• 2 years ago

Obviously there is not an unique answer. My experience is the reverse of you, a bootstrapped startup was more stressful than one with investors because there is no magic money created but the one you receive from reality.

andrewmutz• 2 years ago

I think these guys did a pretty fair description of the trade-offs of bootstrap vs VC. I am currently bootstrapping a company and am really happy with the approach. There are certain types of companies that are great opportunities for bootstrapping and really don't need VC funding.

One thing I think is missed from the Dalton and Michael's discussion is that while VCs know that bootstrapping is a very valid path and aren't lobbying against it, many young founders don't know much about bootstrapping. The biggest tech companies get the most attention and big companies generally need VC funding.

So I agree that it is a "fake" controversy, but I also think it is important for more potential founders to hear about how bootstrapping may be a very valid and good path for them.

frankdenbow• 2 years ago

Pretty reasonable take on the pro/cons of bootstrapping vs vc. One thing to add (and the reason why I started a conference for bootstrapped founders) is that the stories that get pushed often times are ones of investment, the articles you see are on this fundraising process so many see that as the standard way. The more you delve into these stories of companies that survived off of growing on revenue, the more you see whats possible.

itbeho• 2 years ago

In this environment, if you can bootstrap a cash flowing business, you'll hold all the cards going forward.

vipshek2• 2 years ago

This discussion and the points being made are totally valid and reasonable. But I think there's one thing they completely miss, which is the cultural impact of VC.

Given the massive success of software companies over the past decade or two, hordes of driven, talented, and smart young people have joined VC-backed companies or aspire to do so. It's become culturally accepted that if you're an ambitious person, you should be working at - or better yet, founding - a venture-backed company.

The societal opportunity costs of this phenomenon are significant. I know dozens of young, talented people who are founding companies for no particular reason, simply because it's become the default path for what they're supposed to aspire to.

Is this the "fault" of venture capital? Not really - VCs are just trying to attract talented founders and make their portfolio companies successful.

But by doing so, they've created a negative externality, which is that VC has become the gatekeeper of perceived "success." That means fewer talented, high-energy people working in government institutions or critical industries - precisely where those talented people could have the greatest impact on society at large.

vhiremath42• 2 years ago

I understand what you're getting at, but are high-energy people not working in government or other critical industries because of VC lore, or is there a significant contribution from these industries being slow and bureaucratic? If I'm a high energy person who wants my work to have impact, I probably want to work in an industry where people move fast and innovate and don't get caught up in a bunch of red tape (regardless of whether this red tape is actually reasonable).

From talking to friends and younger people entering the workforce, this is almost always the bigger consideration. Most feel like starting a company is still a total shot in the dark from a success standpoint, and I feel like there is more skepticism than ever of the startup lottery.

What I totally agree with is that VCs need to be doing a much better job telling people that starting a VC-backed company is an extraordinarily bad way to make a lot of money. The odds are just insanely stacked against you. That said, most people gravitate to inspirational stories even if you're told it's at odds with what you can expect for your own journey, so, the more of these success stories there are (even if the ratio of them relative to total "tries" stays consistent), the more people will take the startup path.

vipshek2• 2 years ago

Completely agree there are many other reasons people don't join large, established bureaucratic organizations. My career has involved building software within well-established industries, but not necessarily within the large bureaucracies themselves. There is plenty of room for nimble software companies in those industries, but little of it fits the venture-backed model because it'll likely never achieve a 100x return. That's the sort of thing that gets suffocated by an overemphasis on VC.

I think your point about "inspirational stories" hits at the heart of something important. I believe there are plenty of successful software companies working in niche industries and having great impact, but their stories don't get amplified nearly as much as venture-backed companies do, partially because raising VC is viewed as a stamp of success that makes it easier to get press coverage, hire talented people, etc.

If there's one thing that I think needs to change, it's that we need to tell more inspiring stories about people who've achieved success without needing to raise VC. That'll also reduce pressure on VC to be the one-stop-shop for everyone's business ideas.

(Also, hi Vinay! Not sure you remember me, but I used to hang out on the "codechill" Slack a couple years ago. Hope all's well.)

ilrwbwrkhv2• 2 years ago

Maybe asian and immigrant cultures where there is more social stigma attached to not making it big.

adventured• 2 years ago

The last thing I put a lot of time into building, I took on a prominent VC as a business partner. That was a ~7 year partnership. Overall it was a good experience and yet I still find myself not wanting to do it any longer (give up equity to VCs).

When your partner is a billionaire you find it's a lot more challenging to do things exactly the way you want to, to live by whatever your vision for the thing is, and to tell said billionaire no if there's a disagreement. It's not that you can't per se, it's that there is definitely additional relationship and operational risk to the context, additional calculation. It's very common for big investors to have big egos and big opinions. Pleasing investors becomes a thinking mistake problem that you have to manage. That's a mental cost to keep at bay and it gets old/tiring. The same is true whether the VC is prominent or just your average SV VC, and it persists whether it's a small number of investors or a lot of investors you're dealing with.

Besides the obvious that venture capital isn't always right for every business or every business stage, sometimes it's never right for certain organizations. I'm working on a social network that will operate either as a public benefit corporation or non-profit org. There's no place for outside investors in there. Even if you eventually return to dealing with investors, do yourself a favor and build without them from time to time, at least for extended periods of time; it's refreshing to the soul if building things is what you really like doing.

neom• 2 years ago

btw, if you're looking for a good VC podcast, I recently discovered 20VC with Harry Stebbings. He brings on good guests, asks good questions, and has a posh English accent. A+

If anyone has some they like, I'd certainly appreciate links.

https://www.youtube.com/@20VC

mattgreenrocks• 2 years ago

I'm biased, but it is really interesting to hear VCs addressing this topic in the first place. Feels like something changed from the nascent Web 2.0 days where it's presumed every startup needs lots of capital to scale.

keelhaule• 2 years ago

Simple Answer: Bootstrap, because you keep control, VC is employment 2.0.

latenightcoding• 2 years ago

I've been around a lot of "deep tech" founders and the obvious answer in their case is VC all the way. Most are doing fun R&D on VC's dime and their company will most likely never be profitable just acquihired at some point.

4d4m2• 2 years ago

Truth: It's tough to do good, high-coverage marketing and PR with a bootstrapped budget.

thewizardofaus• 2 years ago

This has been my observation too.

VC backed competitors can spend 10-50x marketing spend of early bootstrapped companies quite easily.

4d4m2• 2 years ago

Agreed. This plus operating at a loss to gain marketshare make bootstrapping seem like a tough road ahead.

metacritic123• 2 years ago

Kudos to Michael and Dalton for admitting a lot of truths that aren't VC / incubator friendly, like that most businesses should not be raising VC funding, or that lots of founders have amazing lives and get rich without VC funding.

However, they're still burying the lede and the key conclusion. From those admissions above, they go into sales mode and say that if you want to be a trillion dollar company, you generally need to raise VC funding. This part is also true in favor of VCs, but hides an important assumption.

All the above says is that VCs are good for certain company types, and not good for other company types. But people don't start companies to be a specific type, or to raise VC funding or not -- these are secondary characteristics.

The primary reason a founder starts a company should determine the company type and whether they take VC funding:

1) If you want to have a small (1%) chance of having a massive impact on the world (think billions of dollars of founder valuation), you should aim big and take VC funding.

2) If you want to have a larger minority (25%+) chance of being quite personally rich (think tens of millions), you should probably avoid moonshots and aim for base runs that don't accept VC money.

For 1), it is quite easy to see, only 1% of YC company founders, who are considered amongst the best in the valley, have a billion dollars of personal valuation at the end. If you want to be a Zuckerberg or a Gates, you have to aim for this, but know that it's very rare in the base population.

If you focus on the max valuation, then yes that clearly favors VCs. If you focus on expected utility for standard utility curves, that favors bootstrapping.

---

Finally, as my personal opinion, it seems obvious a priori that VC startups would be a lot more over-promoted, after all, without VC-investable startups, VC funds would do poorly. Literally trillions of dollars depend on enough founders doing these startups -- and they have a massive marketing budget. [1]

On the other hand, bootstrapped companies have no clear "partners that require them" who would overpromote them.

[1] https://paulgraham.com/submarine.html

dmezzetti• 2 years ago

Bootstrapping only works if you have the runway to do it and you don't feel the need to grow fast.

With NeuML (https://neuml.com), I've went the bootstrapping route. I've been able to build a fairly successful open source project (txtai 6K stars https://github.com/neuml/txtai) and a revenue positive company. It's a "live within your means" strategy.

VC funding can have a snowball effect where you need more and more. Then you're in the loop of needing funding rounds to survive. The hope is someday you're acquired or start turning a profit.

I would say both have their pros and cons. Not all ideas have the luxury of time.

lijok• 2 years ago

I don't think that anyone thinks it's more moral or good or right to start a VC backed company or a non-VC backed company. I don't think this is an actual debate.

Show of hands HN, who here thinks it's more moral or good or right to start a non-VC backed company?

ilrwbwrkhv2• 2 years ago

I wrote about morality here and business in another thread, but the gist is:

The stories that you hear with hard work, finding a niche, product market fit, build a great product are all lies.

The true secret is what I think of as "dirty business".

Think: spam, sex, gambling, money making, scraping data, connections (which are not dirty per se but often not mentioned in stories).

Examples:

LinkedIn: spam Snapchat: sex Google: money making Facebook: sex, spam Slack: connections Uber: connections, money making Airbnb: spam

I can go on and on and almost any large scale success (over $10 million ARR) have had these things.

The only time these can be broken is when a new paradigm starts:

Examples:

PC Internet Mobile LLM

These usually happen every decade or so and you have ~2 years to make it (Dirty business also helps here to go really fast).

The other key insight is the way the capitalism system works, if you achieve the initial growth, you almost always will succeed. To go from $10 million ARR to $100 million ARR is easy as pie.

So, the bottom line is if you are a normal, moral person, who is righteous and thinking I will make something to help others and disrupt the world, you will fail.

The alternative is small tech businesses which at the most you can sell for a few million dollars. That is still achievable and easy. You must hyper focus on a location and a niche and just sell to them. But I don't think of them as a startup. They are more like your local salons and restaurants. A mom and pop shop which is instead dealing in software.

For B2B software you need to have at least 3 - 5 customers willing to sign $10,000 and above contracts before you write a single line of code. This is still possible but you need the connections and the deep insight of the industry to make something meaningful.

I do not know why so much of the literature and teaching stuff discounts that initial spark which causes startups to grow. They are all lies. Focus on connections with local politicians (donate $10,000 to the up and coming politician?), movers and shakers, buying large amount of scraped data etc. Think dirty business and then maybe you will have a chance of succeeding.

Would love any counter arguments and comments. This is from a very long, over a decade research into why some businesses succeed and others fail.

gumby3• 2 years ago

Seems to be no transcript.

Bootstrap or VC? [video]

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