Life Is Not a Shark Tank or a Dragon Den
A friend of mine who is a 1st time entrepreneur asked me why I thought that taking investment was a bad idea. I gave her a bunch of short answers, but wasn’t able to elaborate too much since this was done over Twitter. With this post, I’d like to attempt a more cohesive answer.
You see, most people who have never owned a business or had a startup have this idea from watching Dragon Den (Shark Tank in the US) on TV, thinking this is how startups are done: an entrepreneur gets an idea and must find investors so he/she can bring a product to market. The reality is that it’s just one of many ways to achieve your goals. That is if your goal is to a have a successful, sustainable enterprise with you as owner.
What Every Investor Wants
Investors want to make money selling their shares of your company. I know you’re thinking “Duh! Captain obvious! What else is new?”, but I find that this basic notion escapes many new entrepreneurs. That’s because the implications are unpleasant: the only way investors will make money is if you sell your business or go public so they can sell their shares. This is called a liquidity event and even the most patient investor will expect you to provide one as soon as possible.
You don’t want to sell your company or don’t think you’ll ever be big enough to be listed on NASDAQ or another public exchange? Then don’t take money from investors.
Early in my career, I took investment because I thought it would be a quick way to get a pay check until I got the business off the ground. I was anxious to show to family and friends that I was successful because, you know, some people are writing checks to invest in my company, right? That regular pay check was nice and the valuation was such that I was was a millionaire on paper. Unbeknownst to me at the time, I had one foot caught in the endless hamster wheel from hell.
Since I had a partially working product at the time and 20 pre-paid clients, I should have continued selling software slowly and hired only if there was too much work. Instead I took in 2 million in investment (it was 1999), the market changed (3d software went from costing 30K to 3K!) and I had to close everything down because there was no way in hell I would have sold enough copies to repay the 2 million — not with 15 employees and an expensive multi-year office lease. The company finally went bankrupt and I was left with six-figures in debt (had guaranteed a few loans) and a nice case of extreme burn out. Worse of all: My invention didn’t belong to me. It belonged to the shareholders. Never again, thanks.
Raising Money: The Endless Hamster Wheel From Hell
A startup is basically constantly running out of money. That’s the nature of the beast. This means that once you’ve spent the money from the 1st few investors, you’ll have to look for more money, which is a full time job. So forget about building products or coding — you’re now in the business of not going bankrupt, so the 1st few investors don’t lose their money. This means that you will need to hire people to do the actual engineering, production, whatever you have to do to get the product out because you sure as hell won’t have the time to do so yourself because you’ve got 20 investment presentations the next week. And having a payroll is a sad, sad thing because guess what? People like to get paid — usually twice a month. Like, on a regular basis and stuff. Feeling tired and want to take a break? Not now because there’s payroll to meet. Shoot me. Now.
All kidding aside, this hamster wheel from hell is responsible from countless cases of depression and even suicide amongst entrepreneurs. Early last year, entrepreneur Jody Sherman committed suicide rather than face the prospect of his startup Ecomom running out of money. By all account, Jody was a well loved leader who just couldn’t stand the idea of failing and having to restart from scratch in his late 40’s. He was tired of the wheel and couldn’t get off.
A Better Way: Bootstrapping
Usually, a commercial startup has 3 phases: R&D, product/market fit and growth. You spend time developing the product (R&D), find a group of early adopters willing to pay for said product (product/market fit) and then grow from early adopters to a wider, more general group of consumers (growth). So basically the whole deal is to get more and more people to pay for your product. The sooner the better.
In the past, the cost of each of those phases was so prohibitive, entrepreneurs had no choice but to raise outside financing to get started. Nowadays, there are so many free or semi-free options for developing, marketing and distribution, many choose to develop on a their own dime and use growth hacking (free social marketing) techniques to get the word out.
So what if you could develop the product on your own and are able to contact consumers directly? Consumers would see your product and accept to pay in advance in return for a copy of an initial run. What if nobody wants your product? Then you’re not panicking because investors are wondering what’s wrong — you simply iterate on your product until you get something that valuable to someone. With investors breathing down your neck, there no place for mistakes or misfiring — it is their duty to replace you before the company goes bankrupt and they lose their money. Employees won’t help because, you know, they like getting paid more than they like you.
With bootstrapping, you work on your own schedule and spend all your time working on the product and interacting with consumers who in turn tell you how to shape your product to attract more consumers. You don’t have to think about liquidity events or how your investors will ever get their money back.
The truth is that raising money continuously is the same effort as finding new clients continuously. Except that when clients pay you, they are not taking a piece of your company — they are helping you grow your business. When investors come to you before you have sold your product, the money may seem too hard to resist. Free money, right? Nope — just a glimpse of the hamster wheel. Simply sell them a copy of your product and tell them you will call them if you ever decide to raise money. This way, the door is not close and you get more clients. Win-win.
Of course if you are trying to build the next Facebook, Twitter or Apple (all public companies), kindly disregard the previous paragraphs. But if you want to a slow but realistic way to build a startup, bootstrapping is the best way.
DHH Was Right
So, you may be thinking: “But, everyone is raising money!”. Wrong again. David Heinemeier Hansson (DHH) of Basecamp has been arguing for bootstrapping since 2003. “Sell your product to consumers for a profit“, he tells us. Basecamp/37-Signals even had a serie of interviews called “Bootstrapped, Profitable, & Proud” to profiles companies that have over one million dollars in revenues, didn’t take VC, and are profitable. I wished I had followed this advice 15 years ago.
My current startup Lessonator has been years in the making and only now getting clients + revenue, but I’m much happier with the slow pace and the ability to run things as I please. Also I’m able to use the same code base to spinoff another project in 3 months instead of years. One developer, several revenue streams and no headache — that sounds a whole lot more fun to me. And this time, I own everything so even if things go south, no one can take this away from me.
I sometime missed the interaction with my old team (specially when debugging alone), but I quickly get over that when I think about the crazy payroll I had to sustain and the stress that came with it.