Bootstrap: Build a Company without Raising Money
How far you can bootstap the company before raising outside money? The more revenue and traction you show investors, the sweeter your first term sheet. Some startups may not need to raise outside money at all.
Bootstrapped, Profitable, & Proud. This series from Basecamp profiles companies that generate over one million dollars in revenues, didn’t take VC, and are profitable.
Spanx. Sara Blakely bootstrapped Spanx from a $5,000 investment into a billion dollar business. She owns 100% of the private company with no debt.
PlentyOfFish. PlentyOfFish founder Markus Frind never raised outside money. “By the time I found out what VCs were, I was already making millions in profit”. quoted. Frind owned 100% of the company when he sold it in July 2015 for $525 million.
Non-equity Crowdfunding. Raising money from non-equity crowdfunding sites (Kickstarter, Indigogo, etc.) is a fantastic deal for most founders. Companies get the money/capital they need, and don’t need to give up any equity to VCs. Have cake and eat it too.
Fundraising Mistakes Founders Make. By Sam Altman, 2014. Talk to investors in parallel, not in series, to setup a competitive environment. Explain the company’s mission, product, current traction, future vision, the market, the competition, your long-term competitive advantage, how you make money, and the team.
Fundraising Survival Guide. By Paul Graham, 2008. Practical, day-to-day advice for founders of early stage startups. For example, fit meetings with investors into the spare moments in your development schedule, rather than doing development in the spare moments between meetings with investors. And be ready to “downshift” into consulting if necessary.
Angel Investors / Seed Funds
A Guide to Seed Fundraising. Geoff Ralston, 2016.
Dilution. Sam Altman, 2017.
Notes on Raising Seed Financing. By Chris Dixon, 2011. A great overview. Ideally, (1) raise money after you have a product / traction, (2) build momentum… (5) network like crazy, but “avoid anyone who asks you to pay for intros (even indirectly like committing to a law firm in exchange for intros).”
Upside Risk. By Sam Altman, 2013. Angels make their money from investing in rare companies that deliver 100x returns. The the real risk for angel investors is missing out on that outstanding investment, not failing to get their money back on their non-unicorn companies. “And yet angel investors continue to ask for onerous terms to mitigate their ‘downside risk.’ All this does is piss founders off, misalign incentives, and harm the investors’ chance of getting to invest in the best deals.”
How to reference check your prospective investor. Don’t be swayed by the investors’ perceived brand. Dig into the substance. Talk to other founders who have worked with the investor. By Manu Kumar, 2017.
Institutional Venture Capital
Convertible Notes and SAFEs are easy to negotiate and close. They are in widespread use and essentially standard for seed stage investments. However, there are a few drawbacks.
SAFES and Convertible Equity
How Much to Raise and at What Valuation?
Startup Growth Calculator. Drag the sliders to get a rough idea of how much money your startup will need to raise. This tool is helpful but makes many simplifications that aren’t applicable in the real world.
What’s the Right Amount of Seed Money to Raise? By Chris Dixon, 2009. Raise “enough to get your startup to an accretive milestone plus some fudge factor. ‘Accretive milestone’ is a fancy way of saying getting your company to a point at which you can raise money at a higher valuation.”
Startups Should Raise Money at the Top End of Normal. By Mark Suster, 2011. Reach for a strong valuation, but reach too far and you might can get burned by the dreaded down round. “Most investors won’t want to go through the brain damage of doing a ‘down round,’ which creates tension between them and early investors.
Seed Rounds: How to Pick a Valuation. Joseph Walla, 2014. “Valuations have little basis in reality for early stage companies. You evaluate the team, product, market and other variables - then, make a general guess.”
The Equity Equation. By Paul Graham, 2007. When trading stock in your company for anything (money, an employee, etc.) the test for whether to do it is always the same. You should give up n% of your company if what you trade it for improves your average outcome enough that the (100 - n)% you have left is worth more than the whole company was before.
Valuation vs. Deal Terms
How to Build a Unicorn From Scratch – and Walk Away with Nothing. Heidi Roizen, 2015. “In all but the most glorious outcomes, terms will matter way more than valuations.” Founders need to understand what deal terms mean. “Downside protection” for investors
When an early investor decides not to invest in a later round, outside investors may take this as a “signal” that there is something wrong with the startup.
The Importance of Investor Signaling in Venture Pricing. By Chris Dixon, 2010. There are very few hard metrics in venture pricing. As a result, one of the primary valuation inputs is what other investors think about a company.
The Problem with Taking Seed Money from Big VCs. By Chris Dixon, 2009. If you take seed money from a big VC fund, be aware of the potential signalling risk if the VC fund decides not to invest in your Series A round. Other potential investors will think “if this top VC that has hundreds of millions of dollars and knows this company the best doesn’t want to invest, why would I?”
VC Signaling Coming Home To Roost. A more detailed post by Elad Gil, 2012.
But Sam Altman disagrees: “Many little things simply don’t matter very much–for example, the ‘signal’ sent when an early investor chooses not to participate in a later round. If the company is doing well stuff like this is easily overlooked, and if the company’s not doing it will struggle to raise money anyway.” Fundraising Mistakes Founders Make, 2014.
After an initial meeting, VCs will dig deeper into your company: open the hood, kick the tires, shuffle the paperwork.
Breaking Down a Typical VC/Startup Diligence Process. Tomasz Tunguz, 2014. A Redpoint Capital VC discusses his typical diligence process.
6 things to pre-empt 90% of Due Diligence and Part II, A Closer Look. By Christoph Janz, 2015. SaaS companies should be ready to show investors (1) key metrics, (2) a chart of MRR movements, (3) a cohort analysis, (4) a three-year financial plan, (5) customer acquisition channels, and (6) a current sales pipeline (at least for enterprise SaaS companies).
How To Obliterate A Multi-Million-Dollar Fundraising Process During Due Diligence. From Founder Collective partner David Frankel.
Form D. Have your lawyer file a Form D with the SEC.
Beware, Forms D Are Public. By Joe Wallin, 2013. When you raise money from angels or VCs you are generally required to file a Form D with the SEC and state securities regulators. You have 15 days to file it, and it will become public information.
Announce Your Financing In Conjunction With Your Form D Filing. Only announce a financing if you have a purpose for the publicity - i.e., you’re using the new money to hire new talent. “We’ve just raised $X and are hiring 20 engineers – see our jobs page and apply now.”
Some founders have written detailed accounts of their fundraising process. You can learn a lot from them.
Moz’s $18 Million Venture Financing: Our Story, Metrics and Future. Rand Fishkin, 2012. A detailed fundraising story with pitch deck (slightly redacted).
We’re Raising $3.5m in Funding: Here is the Valuation, Term Sheet and Why We’re Doing It. Joel & Leo, 2014. A thorough account of fundraising decisions and finding the right VCs. Includes the term sheet from the raise.
Misadventures in VC Funding: The $24 Million Moz Almost Raised. Rand Fishkin, 2011.
Mattermark Has Raised $2M in Our Second Seed Round After taking $3.4M in total funding over the past 2 years. Danielle Morrill, June 2014.
Welcoming Brad Feld to the Mattermark Team, Announcing our $6.5M Series A. Danielle Morrill, 2014.
Standardized Seed Financing Docs
How do the sample Series Seed financing documents differ from typical Series A financing documents? By Yokum Taku, 2010. A nice matrix comparing the details of the Series Seed, Y Combinator, and TechStars standard documents.
Why There Will Never be a Standard Set of Seed Documents - aka why Brad Feld will Fail, Jason Mendelson, 2010. Perhaps the more important takeaway is that the National Venture Capital Association docs “are too complicated for 90% of the folks out there doing the deals.”
Don’t be creative about the wrong things. By Chris Dixon, 2010. “your deal terms should be plain vanilla. These things are time tested and you are far more likely to screw things up than create value by tinkering with them.”
Here are some of the most popular standard seed documents:
- SAFE Financing Documents. Y Combinator 2014.
- Series Seed Financing Documents - by Fenwick & West.
- TechStars Model Seed Funding Documents (by Cooley).
- Y Combinator Series AA Equity Financing Documents (by WSGR).
- Founders Institute Plain Preferred Term Sheet (by WSGR).
- KISS - Open source financing docs from 500 Startups.