I read recently on Dan Shapiro's blog that VCs don't want to invest in profitable businesses, because it means they aren't necessary and don't have the bargaining power to negotiate as good a deal, and therefore get the big payout!. They want to invest in businesses who are spending more money than they are taking in, to reach as many possible customers as possible and build out functionality before it's needed and make the biggest splash possible. VC cash then helps them do that -- but the question isn't how much is it going to cost, but how much can we put into the business that will drive explosive growth?
Personally, I'm more interested in sustainable businesses, where it's not "go big or go home" but more to carve out a nice sustainable business that really makes a difference in a community, and grows organically.
We're in the midst of helping one startup business plan out its technology needs, and a big part of that discussion is how much money they need to get the business off the ground.
The thing is, what you need to ask for when creating that initial business plan totally depends on how you plan to grow.
The amount you need to ask for has a lot more to do with the perceptions and experience of the investor, than what it might actually cost to get the business off the ground. Nobody has all the answers here -- this becomes totally a question of predicting the future. What I'd like to do is start filling in some strategies and differences for growing a bootstrapped business, as opposed to a VC-funded business.
Every successful business has some very crucial milestones along the way. One key difference between a bootstrapped business and a VC-backed business is the sequence these milestones happen.
As a bootstrapper, I think of these key milestones:
- Store front/product/service launched and ready for a sale
- First sale to a paying customer -- proof of concept
- Revenue exceeds expenses -- profit
- First non-owner employee
- First founder vacation -- business runs without constant supervision
- First million dollar year -- established a consistent customer base and repeatable product
- First 10 million dollar year -- sustainable growth demonstrated, systems working smoothly
The key thing here is that profit milestone is as early as possible. When bootstrapping, that absolutely needs to happen as fast as possible, because that's what fuels the rest of the growth. With bootstrapping, your money comes from customers, not investors.
In contrast, for companies looking for outside investment (beyond seed money), this sequence might be hugely different:
- Patent filed/Intellectual Property developed
- Store front/product launched and ready for users (not likely to be a service)
- First user (don't necessarily need them to be paying customers at first)
- Significant market penetration
- Press coverage
Profit is the last goal for a VC-backed business. If there's any profit before the spike in growth, it means the business can no longer think of ways of spending all that investment cash to get bigger -- and it's a signal that it's time for the investors to leave.
There's something slightly sinister in this. When looking at VC-backed startups, and evaluating performance, the questions revolve around market penetration, exits, acquisition targets, and some sense of cornering the market.
For bootstrapping, the concerns are entirely different -- building a sustainable business, finding customers who value your product or service enough to pay you something that you can profit on, making profit on every sale. A real business, instead of a speculative venture.
I'm sure I'm not the first to draw this comparison, but it's very much like what the Oakland Athletics did, as described by Michael Lewis in Moneyball : they figured out that on-base percentage is far more valuable in generating wins than the number of home runs and hits. It cost them far less to find patient batters who could get on base than it did to acquire home run hitting stars, and they ended up with one of the best records in baseball on a 10th the budget.