Should you raise money or bootstrap? (By bootstrap, I actually mean raise < $250k from individuals or angels).
Having run a startup that raised money and now in running a VC, ironically, if I were starting a product company today, I would start out with the mentality of bootstrapping for as long as I could. And, maybe, just maybe, I might consider raising more money under a few limited circumstances.
I would raise more than $250k if I had a company that:
1. Was growing 30%+ MoM in sales and my operations could not keep up to fulfill those sales
I’ve noticed for operationally-heavier companies (i.e. not SaaS businesses but generally tech enabled services or similar), it can be easy to grow your sales quickly, but often these companies need to throttle their growth because they do not have enough people to fulfill these services.
2. Was a marketplace with high engagement
Marketplaces tend to be “winner take all” businesses because they are only valuable if both the supply and demand sides are both liquid and efficient. This happens when you have a lot of supply and demand, which means to really thrive, you need to be willing to invest in a land-grab on both sides.
This is why you see companies like Bird and Lime raise so much money. They need to saturate cities with scooters and with users (basically buy you as a user). In some sense, their businesses are “easier” on the supply side than the current ride-sharing market because they can manufacture more scooters and don’t rely on people to drive them. They can create infinite supply. In the ride-sharing market, supply is basically a zero-sum game. In other words, someone who is driving for Uber right this moment cannot be driving for Lyft or a food delivering company or what not. That person’s time is occupied. The ride-sharing market will change over time with self-driving cars, and that will also become a marketplace with infinite supply which is easier than trying to grab two sides of a market. But you still need tons of money to manufacture a lot of vehicles.
3. Was growing net revenue 30% MoM for many consecutive quarters where I felt confident to really pour big money in marketing channels
If your business gets past a certain threshold – call it past the $2m runrate (series A territory) – and you are still growing at a fast clip using a repeatable marketing channel or two that works, then it likely makes sense to step on the gas.
The caveat is that many companies have a difficult time crossing the $10m runrate – this is very difficult to do (series B territory). So you are gambling that, with more cash, you can get to series B metrics. It’s just really hard to keep growing 30% MoM with large revenue numbers. Also, running a company at that level involves a large team, and it’s tough to manage a larger team. Despite those risks, I would still raise money in this circumstance too.
So what are good bootstrappable companies?
I think the perfect profile of a boostrappable company is a SaaS company. There are often little to no network effects, and so your competitors affect you less. In other words, company A using product X doesn’t affect company B’s decision to use it most of the time AND company B being on the platform has no affect on the user experience or value that company A gets out of product X. There are low operational costs; software has high margins, so you can often pour profits back into the business to keep growing (at least to a good level).
I also think events businesses are good bootstrappable businesses. VCs don’t like to invest in these, and so it would likely be impossible to raise VC money at any point in time with this type of company. But, as I’ve mentioned, events businesses can actually have really low operational costs despite what most people think. If you can get the venue, food, staff, and content all free, then the costs are just marketing and your own salary. On the revenue side, you get your money upfront when people buy tickets or sponsors send you money ahead of the event. Plus, you can often pay vendors on a net 30 basis. You get money upfront and pay costs later in most cases. People often cite scaling as a stumbling block, but if you look at the truly efficient events companies – Web Summit comes to mind – they basically print money and have a scaled playbook to do events all around the world.
I think people often equate bootstrapping with low growth or “lifestyle” businesses (which somehow investors seem to equate with “no money” but not always true). But, I think that’s false. With the right conditions, bootstrapped companies can be super high growth, high revenue companies. It’s actually not true that you need VC money to grow really fast. With high margin and low cost businesses, you can grow really fast without much or any external funding. At the end of the road, you can decide what exit you want to take (if even). You have control over your own destiny in a way that most VC backed companies cannot.
I also think that people think raising VC money is sexy. It’s like a stamp of approval. The truth is, VCs are wrong most of the time! Most of their startups end up failing. The flip side is that there are a lot of great businesses that don’t need VC money to grow really quickly (for all the reasons mentioned above).
I think ultimately, very often entrepreneurs end up raising money for the wrong reasons or raise money too early. They think life will be easier if they raise money – the salary would be better and having more help would be better and pouring more money into marketing would be better. On the surface, I’d say that all of this seems better – of course we all want more money! But unless you have found fast growth channels, your people and marketing dollars end up not being put to very efficient use, and you are actually no better off than if you had bootstrapped your company but you have given away more of your cap table.
So from seeing things as both an entrepreneur who has raised money before and now being a funder of many startups, this is what I would do if I were starting a product company today.
We recently announced at Hustle Fund that we will start investing in Southeast Asian software startups, and my new business partner Shiyan Koh, who just moved back home to Singapore, will be leading the charge on that.
I was in Singapore last week, and I was blown away by the amazing opportunities that Southeast Asian entrepreneurs have ahead of them. It’s one thing to hear from other people that Southeast Asia (SEA) is up-and-coming, but it was totally another thing to go there and talk with so many people about the future.
Here are a few thoughts that come to mind from just my short trip there. I’d be curious what other people in-region think about this (and keep in mind, I won’t be doing the investing there; Shiyan will be 🙂 ):
1. There are opportunities galore
People like to use chronological analogies, so if I had to do that here, I would put investment opportunities in SEA at around 1997. To add some context, I loved learning about all the low-hanging-fruit investment opportunities there are.
Basic infrastructure is just being tackled and getting strong traction right now. For example: payments via Grab and others such as AliPay are coming into the region. Basic marketplaces like Carousell are big or getting big, but there are plenty of opportunities for “large niche marketplace” plays to emerge.
In this first inning of software companies in SEA, major consumer businesses have started taking off, but so many other categories are just starting to emerge. B2B, for example, hasn’t even really started as a category yet (more on this below). Health is another area that has a lot of low-hanging fruit opportunities and, in some countries, is less regulated than in the US (for better or worse). Fintech, too, has many areas that have not yet been tackled – payments for the banked population is just the first step. This really resembles the era when in Silicon Valley, we had Yahoo, EBay, and Craigslist. PayPal was not around yet, but ideas were starting in payments.
I think if I were an entrepreneur who was location-agnostic, I would definitely move to Singapore and start a business there. I can think of 20 clearly big low-hanging fruit opportunities in Southeast Asia that would be great to go after, but in contrast, it’s really difficult to even think of one clearly big opportunity in the US. Obviously, the US still has plenty of big opportunities ahead of it (more on that below), but the low-hanging fruit around “infrastructure” has been established. Messaging and email generally works. CRMs and marketing tech generally work. Ads generally work. Marketplaces generally work. Payments work. People in the US can pay for things electronically and can get most services and goods today from the internet. Infrastructure and services in the US generally work, so improvements in these areas are all incremental. Entrepreneurs can still make money improving these areas, but infrastructure improvements in the US are incremental in contrast to SEA, which are right now binary opportunities.
2. Building for Southeast Asia is less about tech and more about hustle
All of that said, because infrastructure takes a lot of pure, brute force and hustle to drive adoption, the kinds of entrepreneurs who will thrive in this type of ecosystem are those with a lot of hustle and strong business mindset. All the low hanging fruit opportunities that I mention above are not tech revolutions; they are all about customer adoption. In many cases, the tech required to execute these businesses have been done elsewhere (payments, marketplaces, etc.).
Customer adoption is always hard wherever you go, but it’s arguably even harder in a place where there aren’t ready distribution channels. The interesting thing about the US market is that online customer acquisition these days is actually fairly straightforward for most customer audiences. You can build a SaaS company and get to $1m ARR fairly easily while 10 years ago this was very difficult to do. This is because we now have the infrastructure to do things like look up decision makers on LinkedIn or elsewhere and find online-means to reach people. In SEA, there are some pieces of infrastructure that have been established and exceed the US. Mobile penetration in SEA is much higher than in the US (on a volume basis). This makes it easier to do customer acquisition for a consumer-based company. For B2B, for example, decision makers for older businesses can’t be easily found online. In other examples, if you’re selling to unbanked populations, not only is the customer acquisition hard, but you also have to do operational things like collect cash, which US startups don’t have to worry about.
I think this explains why we tend to see consumer businesses emerge first; tech-savvy internet users are easiest to reach. Other customer audiences are laggards in adopting the internet. Startups formed to serve them need to wait until they come online so that the customer acquisition can be faster.
3. B2B requires selling to other startups
This brings me to my next point. Throughout my trip, lots of people (investors, startup ecosystem builders, entrepreneurs) told me that they are puzzled about why B2B hasn’t taken off yet, even though that seems to be the next opportunity.
Here’s my take on B2B: if you look at the US ecosystem, most of the high flying B2B companies got to their level of growth because of fast sales cycles. These fast sales cycles tend to come from selling to other startups. Slack, Stripe, Mixpanel, and Gusto grew by selling to software startups. The accounts start small but increase quickly when some of your startup customers become big within 5 years. I noticed this with my startup LaunchBit. We started by selling to startups too, and within a few years, the startups who found success both with us and just in general grew their accounts with us considerably.
In Southeast Asia, if you are starting a B2B company right now, you will likely need to be selling to older or slower-moving industries. That sales cycle can be long, but in 3-5 years or so, if a lot of startups emerge in the ecosystem, then the B2B sales cycle selling to SEA startups will become fast. Here’s a concrete example: we met with a health company based in Thailand who flew to Singapore to pitch investors. They showed us how they were communicating with their consumer customers – all through LINE messenger. There were literally hundreds of threads of conversations in LINE. At some point, as the startup grows, those conversations are going to become a real pain to keep track of. Can you imagine doing all your business in LINE? (I fully realize that a lot of people do all their business in WeChat in China). You can imagine that at some point, there will be new marketing automation companies that will start building marketing communication software to allow companies to communicate in a more organized manner en masse via LINE to their customers. However, this will only become a big opportunity if there are lots of startups using LINE. So, I think we are probably 3-5 years out for large B2B opportunities to emerge because a lot of startups need to get started first.
That said, we are definitely interested in looking at these types of opportunities even as early as now because they take time to build. 🙂
4. Southeast Asia is fragmented
It’s fun to just lump every SEA country together, but the reality is that SEA is quite fragmented in a way that the US is not. (by language, culture, regulations, etc. – though sometimes the US seems quite fragmented – hah).
I think it’s great if startups have big ambitions of serving audiences globally, but it’s really important to tackle one market well first.
The market that everyone seems to hone in on is Indonesia. Indonesia has 250m+ people, so it’s close to the size of the US. However, it’s important to segment further. If you’re trying to go after a banked population that has disposable income, then the addressable segment is probably more like 100m people. This is still a really large market, though.
Once you start talking about population numbers closer to 100m people, then other countries start to rival Indonesia in size. Vietnam, for example, has strong tech adoption and has nearly 100m people. Thailand has nearly 70m people.
From our perspective, while it’s important to be cognizant of market size (for example, Singapore has ~5m people but is a great hub for building a business even if not a large addressable market on the island itself), I met a lot of people who were overthinking the SEA market landscape. As a startup, focus is super important, and nailing your product or service for one market of 5m people or 50m people is already really hard to do. And that one market – whatever it is – should be the focus before trying to dabble in many markets that all have completely different languages, culture, and regulations.
However, this seems counter to the advice that many entrepreneurs seem to receive in the region. If other investors are looking for you to expand to Indonesia even when you’re still tiny, then you may need to think through your strategy on fundraising. I fully realize that sometimes you have to adjust your plan to make your company more amenable to fundraising, but at the same time, VCs don’t always have the best advice either. This is a tough balance. So maybe you start with Indonesia if you’re familiar with the market. Or maybe you start conversations with VCs well before you start your company to understand how people think about addressing one market really well before expanding.
5. Liquidity opportunities for investors are unclear
Ultimately, as an investor, I think about how a company can eventually get liquidity. And right now, even though some of the markups of high flying SEA companies are good, it’s unclear what the “typical” path of a successful large startup looks like in this region.
In the 90s, going IPO was a common liquidity path in the US. After consumers became wary of IPOs, M&A became the much more dominant path, though IPOs are coming back in favor again in some cases.
What this looks like for SEA is unclear, and what’s even more unclear is the timeframe. In China, the path to liquidity can be 5 years or fewer. In the US, our darling unicorns often take a decade and sometimes longer to exit. Will large US or Chinese tech companies be purchasing companies for large amounts in SEA? Is that strategic to them? Or will these companies go IPO? And depending on the country, will investors even be able to get their money out once they’ve made money? These are all questions that we have discussed and frankly don’t know the answer to, but we are betting this will be figured out in the next few years while our investments mature.
6. What are opportunities in saturated markets?
This trip got me thinking about opportunities in saturated markets. In the US, I’d argue that most categories are crowded. Crowded markets aren’t necessarily bad; it proves demand. If entrepreneurs can get to a certain level, any exit is good for them. For VCs, it’s different. This is where entrepreneur and VC incentives don’t align. A lot of VCs – especially microVCs like us – will generally sit out of crowded markets because they don’t have the capital to pour into their companies to compete and become big winners. Smaller exits are not good for VCs because they really need their winners to make up for their losers plus return more. We can debate the VC model all day, but that’s another topic for another day.
In the US, the big opportunities as I see it are:
Products and software for unserved consumer populations along the lines of gender, race, and ethnicity; fashion tech, for example, is an area that has been long ignored
“Super high tech” that alters how we live life dramatically; think flying cars and everything that Elon Musk dreams up
Providing software to a new generation of tech savvy people in the workplace OR consumerizing B2B software for the phone; for example, every doctor and construction worker today can use technology but 10 years ago, that was not necessarily the case
This means that entrepreneurs need to be more specialized in skillset than in a landscape like SEA. For example, if you are an entrepreneur building a new kind of autonomous vehicle, you really need to have a strong engineering background. On the other hand, if you are building a new kind of ecommerce product for an underserved customer segment, in many cases, you may not need to be technical at all, but you really need to know how to go after your customer persona to be able to out-target more general competitors who are going after a broader segment.
What this means, I think, is that we will still continue to see a lot of really interesting technologies emerge from the US as well as even more products and services that will serve just about every consumer and B2B demographic. All of these are all still large opportunities, but I think the ideas that win here will just be much harder to come up with.
Just my $0.02. Would be curious for your thoughts.
I just passed my two year mark at 500 Startups. The other day, my colleague asked me how many company pitches I’ve personally seen. When we were calculating it out, it came out to about 20k!
To be fair, this number includes pitch emails like this (including a response from my former colleague, Sean Percival).
(In fact, the vast majority of pitches I’ve seen probably fall under this category, and these only take a few seconds to read and archive. This is how you get to see 20k pitches!)
That being said, it’s been quite a ride to see so many pitches in just two years. Here are some learnings and what I immediately think about when I see a pitch:
1. Ideas are a dime a dozen…and it’s important to stand out.
As an entrepreneur, you think your idea is unique. If you’re still in the early stages of your entrepreneur-education/journey, you may even think you need to protect your idea and not share it with anyone. Even if you’re in the later stages of being an entrepreneur, you still feel like your idea is unique or at least maybe there’s only one or two other companies out there like you because that’s what you read about in TechCrunch.
It turns out everyone has the same ideas.
This isn’t a bad thing, but it means that you need to go in with the mindset of figuring out how to stand out. The good news is that if you’re making progress on your business, you can show that you’re executing. Most entrepreneurs overpitch their ideas but underpitch how they’ve been executing (revenue, traction, setting up infrastructure, etc.). This can set you apart because the vast majority of businesses I see at the seed stage are just ideas with no action.
2. Speed matters.
Not only is it important to show what you’ve done, but if you’ve been executing on a fast time scale, then that’s even more impressive. At the seed stage, there are companies who have been around for 5 months and others for 5 years. You are not only being benchmarked on hitting milestones but also on your pace.
This is one of my favorite startup presentations of all time on going fast by Mike Cassidy. Demonstrate that you can pull the trigger on things quickly — whether it is getting customers, hiring and firing employees, or product development. Convey this in your pitch.
3. If you are in a super competitive space, it’s important to address competition upfront.
If you are in a super competitive space — areas like cleaning or food delivery, for example — it’s going to be harder for you than you can ever imagine, even if you are making progress quickly. In these areas, investors are not just seeing a handful of companies doing the same thing but hundreds or thousands.
To give yourself the best shot at getting noticed, you need to do 2 things:
Demonstrate immediately — not at the end of your pitch — that you are aware that there are other businesses like yours. This shows that you have thought about the competitive landscape, and despite knowing that it’s competitive, you believe there is an opportunity for you to outcompete all other companies.
Being in a competitive space isn’t a bad thing — Google was like the 8th search engine to enter the scene, and they turned out OK — but you need to address the landscape.
Address where you fit into this landscape. This is about really understanding how you are different from the other players out there.
For example, I was talking last week with a company that is a new type of job board. They showed me their problem slide which said something to the effect of, “There are so many people who are unemployed and so many employers who cannot find good talent…blah blah blah.” Online job boards have been around for a couple of decades and even today is an incredibly competitive space! Everyone understands this problem. So, this is not the correct problem to outline in this pitch. The right way to outline this problem is to tell me why existing job board solutions suck or are ineffective and to be super insightful into the nuances of why this is the case. After that, present a differentiated solution that doesn’t have these same nuanced issues. In some sense, if you are in a crowded space, your job is to say, “The problem is that Companies A, B, and C suck, and here’s why.”
If you can do this, this will help you at least get attention on your pitch.
3. I treat referrals and cold-emails the same (for the most part).
In the beginning, I thought referrals from others would be much higher quality than companies emailing in cold. Sometimes this is true. Often it’s not. It depends a lot on who is giving the referrals. It would turn out that “famous” investors referring companies don’t necessarily refer better companies, and founders don’t necessarily refer great companies either. A lot of founders are doing favors for their friends by putting in a good word. On the flip side, there are some people whom you wouldn’t have heard of whose referrals I value the most.
4. How people present themselves in pitch emails tell me if I should NOT take a meeting
I use pitch emails as a good proxy for finding the most on-point, sharp founders. Really, I can’t tell immediately who is on-point and sharp, but I can tell who is not. Meandering email copy is not a good sign. Bad spelling and lack of punctuation = also not a good sign. Bad grammar is excusable if you are a non-native English speaker, but if you are a native English speaker, that’s inexcusable. Use a company domain name as opposed to a Gmail, Yahoo, Hotmail, or AOL email address. Otherwise, your business doesn’t seem serious enough yet.
These all seem obvious and not worth addressing, but you’d be surprised just how many pitches have basic mechanical issues. If you are not good at paying attention to detail, ask a friend who is good at that to help you proofread. Getting in the door with your best foot forward is so important because it’s easy for your email to get ignored or lost.
Use bullet points when possible rather than paragraphs. They are easier to read. Bullet the key awesome things about your business. Here are some example bullets:
Revenue: now at $15k MRR, growing 30% MoM
Monthly churn is < 1%
LTV to date is $700; CAC via blended paid channels is $250
Pilot customers include Samsung, MSFT, and Oracle
CEO previously founded a marketing tech company and sold it to Marketo; CTO previously worked as a software engineer at Google X; have worked together for 2 years