Yesterday I tweeted:
- To be clear we have invested in companies that don’t meet all or any of these criteria, and we’ve also not been able to invest in companies that met it perfectly. But I wanted to give founders a wheelhouse of what we’re looking for.
- But several folks asked the question (I’m summarizing): “that sounds like a successful business with a clear trajectory towards continued success. Why would they raise capital at that point?”
- I agree this alone is a huge milestone in an entrepreneur’s journey and is itself a level of success. So why go and raise money at that point when you don’t “need” it. It’s a fair question and one I realized I haven’t explicitly answered, so this post is non-exhaustive list of reasons why bootstrappers in this or similar situations might still want to raise capital.
- PS – but what about those that truly need it in the way someone who wants to build a McDonald’s absolutely must have a construction loan to get it done. It’s a fact of the investing world right now and the return requirements of funds that early-stage investors are generally much more interested in opportunities that don’t necessarily need the capital vs those that truly do. I think about this constantly and right now my opinion is that the best route for entrepreneurs is to try to bootstrap through those early phases.
- I am constantly thinking about experiments to try here and keeping an eye out for other opportunities for very early stage capital but for 99% of entrepreneurs the best thing will be to bootstrap to some amount of traction. We are building out resources and a community for this at Founder Summit Remote.
Uses of Capital
So in this scenario you’ve got a nice software business that’s maybe not a rocketship but it’s growing steadily, some base level of monthly recurring revenue, and customers are fairly happy and stick around. What would you go and raise outside capital and what would you do with it? I’ll list here a few of the reasons I feel are most aligned with us as investors, thought there are many more:
- To go full-time: by far my favorite reason for investing at Earnest is so that the founder(s) can go full-time on there business. They have something that’s clearly working but they are still at their job or freelancing and trying to balance it with a growing business on nights and weekends. The long slow SaaS ramp of death is real and even with steady growth it can be a long stressful slog to get to founder-break-even1. Outside investment let’s the founders quit their jobs or spin down their freelance work to focus full-time on their business. In my experience the amount of capital for this can vary by an order of magnitude from a solo founder just reducing freelance contracts to multiple founders with kids, a mortgage, and a full-time job they have to quit (we’ve invested in both).
- Key early hires: another thing outside capital can unlock is making some early key hires that will take your business to the next level before you can 100% afford them. Most bootstrapped businesses are built with founders plus the best team the meager revenue can afford. At a certain point the business really needs an experienced senior engineer, head of marketing, director of partnerships. The founders know this can take the business to the next level but they’re operating at or near break-even and it will take many months to build up the cash and margin in the business to make an offer to this kind of employee. Putting outside cash in the bank can give founders the confidence to go and recruit this kind of top talent.
- Capital Cushion to keep thinking long-term: Imagine you’re two founders at $12k MRR… this might be just barely break-even to pay your hosting bills and cover each founders’ cost of living. At this phase, you’ve been slogging on this business for a long time, probably not making much money and you’re just now eking out a living as an entrepreneur. There can be a tendency at this point for founders to get very conservative and become afraid to make big moves, launch products, experiment with pricing, say no to customers who are not a good fit, or hire more people. You’re barely hanging in there and you don’t want to risk anything. Having some cash in the bank that ensure you can make a few mistakes and still keep your salary enables bootstrapped founders to continue making long-term bets on the business.
More than cash; changing the trajectory of your business
At Earnest, we typically like to invest in businesses where this will be the “last check” in the sense that business plan after we invest is to not need further outside investment. What that means is that the capital itself typically solves a short/medium-term problem (go full-time, make a few key hires, etc). But Earnest is intended to be more than just a source of cash and our goal is to help increase the long-term trajectory of your business.
This by the way is what the founders we have invested in consistently rate as the most valuable aspect of working with Earnest, far and above the cash itself. Here is our approach:
- Mentorship: we bring together an incredible group of experience founders who are both investors in the fund (and thus in the companies we back) and who allocate time to help founders navigate the uncertainties of building a business. Learn more about our unique approach to mentorship.
- Community and Accountability of Like-Minded Founders: A very common challenge bootstrappers face is that 99% of all the advice, resources, and communities for founders are geared towards those who are currently or aspire to raise venture capital. Through the companies we invest in, we bring together a tight knit group (through Slack, Basecamp, Zoom, Meetups, and more) that is there to collectively solve problems from similar points of view, and to motivate and encourage each other.
- Shared Resources: Need help finding an accountant who actually understands SaaS? Want someone with experience to look over your first big enterprise contract? Looking to recruit and interview your first senior devops engineer? We put an enormous amount of energy into building out shared resources specifically tailored for the needs of bootstrapped software founders.
Is it worth the hassle?
The last thing I sometimes hear and saw on this Twitter thread is roughly “yea I see the upside but is it worth all the hassle of dealing with investors?” I empathize with this immensely. As an entrepreneur I wasted a big chunk of my life trying to raise capital from VCs and I know tons of horror stories of founders who had to deal with investors taking control or trying to force them to take their companies down paths they didn’t want to go.
At Earnest we’ve done everything we can to be uniquely low hassle for founders. Our Shared Earnings Agreement structure can be executed in a day with no need to change the company structure, essentially no closing costs, no issuing of shares, and gives us no control over the business. We think it aligns incentives with founders of the bootstrapper mindset more than any other form of capital (it’s why we had to invent it).
If it sounds to good to be true we are always happy to put you in touch with the founders we work with who have been through the process.
When the business generates enough revenue to cover the founders’ cost of living↩