“I hate VCs.”
That’s how I felt after I shut down my first business. We’d raised a seed round from a VC and angel investors, yet three-and-a-half years in, we shut the business down.
What hurt the most was that none of the investors seemed to care as much as I did. Our angel investors were quick to ask how they could claim their SEIS tax relief and the two seed funds were quick to let everyone know they had liquidation preference and would get money back before others.
I’ve long observed how frenzied the fundraising narrative has become in startup land. Founders chase VC funding as if it’s the answer to all their prayers and the only way to scale a business.
An opposing narrative is forming too, one that is just as narrow. That view holds that all VC money is bad and that bootstrapping a business profitably is the only way to go. A growing community of indie builders, hackers and hustlers are following in the footsteps of Buffer, Basecamp and Mailchimp in building tech businesses that reject the Silicon Valley status-quo. These types of companies apparently aren’t unicorns, they’re zebras.
Both narratives see the world in black and white. Either raise VC or never raise a penny. Unicorn vs zebra.
In reality, there are many different ways to fund a startup, depending on the founders, the product, the market and the vision. Most fall somewhere between being completely bootstrapped and raising hundreds of millions.
In reality, there are many different ways to fund a startup, depending on the founders, the product, the market and the vision.
Founders need to better understand the pros and cons of all the options and then reflect on their personal priorities and those of the business to figure out what works for them. (Disclaimer for my current business, Sanctus we’re somewhere in the middle having taken only angel investment and been profitable.)
Considering the pros and cons
The cons of VC are now becoming well publicised, thanks in part to documentaries on epic startup implosions like Theranos and WeWork. There are the onerous legal terms, high growth expectations, intense pressure at a board level, lots of financial insecurity and the constant need to perform at an exceptionally high level. Plus you always need to be fundraising to continue to increase your valuation and have the funds to fuel further growth.
How (and how not) to run a startup.
The positives are investor support at the board, the ability to invest with deep pockets, the capability to hire exceptional talent and the ever-expanding support network that VCs are offering founders and their teams. Having a good VC can be like having a business partner, they won’t be as hands-on as you, but they’ll be there with you supporting you and giving you challenges, feedback and accountability.
The cons of bootstrapping a business are the opposite of the pros highlighted above. It can be quite lonely. The only accountability in the business has to come from the founders. There are many more constraints on resource, meaning that investing is much harder, salaries are lower and talent is typically not as good. It can become easier to become focused on making the next pay-run rather than disrupting your industry. Scaling can be tough; most people in the business will be at capacity just keeping things running. To then scale means going over and above what you’re already doing often with no additional resource to grow. It’s much easier to get stuck and plateau.
The positives of this approach are the same problems reframed. You as a founder, answer to nobody other than your cofounders, team and customers. There’s complete directional control, and there’s an intimate connection between you, your customer and your product. There’s nowhere to hide so the founders are deeply involved in the business and build almost everything themselves. Due to the financial constraints, there’s a ruthless focus on prioritisation and creating the most value possible, which can breed excellent product decisions and ingrain a strong appreciation for efficiency and healthy profit margins from day one. There’s no pressure other than the pressure you might put on yourself to grow. You can be much more relaxed and put yourself first, nobody’s stopping you from taking a sabbatical.
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Reflecting on which path is right for you
How a business is funded should be dictated by the desires of the business and all its stakeholders; there is no right or wrong. So how to choose which path?
Founders should reflect not just on what company they want to build and why, but also on ‘how’ they want to build it too. Do you want to build a hypergrowth company with a lot of staff or do you want to build something smaller?
What are your aspirations for your life? Do you want a family, do you need to provide security for yourself and others? What financial risks can you make and what are your financial goals?
What about your cofounders? Do they have the same goals? There’s a lot of personal reflection and honest answering of some existential questions along the road in building a business.
There’s a deeper question too: what does the market want? Is the market ripe for disruption, do you need to act fast to beat competitors, is it a winner takes all market? I believe there’s a special place in between the question of what do I want and what does the market want, here lies the answer to the type of company you want to build.
You need to have these conversations mainly with your cofounders and early investors (if you have them). These are the people who’ll be right in there with you and need to be in the loop.
I will say that once you’re on the VC funding path, it’s near impossible to step off. Whereas if you don’t raise and bootstrap, there are plenty of options for you still to choose from, including raising VC one day.
Conscious funding choices
I hope we can begin to make more conscious choices about how we fund our startups and the consequences the different paths have. There’s a lot of misalignment at the moment and a lot of people chasing investment for the wrong reasons when there are lots of different paths to take.
All in all, there’s no right way, just your way.
James Routledge is the founder of Sanctus and author of ‘Mental Health at Work’.