The reason there is not a lot of dialogue around this is because the numbers don't work for all parties at the right time.
When you have a small founder team, you need capital for essentially nothing to show. You can't raise that capital selling the $170M exit dream to angels or a fund.
Conversely, VCs are assuming a 10% or less success rate across their portfolio. And of that, maybe 2-3% of portcos really returning everything.
So they don't have the luxury of shepherding 100 portcos to $170M exits, since in reality, a $1b exit has a similar chance of happening as a $170M exit. Which is to say very very low.
There's no magic sauce, no prime formula, no wizened or sageinvestor. It's a shit show from start to finish. You're best off finding investors who are on the same wavelength as you, and focusing less on whether you hit a home run or a grand slam.
When you get to a place where you're printing cash or whatever, then sure, make sure the math works out for you. But for 99% of all founders, this question never comes, and they spend too much time thinking about it.
So in the failure case, very little of it matters, but in the success case the VC industry can be exceptionally predatory - participating preferences, multipliers, etc. etc. etc.
Honestly, it takes no time at all to have clean term sheets and you don't have the option to fix it later.
Sage advice. Most startups fail, so squabbling over the numbers has always seemed absurd to me. I'd rather see discussion along the lines of "what happens after we do well" because you have no idea of what "well" will be down the line.
There is no way to ensure you don't get screwed in an equity agreement for a failed company. Since most startups fail, worrying about some future event that most likely won't happen, is a waste of time.
Most equity agreements can also be rewritten with numerous "tricks" down the line. A cap table re-org is a great one. Another example: I got written out of a companies equity table once when they shut down the original company, sold the name to a new company for $1 and then did a DBA for the old company name.
You're better off figuring out what happens when the company is actually successful, not what happens if it eventually becomes successful. Does that make better sense now?
This is a great post, but I think it fails to see one important point...
> a founder selling at the Series D price of $210M, would make the same amount of money at exit as they would have if they’d sold for $38M after having only raised a seed round (...) Lifetimes of work and risk lie between a Seed round and a Series D round. And, despite increasing the value of the underlying business 7x, the dollars at exit for the founder remain roughly the same.
Even though the exit dollars might be the same, it's failing to see two important points:
a) founders taking money off the table in early rounds. Founders can sell part of their equity at their company just as a personal "cash out" strategy. 1password founders took their Series A mainly for this.
b) the network capital gained at a Series D company is NOWHERE near at a Series A company. It's impossible to put a dollar amount to that, but it'd say your career will be completely different from a successful Series A or Series D company.
I'd take a solid cash cow producing producing value for customers at an A-round size over growing it to D-round size any day. Maybe because I've just been through enough of this crap to know that yes, you want to make money with your startup, but there are some things no amount of money can compensate you for...
And a company spinning off a fair amount of cash can be grown surprisingly rapidly organically, though it does take several changes in how the company is run as it hits inflection points (there are usually several!) due to growth (e.g. people, processes, and effective business/marketing/sales oversight become more important to grow beyond $6-10M/yr...)
I’d love to see a similar analysis for non-founders. I.e., the other N-2 people at the startup. Like, how many hundred-millions or even billions will exit have to be before you get $500k as the Nth employee of a typical Series A/B/C/D?
It's crazy that a series d exit would net a founder 7 million and yet my bootstrapped business returned a 4 million profit for me last tax year.
I think people need to learn more about how to scale a bootstrapped business. Even when I was getting started, I read a ton on VC funded businesses but not a lot on non VC funded businesses.
I think there is tremendous amount of money to be made in bootstrapping as well. I think a lot of indie hackers / bootstrappers also think too small.
You can definitely make 100s of millions of dollars without VC money. That part of reality has not been properly dispersed.
It is straightforward to get a body-shop consulting business to mid-7-figures.
In an acquisition of that business, you're going to get a very low multiple on your forward revenue. That's because, in general, you can't plug a body-shop consultancy into a bigger sales machine and amplify the profits; sales and delivery in those businesses are delicately balanced, and while they can be scaled, they can't be abruptly scaled by an acquirer.†
If you can bootstrap a product business, none of that caveat applies. You should bootstrap if you can!
† (but if your consultancy is throwing up 7 figure profits, you might not care about its sale value; just run the company for 10 years and bank the profits).
"It is straightforward to get a body-shop consulting business to mid-7-figures."
Sorry, no. This is demeaning. It's not easy and it's not straightforward.
disclosure: Been running a "body-shop consulting business" (also demeaning) for 21 years in London, started about a dozen other businesses, 2 are 2MM+ rev/50% EBITDA profit recurring revenue companies.
Please don't demean "consulting" or "agency" work. In my experience it is way more challenging to win and grow business in those circles than it is in a well times SaaS company. I learnt a LOT doing that for a long time. The work is just as relevant.
Establish yourself. Specialize. Hire someone to increase delivery capacity. Sales capacity improves; ratchet delivery up with it it (get better at recruiting). Raise rates continuously and aggressively. Give it 2-3 years (once you've got your sea legs).
Be good at what you're doing and steer clear of commoditized work. You can't scale up a generic IT consultancy this way. Or maybe you can! I've never tried.
can you give more details about this from your own perspective? What does commoditized work mean to you and what should one assume about IT consultancies that tend to dabble in this kind of work? What are the problems with it in your opinion? Is this work even avoidable?
I have my own thoughts on this I just don't want to bias your response.
I'm curious to hear your thoughts, and I don't think you'll bias tptacek, he's spent a long time doing it.
I spent a lot of time in consultancies and started one myself, I'm not tptacek but here's my two cents.
Does the buyer see you as a commodity? How hard is it to find someone else to do what you do?(as defined by the customer not you) Can you differentiate yourself from competitors?
I think it really comes down to establishing a brand. And the problem is if you can't establish a brand you can't charge enough to fund growth (and at the beginning charge enough to give you time to grow the company).
A company with a brand can charge 2-3x their labor costs. A company without one can maybe charge 25% more than their labor costs and this puts you in the classic consultancy spiral where you spend so much time working for your business you don't have enough time to work on your business.
My thoughts are, as someone who worked from the consulting end and not management or sales, that when you hire sales people to bring in consulting work, they inevitably bring in commoditized work because sales people have unique incentives and pressures. If you are at the point where you are trying to get sales people to sell specialized consulting work, you aren't doing it correctly. It more or less has to sell itself with a brand as you say. Sales people don't want to spend the time building relationships or learning specialized information to sell to specific targets. So you can't scale up a small consultancy imo.
From the employee side, it is boring and meaningless work that burns you out. So taking on that kind of work will likely cause a death spiral in your firm. Your more senior employees will leave and you will have to hire more entry level employees and at that point you can only take on commoditized work and your brand reputation is shot.
I've seen big consultancies buy up small boutique consultancies and it always turns out badly. My own thought is if you are an IT consultant and you find yourself doing commoditized work, something has gone wrong.
Is it really? Do you want to understand what I'm saying, or are we here to dunk on each other? I think you have the impression I wrote a drive-by comment about building businesses, and, as I said upthread in response to you, before you wrote this "peak HN" barb, I have a little bit of experience here, too.
What's a little annoying here is that I don't even think the parent commenter is building consulting businesses. I was moved to comment at the incredulity people seemed to have about bootstrapping 7-figure businesses. One way to do that, straightforwardly, is to build a consultancy. But there are others.
Without question the bootstrapper. You almost never hear about them but there are thousands of them out there. They don't have huge PR VC teams behind them, hence you never hear about them.
I think you mean the opposite, given the phrasing of the question.
> They don't have huge PR VC teams behind them, hence you never hear about them.
This seems like half an argument. I get that PR teams have an incentive to talk about their company, which is why they are in the news sometimes. But it doesn't explain why non-VC backed companies that are swimming in cash would be so elusive. Would they be in the news? Perhaps not — though they might still want to generate PR for themselves, to grow their business.
But you'd think that people in the startup world, who spend lots of time reading about startup strategies, examples to follow, etc., would have heard of such companies if there were many out there. I've been at this for a number of years, and I rarely hear about bootstrapped startups that are quite so successful. I guess PE folks would have a good sense, since such businesses would presumably make great acquisition targets.
And perhaps that's what keeps them so rare — someone making a couple million a year would rather sell the whole thing for $20M and move onto their next thing (be it a startup or a private beach), and there are plenty of acquirers who are happy to make that trade.
The reason why you don’t hear these stories is because no one making meaningful money as a bootstrapped founder wants to invite unnecessary competition.
Take a look at any sub-reddit related to entrepreneurship. The minute someone even hints they are making a lot of money in some area you see multiple replies asking about the product, niche, etc. People will clone what works. Why would anyone create that kind of exposure if they didn’t need to?
[Edit: just read the rest of this thread and there are three people asking the $4 million guy how he did it, so I guess point proven?]
Yes, there is curiosity. I'm not sure if that proves the point that one would not want to reveal details about the business, or if it indicates that perhaps the commenter's claim strikes many people as somewhat outlandish, or at least rare. I'm sure there are some folks out there clearing $4M/year with their bootstrapped business. But I'm also sure there are folks out there who tell tall tales on the internet.
There are thousands and thousands of private bootstrapped business where the founders are banking 1-10M EBITDA every year. You almost never hear about them.
This thought crossed my mind. But wouldn't there be chatter about this sort of thing within the startup community, as bootstrapped businesses get snapped up? There are podcasts like Built To Sell, which tell the stories of small companies that have been sold. I've noticed that many of them are service businesses, and there aren't as many SaaS companies as I would have expected. Presumably the incentive to keep quiet about your lucrative niche would end after you've sold the business?
THIS! I have been a founder and/or CTO for around a dozen startups. Two exited successfully by M&A, but they made only enough money to offset the others I lost my ass on. (One of those was due to being 20 years too early - that product might sell well, now...)
I'm no longer interested in a doing a startup for someone else to own and control. (My biggest startup mistake was hiring an experienced CEO and COO to run my dream startup. The person with the vision and dream needs to be calling the shots, and hired guns are only just that... Passion for the product is really important!)
Although I love startups, they are hard and take a LOT out of you. It's not worth the hit to your life (and your family's!)just to make a pile of equity/money for some ungrateful trust fund kid or a VC partner who thinks their crap doesn't stink just because they happened to be in the right place when their first startup hit big.
VC investment is fundamentally parasitic. If you're building a software/services startup, you almost never really need VC - if you can build a product company without it, do so. I live in Austin, where there are a LOT of startups and startup people. Out of all of them, I know one inventor/technical founder who thinks that taking VC was really worth it, and didn't get screwed over by being liquidated to death. That's not a real good showing for the VC guys. Just sayin'...
I'm really curious about your story. Two years ago your posts were seeking business tips because your efforts weren't working. One year ago you were looking for a way out of web dev. What did your path look like between then and now?
So I had been trying to sell software products that I built for about a decade. 2 years ago things hit rock bottom and I was thinking of switching away from this industry completely. As in most stories I guess when you try and try and hit rock bottom, something changes in your head? Then things started clicking and I hit upon my first offer which worked. Reinvest all profits into social media ads and if your product can be used anywhere it is ridiculous how fast you can grow. I make 3 of those 4 millions in the last 2 months. What is also crazy is how much of a margin there is in a software product. I know of some people who do this in ecommerce but they have profit margins of maybe 20%. I have profit percentages of over 90. But I had to hire more people towards the end of last year and that was a pain and still is. Hiring is not a solved problem.
I run a bootstrapped software company, not at the $100M scale.
My interest piqued I clicked, had a look at Aha! (having never heard of it before) and immediately thought - hey I could use this. You got me, ka pai, haha.
Any insight on how to navigate inflexion points that seemingly require more capital that cashflow allows? Stay true and spend less? Number 8 wire might not be the same solution today as it once was, that's my worry.
In a business that is more capital intensive than SaaS bootstrapping is likely to be a lot harder. The beauty of SaaS is that expenses scale smoothly with revenue so you never need large capital infusions.
It may be tempting to think "if only I had enough money for a big advertising campaign". But if you are not seeing that small investments in advertising result in corresponding small increases in revenue, then it is very unlikely that a big investment in advertising will result in a big return.
When something is working well it is blindingly obvious. If you are having to look hard for signs of positivity then it is not working. Lots of money can only serve to make things appear successful for a limited period of time.
Not a lot that I can find. Essentially businesses are about making bets about what reality will look like in the future. So the better modeling you can do of reality, the more successful you can be. Earnestness is a strong word in my dictionary when it comes to testing ideas these days. I started seeing success when I stopped lying to myself and became earnest after over a decade of failure.
> So the better modeling you can do of reality, the more successful you can be.
How do you approach modeling?
> Earnestness is a strong word in my dictionary when it comes to testing ideas these days. I started seeing success when I stopped lying to myself and became earnest after over a decade of failure.
It sounds like there’s something here, but I’m not sure I understand what you mean. By being earnest do you mean being serious about the idea, or is it something else?
Earnestness is basically intellectual honesty but it takes effort. You think you are being intellectually honest but you are not. You need to peel back the layers.
Regarding modeling multiple models overlap is closest that you can get.
Not a successful self-funded entrepreneur but Im working on it and I’ve studied a lot of the greats.
DHH and Jason Fried blog and books like Rework
Arvid Kahl is a successful software bootstrapper and has a few great books and a bootstrapper newsletter
Everything by Rob Walling is focused on software bootstrappers, and his associates brands / YouTube channel, Microconf community etc
Indie Hackers podcast , interviews, and website
Founders at Work is written by a YC founder but ironically had lots of bootstrapped interviews like Craigslist and Joel Spolsky (Trello)
Patio11 blog is classic
MJ Demarco is non tech and writes more “motivational” style books about bootstrapped entrepreneurship
Once you go down this rabbit hole you’ll discover many more . Especially since bootstrappers love making content about their experiences as it’s marketing and potentially more revenue (what DHH calls “selling your byproducts”)
This. In addition to better outcomes for founders it can be a better outcome for the economy at large including but not limited to customers and employees. As a whole society would be better off with fewer Ubers & WeWorks.
Given what WeWork charged, you can't convince me there was much subsidy there, nor much social benefit.
"Cool offices" are something that should never even be talked about by a founding team until they have several spare million sitting in the bank. Until then, rent cheap-ass real estate and buy second-hand office furniture. And that's if you even have offices, which you may not need if you're a software and/or services company. Nice laptops, monitors, chairs, Zoom, GitHub, and Google subscriptions are really cheap compared to real estate!
I am not a good writer that's why I do not do blogs and stuff but I will try:
2 fundamental ideas: Distribution & Supply Chains
Distribution:
You need to secure distribution before your company can grow. Which means essentially a lead list or people you can reach in bulk or manually by walking down the street. You need at least 500+ such connections.
The goal of the initial distribution is iterating on your core value proposition. Core value proposition is a binary statement which should be answerable by hell yes or no by your distribution. So iterate on the statement on the first 100 till you get to a hell yes on the binary question. That question should also become the heading of your landing page above the fold.
Supply Chains:
To deliver the product you need to think in supply chains. If you have played factorio or such games this will make more sense to you.
You need a constant supply chain of potential customers (distribution from above).
You need a constant supply chain of great employees.
You need a constant supply chain of new income streams in your product.
A good product delivers value at first touch. That is through strong UX and clear demarcation. Every feature should exist to deliver the core value. So you need to reject a bunch of designs, product ideas, customer feedback to make sure that you are only delivering value.
Other thoughts:
I can only speak of core technology businesses. If you are selling data, you are not a tech company, stop acting like one. Just put stuff in a spreadsheet and sell that.
Use a strongly typed language like Golang or a highly expressive one like Ruby for your backend. Choose extreme languages such as Imba or Steel Bank Common Lisp (which I built on initially before switching to Golang) for maximum advantage.
Make sure that you have a potential market of at least a $100 million flowing through.
Not to detract from an interesting post, but the last point about programming languages is confusing, and seems to give little information.
Use expressive, untyped Ruby or inexpressive, strongly typed Go? Or SBCL ?
Most people would put Ruby and Go on pretty opposite sides of the spectrum.
Maybe you prototyped in SBCL when you needed extreme flexibility/iteration speed at first, and then switched to Go when maintenance became more important? That's a fairly common evolution at big companies.
(Not the original poster but have a similar background).
#1 advice for engineer-founders is to always be questioning whether coding is the best leveraged use of your time.
As a bootstrapped engineer founder, I spent way too many months (years?) coding non-stop, even after we got past PMF, despite having the revenue to hire engineers to replace me day-to-day. These days I do zero coding, and am still equally happy and fulfilled. At least for me, spending days coding was a really easy way to feel productive, but it wasn't the best use of time compared to hiring, marketing, sales, company culture, etc.
#2 advice for founder-engineers: after you're able to stop coding, remember that your product is worthless if no one knows about it or if no one is using it. Once you get product market fit into a good place and have revenue traction, it's time to spend your nights thinking about marketing and sales rather than code.
TLDR: always make sure you're spending your time in the most highly leveraged areas. Hiring and delegating. Coding is rarely the highest leveraged area your time can be spent.
I think the #1 thing most bootstrappers struggle with is finding the right market, idea, validation etc. As much as people say “ideas are overrated” I increasingly think that’s not true, it’s that a good idea has to include things like “can realistically get done by a self-funded tiny team and make revenue soon” which the “idea guys” rarely have.
As far as not coding too much, I’m increasingly finding this true. One thing I’ve noticed is that most non tech founders outsource development and most technical founders don’t even though technical founders can outsource far more efficiently since they can play more of a “tech lead” role rather than hand it to a dev shop. I really regret not hiring designers sooner since I’m bad at it and there’s tons of affordable talented designers on Upwork.
Still, hiring is a little nerve wracking since it eats into your runway. It’s really tough to know when to burn money or time when you have minimal or no revenue. After PMF , hiring makes sense but before then it’s really ambiguous how to make that call.
It's not hard to come up with a highly profitable, but morally bankrupt idea. It's anything that serves those on the top of the food chain: a new creative way to enchance the survelliance machine, etc. But most of the engineers are firmly attached to the ideas of truth and goodness, and so they struggle with ideas that also fit their moral constraints. Big firms understand this, and create a layer of fake goodwill to shield engineers from the reality of what pays their salary. That being said, morally upright and profitable businesses exist, but it takes some nontrivial intuition to invent one.
Could you share what market or type of business you are running? I always have a difficult time wrapping my head around starting a business in a large market with clear market winners ($1B+ Rev.)
While we insist it's not about the cash, it's about this meritocratic fever-dream, we still obsess over VC returns, fund sizes, exit strategies. gil's analysis underscores this paradox - startups chasing after the elusive "meaningful exit", ideally returning the entire fund in one stroke.
but here's where things get interesting. capshare's study reveals a predictable pattern of founder dilution based on rounds raised. by series d, founders own a mere 11-17% of their brainchild. employees fare slightly better with 17-21%, but investors take the lion's share at 66-68%.
so, what does this mean for founders? well, they'd make as much selling at $210m in series d as they would selling for $38m post-seed round. More funding doesn't necessarily mean more money for founders, kind of obvious esp in the post-WeWork era. it's a stark reminder of the trade-offs involved in chasing VC dollars, which can chafe something like mcmaster-carr grade 3 steel wool.
much like startup founders, it serves multiple roles, adapting based on need. it doesn't seek the limelight, focusing instead on getting the job done. perhaps there's a lesson there for startups obsessed with fund sizes and exits. basically it's not about how much you raise, but what you do with it.
> For an industry that doesn’t do it for the money, we sure talk about money an awful lot in the world of startups.
Do people really insist that this is the case with a straight face? The vast, vast, vast majority of startups exist to exploit a business niche that is either underserved or as-yet poorly understood, or to build an 'interesting' app. The point of all these is definitely and without doubt about building a successful business where 'successful' is a virtual synonym for 'profitable' and where 'profitable' also seamlessly serves as a proxy for 'meritocratic'. It seems really disingenuous to suggest that there is some nobler cause at work - and I don't think there is anything particularly wrong with that.
One thing that would be helpful to add to this post:
1) the chances of your company making it to series B
2) the chances of you as a founder actually making any money.
Much of the startup "legend" of massive exits, everyone making lots of money, is exactly that: legend.
VCs batch startups together because >90% will fail. Of those that do make it out of the incubator in any meaningful way, you can expect another 80% mortality over the next two years.
Say you get aquihired, you're not going to get much of a share payout, if at all.
Even if you get blockbuster hired (ie bought for 250million) you're probably going to get golden handcuffs rather than "fuck you" money upfront.
Same for an IPO, your shares will be converted, but you can't exercise them until after n years.
The numbers I'm seeing in the comments certainly make the case for how unlikely it is for a startup employee to make anything off their startup stock options, if this is how unlikely it is for the founder to make anything.
TLDR: dilution is a thing and investor incentives are not always aligned with founder, when it comes to early exit opportunities.
---
But...
I don't think there are really a lot of opportunities to exit at $38m in the early stages of a startup, even if your valuation says it is possible on paper. There just isn't much of a market for companies at that stage of growth.
Imo, the more likely scenario is for a startup to either 1. fail to raise and run out of money, or 2. Become self-sustaining, but never successful enough to achieve a meaningful exit for the founders or investors, basically a "zombie" company that may never exit.
In the second case, it is the investors that get screwed, as the founder has made a nice lifestyle business out of their investment. I think most investors realize this is one of the outcomes though, so "screwed" is probably too harsh of a term to use to describe it.
The second case isn't probably good for founders either. I don't think it would be easy to convince investors to let you take cash out of the business to any meaningful degree, but I suppose that depends on how much control you have over the business at that point.
I think there are a lot more potential buyers of $38M companies than $380M companies, particularly if the burn rate is low. There are a lot of exits in this range in the B2B software space to private equity types of co's that are rolling up companies in a particular vertical.
In the second scenario, employees with equity are also screwed. Just led one of those zombie startups. It's selfish and incompetent as hell to take investment, hand out shares, and then steer into a low growth lifestyle business whose share will never be worth anything.
> founder has made a nice lifestyle business out of their investment
It’s perfectly reasonable that one might have a medium size business supporting the local economy. It’s a shame that VC model is hostile to this outcome.
Bootstrapping is a fine alternative to VC and more appropriate for many businesses.
But it isn't hostile to want a return on your investments, and investors are not operating as a charity to support the local economy, although that does incidentally happen as a result of investments.
I think for most founders, exiting with 100% ownership of a small pie is a much better proposition than exiting with 10% of a large pie IF you have that decision to make. The risk, hard work and difficulty in the latter are exponentially greater.
Regardless of where you sit on the line between ambition and optimizing for founder outcomes, I think we can all agree first time founders aren't thinking about the math here enough and are far more susceptible to listening to what VCs say they should do and care about. Having been in this position, all I can say is I'm glad we didn't raise more money because we had far more exit options. I really appreciate what Bryce and indie have done to change the narrative here.
When you have a small founder team, you need capital for essentially nothing to show. You can't raise that capital selling the $170M exit dream to angels or a fund.
Conversely, VCs are assuming a 10% or less success rate across their portfolio. And of that, maybe 2-3% of portcos really returning everything.
So they don't have the luxury of shepherding 100 portcos to $170M exits, since in reality, a $1b exit has a similar chance of happening as a $170M exit. Which is to say very very low.
There's no magic sauce, no prime formula, no wizened or sageinvestor. It's a shit show from start to finish. You're best off finding investors who are on the same wavelength as you, and focusing less on whether you hit a home run or a grand slam.
When you get to a place where you're printing cash or whatever, then sure, make sure the math works out for you. But for 99% of all founders, this question never comes, and they spend too much time thinking about it.