![]() ![]() They launched a full six years before Xero and for a long time they had a comparable (or even better) product. They’ll build a bigger brand, network effects and virality will snowball, and they’ll eventually take the market.Ī good example of this is Saasu, an online accounting application you’ve probably never heard of. Over time, this generally means they’ll outgrow you. They’ll be outbidding you on Google Ads, showing Facebook ads to all of your potential customers, and they’ll have bigger booths and presences at industry events. If you have a number of competitors who have taken venture-backed funding, then they’re going to be using their considerable financial war chests to grow. How big is the market opportunity you are going after? Is it big enough that if you were to take a portion of it you could generate hundreds of millions in revenue? The market you are entering (who you are targeting, existing competition, maturity, etc.) is a key factor in determining whether to bootstrap or not: Total addressable market There are four key factors to evaluate when choosing to bootstrap or to seek funding, and each has a number of considerations.ġ. Now that you fully understand the importance of the decision, let’s next look at a few factors you should consider when deciding which path to go down. While this fable might seem a bit hyperbolic, it’s reflective of how the venture capital business works and shows that taking funding from a VC firm could literally be one of the most consequential decisions of your life and career.ĥ factors to consider when choosing to bootstrap or raise You want to take the money and spend more time with your family, but Scorpio Ventures is pushing you to reject the offer.Īnd because the investment terms give them veto rights over any transaction, you’re now in a position where you’ve built an amazing business, have a huge offer on the table, and want to get out, but can’t.Īll because 5 years ago you took VC funding. However, while you’re having the best day of your life, Scorpio Ventures is having one of its worst.Īlthough they stand to make about $150 million from the deal (10x their original investment), your company was one of their most promising investments, and if you take the deal it’s unlikely they’ll be able to return the $1.2 billion they need to in order to deliver the 3X they promised their LPs. Enough to buy a waterfront house with a yacht and a Maserati and enjoy the rest of your life with your family and friends. comes along and offers you a whopping $450 million for the company.Īs the founder, you’re ecstatic. You use this money and grow like crazy over the next 5 years. They invest $15 million at a $45 million valuation, taking 33% of the company. With their new money in the bank, Scorpio comes along and invests in your company, Globex Corporation. This means that in 10 years’ time, Scorpio has to return about $1.2 billion to its investors in order to be considered successful. get a greater return than the 8-10% annual growth they’d get by putting their money into public stocks, bonds, etc). Typically, LPs would expect a 3-4X return on their investment over the course of a decade in order to make it worthwhile and effectively ‘beat the market’ (ie. ![]() Scorpio Ventures goes out to a series of limited partners (LPs) and pitches them on how good they are at picking great startups to invest in. In the book, he uses an example VC fund called “Scorpio Ventures” to outline some of the fundamentals of how venture capital firms work. Rand Fishkin, the founder of well known SEO software company Moz, wrote a brilliantly open and honest book called Lost and Founder a few years back. Why bootstrapping vs VC could be the single most important decision you make I’ve been fortunate to be part of 3 startups (Invision, Campaign Monitor and Safet圜ulture) that have taken a combined $830 million in funding as well as bootstrapped several startups myself, and have spent a lot of time thinking about why and when VC funding should be taken on. However, this isn’t a decision that should be taken lightly and there are a multitude of factors (ranging from product, company, founding team, market, etc.) that largely determine which path is right for you and your software business. Given the current economic conditions, it’s gotten a lot harder for startups to raise the kind of funding rounds that were once the norm a few years ago.Įither by choice or because they haven’t been able to close a round, this has led many startups to consider whether the VC path is actually the right one for them or whether they are better off trying to bootstrap their business.
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