Bootstrapping: What Angel Investors Don’t Want You To Know

Published in Inside Nelio.

The entrepreneur’s dream:

A group of friends or colleagues come up with a novel idea for a “collaborative platform” or a “disrupting comparator of …” or whatever else. After creating a small prototype, they participate in one of the best startup accelerators, which provides them with just the right training and environment to best shape their idea, establish a good business model, design and test its scalability, get customers and, above all, get the necessary funding to accelerate growth. After a big expansion, they become part of the Next Billion-Dollar Startups list. Finally, if everything goes according to the plan, they hit the big time when they get an initial public offering or even sell the company for billions.

Ganar mucho dinero
Sometimes this incredible dream becomes true. But only sometimes…

Alternatively, you may have decided to bootstrap your startup, either because you don’t have the time or resources to access funding, or because you want to keep your equity in your startup, or because you believe you’re the best, or because… (well, for whatever reason).

Bootstrapping

If you’re not familiar with this concept, bootstrapping is a term that refers to starting something with no resources (or with very few) and to undertake only with the means you have. The best part of this model is that the equity of the company is exclusively held by the co-founders. But don’t be fooled, big investors are clear on the problems that bootstrapping involves:

  1. Speed of Growth. You are limiting your resources a lot (keeping the team very small, possibly only the partners). That implies that your work and production capacity for work will also be very limited. The project can become a major or almost impossible challenge if you want to compete in a market where everything moves very quickly and your competitors are much better equipped. Are you sure it’s not better to be more competitive?
  2. Personal Risk. With bootstrapping you keep your equity, but this implies that your partners and you take all the risks. How much can you endure without being paid or with a shitty salary? To what extent can you think clearly if your income is so low? With funding and a monthly income, you may have less pressure at home to quit this absurd adventure.
  3. Company Image. There are big investors known for their ability to find the best business opportunities. If you can say that your startup is owned by some of them, you’re already portraying an image of credibility and guaranteed success. If you’re alone, it’s going to be harder to earn a reputation.
  4. Support Network. Investors can not only provide you with a better brand image, but some of them may also help you as great mentors or provide you with a network of contacts of clients, mentors, workers or future investors. Your investors are the first ones interested in your business doing well and so will be happy to give you a hand. With just bootstrapping you may be more lost.
  5. More Capacity. There are many types of technology businesses that need investment in order to create the product or provide a service, especially if they involve a large team or the physical manufacturing of the product. If your great idea involves developing a large initial project, you clearly need capital and it possibly doesn’t make sense to try a bootstrapping model.

So, apart from not losing equity in your company, is there any other advantage of bootstrapping? Are there really any big technological companies that have achieved their growth with a bootstrapping model or, at least, following this model for a considerably long period of time? Because, let’s come back down to earth: if there are actually no examples of this, perhaps it is not such a good idea to be one of the pioneers, don’t you think?

Big Companies With No Venture Capital

After looking for information, for your own peace of mind, I’ll tell you that there are some companies that have worked with only their own resources. Let’s see some examples:

#1 Clicky

Roxr is a small startup founded in 2006, and based in Portland, Oregon. They are the creators of Clicky Web Analytics, an analytics tool (competes with Google analytics) that provides users with real-time traffic intelligence for their websites. The startup is still run by its two co-founders, Noah Merritt and Sean Hammons. In 2011 their revenue forecast was over one million dollars with a 60% margin. As you can see, there is a fairly reasonable salary left to the co-founders.

#2 Carbonmade

Carbonmade is an online portfolio service that helps designers show off their work.

Web Carbonmade
Web of Carbonmade.

It was founded by Dave Gorum and Jason Nelson in 2007. Originally, it was conceived by Dave as a tool to create an online portfolio for himself. With Jason’s help, it ended up being open to the world due to popular demand. After following an organic growth, today they have more than one million portfolios and a team of 12 people.

#3 Litmus

Litmus is an application with email marketing testing and tracking tools, that helps you send better looking and performing emails. Litmus was founded in 2005 by three childhood friends, Paul Farnell, Matthew Brindley, and David Smalley. It started as a design test tool for different browsers and then focused on emails.

They followed a bootstrapping model for a decade, until 2015 in which they had their first investment round of $49 million by Spectrum Equity. They currently have over 250,000 customers and more than 75 employees.

#4 Goldstar

Goldstar is the world’s largest online sales company for half-price entertainment show tickets. It was founded by Rich Webster, Jim McCarthy and Robert Graff in 2001, with $1,000. They started looking for shows that could not sell their tickets to offer them at half price.

Goldstar web
Web of Goldstar.

They didn’t want to have anything to do with VC since they had had bad experiences in previous startups. Graff said in an interview that they simply didn’t want anyone to tell them how they had to do things. Currently, they have more than 100 employees in the United States and 8 million members in more than 26 cities.

#5 Github

If you are a software developer, you will know this service perfectly. It’s a code hosting service for software development projects that uses the Git version control system. The code is stored publicly, although it can also be done privately, by creating a payment account. It is also known as the developers’ Wiki.

Tom Preston-Werner founded it in 2007 and followed a bootstrapping model until 2012 in which Andreessen Horowitz invested $100 million. The company had increased its revenue by 300% annually. In 2016, GitHub was ranked 14th in the Forbes Cloud 100 list (the 100 best companies of cloud services).

#6 FastSpring

Of course, we could not fail to mention our billing platform, FastSpring. They offer a complete SaaS solution for all payments management for recurring subscriptions. It was founded in 2005 by Dan Engel, Ken White, Ryan Dewell and Jason Foodman with the aim of providing a solution for companies selling software.

Pedidos Seguros con FastSpring
Secure Ordering by FastSpring

In 2007 they invoiced less than one million dollars. In 2010, 35 million dollars. In 2011, 66. In 2012, 95. And in 2013 more than $100,000. It wasn’t until the year 2013, eight years after the foundation, that they had the first VC, by Pylon’s L.P. with the aim of expanding their business in Asia.

#7 Sparkfun

Sparkfun is an online store of electronic products and parts founded by Nathan Seidle in 2003, who, that at that time, was looking for a piece and saw a business opportunity for a store with these characteristics. He started the business with a debt of $2,500 from his credit card with which he randomly bought a few products without knowing if he would sell them. He started to have one or two orders per day, and with what he won he bought more pieces. He says it took him 3 years before he could buy a new winter jacket. At present, it already has more than 10 million dollars of income and is a popular reference in the community of “makers”.

#8 WooThemes and WooCommerce

To those of us who are WordPress plugins developers, we love the story of WooThemes. In 2008, after a few virtual talks between Adii Pienaar, Magnus Jepson, and Mark Forrester, each from one end of the world, they started selling WordPress premium themes creating WooThemes. In 2011 they already had 100 items available for sale and launched WooCommerce. They did not stop growing, getting more than 7 million downloads of WooCommerce in 2015 with a team of more than 55 people in 19 countries. In May of that same year, they were acquired by Automattic.

#9 AppSumo

AppSumo is a website for daily offers in web applications and digital products for developers or “geeks”. Noah Kagan, while working at a Facebook gaming payment company, found it difficult to find new applications in the cloud and decided to start a business. For $60 he got a team from Pakistan to develop the back-end of what would be AppSumo, and he developed the front-end. After a month, he launched it to the market and managed to sell more than 200 products. Noah acknowledged in an interview that he eventually accepted an investment from his mother Debra of $20.47. Currently, it has over 700,000 subscribers, 50 employees, and a turnover of 8 digits.

#10 MailChimp

In 2000, Ben Chestnut and Dan Kurzius created the Rocket Science Group, which offered services of design consultancy of greeting cards. Some of their customers started asking for ways to reach their own customers by email. This was when they created the email service. In 2007 they left the design side and dedicated themselves exclusively to MailChimp.

Its founders have repeatedly said that, when talking to potential investors, they never seemed to understand their customers, mostly small businesses, and suggested that they should pivot to enterprise to accelerate growth. Ben commented that they’ve always preferred to stay true to their business vision and therefore have never had external investment.

Currently they have more than 700 employees and by 2016 they exceeded 400 million dollars of income.

#11 Milanuncios and Habitaclia

Ricardo García, being self-employed, created this portal of classified ads in 2005. Initially, it was a very simple website, but it grew and in 2010 it already surpassed the leader in Spain, Segunda Mano.

In 2011, Ricardo created his own company and was joined by Klaus Gottschlich, former CEO of eBay in Spain. They were invoicing millions with a team of 8 people. In 2014, the Norwegian company Schibsted Classified Media bought Milanuncios.com for 100 million euros.

And a similar story is Habitaclia’s one, created by Jordi Peña, from Mataró (Barcelona). It started off as a simple website; he created the company in 2008 as the only founder, and the company grew until it got 80 employees in 2016 and an invoice of 6.8 million euros in the first quarter of that year, 36% more than in the same period the previous year. It was acquired by the same Norwegian company Schibsted Classified Media at the end of 2016. The purchase figure was not made public, but it was estimated that it could be around twice as much as that of Milanuncios.

#12 Pompeii

This footwear company was created by Jaime Garrastazu, Jorge Vidri, Nacho Vidri, and Cosme Bergareche in January 2014 with 18,000 euros. They used the capital to create 350 shoes. They were sold in two days thanks to a strong marketing campaign and they started the whole process again. They managed to get an invoice of 135,000 euros that year, 360,000 the following one, and in 2016 they touched the 2 million.

#13 Hawkers

This online sunglasses startup has been making headlines lately for its great ‘viral entrepreneurship’ capability. It was founded by 4 entrepreneurs with just 3,010 euros at the end of 2013, and in 2014 they invoiced 14 million. To achieve a faster growth, being a profitable company, in 2016 they finally accepted an investment round of 50 million.

What Are Our Thoughts?

You can find quite a few articles about the success and failure of startups. Most of them only focus on the success/ratio failure: some people say only 10% of the companies that are created survive the first 3 years of life, others put this figure at 20% or so… and there are also those who totally question these figures. But they all fail to mention whether the successful companies used venture capital or not.

Reading some interviews of the co-founders of some of the mentioned companies, they agree that the advantages of boostrapping are:

  • You focus exclusively on what’s important, this is, to get customers, rather than raise money.
  • It helps you to stay scrappy and to find talents that maybe you didn’t even know you had.
  • Admittedly, it is hard, but it forces you to get creative with your strategy and come up with solutions you would never have thought of.
  • You have absolute control over all decisions without pressure from investors who do not share your vision or company style.
  • You’re the one who puts the pressure on growth. Although some of them say that the first years were very tough.
  • There is no obligation to sell the company at the end to return the investment.
  • If things go wrong, you just have to close and that’s it. Without having to give any explanations.
  • And of course, if things go well, you get 100% of the cake .

Each startup is a unique world with a team in which each of its members has their own personality, ability, ambition, and lifestyle. For us, our main objective is not to convince investors how great we are (which we are), but to persuade our customers of how incredible our tools Nelio A/B Testing and Nelio Content are. And to have some fun along the way, of course!

Featured image by Sam X.

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