This column is by serial entrepreneur & startup strategist Mitchell Harper
When it comes to raising money, I’ve been on both sides of the fence. We’ve raised $155,000,000 at BigCommerce (which I co-founded in 2009) and I’ve bootstrapped companies from nothing to almost $10M in annual revenue.
Having been on these two very different journeys, I am a huge believer in bootstrapping until you massively mitigate the risk in your business, to such an extent that raising money happens at the valuation you want, with the terms you need to maintain control, negotiate away crazy liquidation preferences, etc.
Bootstrapping to most founders means growing slowly and reinvesting profits to continue that growth, but there’s another model that literally some of the best SaaS companies in the world used — and it has nothing to do with raising money early on.
It was used by Mailchimp, CampaignMonitor and we also used it to build BigCommerce to 10,000 paying customers before raising any money.
Here’s the idea:
Build an income producing business first and use the profits from that business to bankroll your startup’s first year or two so you don’t need to raise money early on.
Mailchimp had The Rocket Science Group, which was a digital agency. Campaign Monitor did the same thing. Their agencies generated profit. Some of that profit was invested back into growing their agencies and some was invested to build their SaaS companies.
At BigCommerce, my co-founder Eddie and I grew our previous company (Interspire) from $0 to $7M in annual revenue for 5 years and then used the profit to “fund” BigCommerce for the first year and a half.
It was kind of like we became our own investors.
When we did decide to raise money, I can tell you that we did it at almost double the valuation we wanted and on incredible terms, because we could confidently and truthfully say “we’d like to raise money, but we don’t have to, so we want to do it at our valuation and on our terms.”
That got investors very interested and created a bidding war.
I’ve spent a lot of time thinking about why more entrepreneurs don’t take this approach and I think it’s because:
- It’s easy to raise money (everyone seems to be an angel investor these days)
- Most people are impatient and can’t resist VC money
- They play the short game
Is it worth taking 1–2 years longer to build a startup that you own 100% of, with customers, revenue and absolute proof of product-market fit before you approach investors?
To me, the answer is YES every single time.
But you have to be patient, be prepared to commit for 7–10 years and have some sort of skill you can build your income producing business around first. It could be consulting, a digital agency, etc.
If you can do those 3 things, then ultimately you control the destiny (and own all) of your startup. It also makes it a lot easier to raise money from the best investors because you’ll instantly stand out.
“You bootstrapped your company to $5M in ARR? Wow, how did you do that? We’d love to meet and hear more about what you need from potential investors”.
I can’t tell you how many times we heard that from investors when we were raising our series A for BigCommerce back in 2011.
Bootstrapping doesn’t mean you can’t raise money. Or that you want to build a “lifestyle” business. It means you’re smart enough to NOT raise money in the early stages of your business, even when everyone else is.
UPDATE: I just live streamed about this in detail over on my Facebook page. If you need more detail and want a specific plan of attack to actually implement this strategy, make sure you check it out.
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