Putting Unicorns Through the Meat Grinder

Why I own two digital agencies and buy small software companies for a living

JD Graffam
Mar 22, 2016 · 7 min read

“Buyers like us, we have a lot of options. It’s a buyer’s market.” My friend, a successful entrepreneur who, like me, buys software companies, went on about how VC money is harder to come by lately. “And these guys” — he gestured at the Twitter and Uber offices — “have given people the wrong idea about what success looks like for a startup.”

It was Saturday, and we were having lunch at a hip burger joint in San Francisco. Across the street was one of those fancy condo developments. You know the type: svelte, high tech, all that downtown living crap.

Caddy corner from where we sat, Twitter’s iconic blue bird hung not quite halfway up the fascia of the building, a symbol of a simple and valuable idea struggling to become what its investors need it to be.

We spent the rest of lunch discussing just how how skewed the formula for “success” had become in hubs like San Francisco that influence the rest of the startup ecosystem worldwide.

The Airbnb and Uber stories have convinced smart founders, capable of building sustainable businesses and creating jobs, that they must pursue the unicorn dream.

I hope you can appreciate the irony: San Francisco is where seemingly everyone in our business wants to be. It’s the Mecca for entrepreneurs who are supposed to be smarter and more successful than I am. And here I am, a small-town southerner, having meetings in the “it” city for tech startups and SaaS apps, looking around and thinking, “This doesn’t make sense. This is out of control.”

What’s with the unicorn obsession?

Stop and consider this scenario:

Two founders have an idea for something (mildly) disruptive or innovative — say, on-demand cutlery as a service. They envision an Uber model for people who will carve your turkey at Thanksgiving.

These co-founders are smart, and they have a good team. They raise a solid seed round, put a million dollars in the bank, and manage to build up their monthly recurring revenue to $30,000 in six months. The Unicorn Formula says that if they hit a few more milestones, they will be poised for a really good Series A — like it is some kind of given.

But despite bringing in $30,000 a month, the founders are spending more money than they’re making. As they consider more fundraising, they revisit their cap table. It gives them a reality check: they have given investors a big chunk of the company’s equity and another 10% to the developer who built the MVP.

The MVP was supposed to be just the beginning, but the founders now lack the energy to execute on their bigger vision. Nobody— not the founders, the investors, or the developer — has enough passion or upside to keep pushing, achieve the next milestone, or raise more money.

“The Unicorn Formula says that if they hit a few more milestones, they will be poised for a really good Series A.”

Each founder now has 20% equity, and if they did raise another round, they’d have to give up even more. Besides, they have a new idea now, and that’s where all the energy is.

$360,000 a year in recurring revenue sits on a table that everyone wants to leave.

Everyone has invested a bunch of time, energy, and money upfront with hopes that sometime in the future the business will take off. Yet, they give up on the unicorn dream just as they gain traction with a small, sustainable business.

So what happens when a venture-backed startup doesn’t hit that hockey stick curve?

Usually, it just goes away. But every once in awhile, somebody like me might acquire it.

Where founders see sunk costs, I see value in the products, as well as monthly recurring revenue and SaaS metrics that my team can optimize. Optimizing a SaaS business requires significantly less effort and risk than starting one, especially with an existing team in place.

My friend leaned in further. “So, what kind of deals are you looking for?”

My friend is encouraging me to start looking into venture-backed businesses. My acquisitions so far have been bootstrapped business-to-business SaaS apps, because I look for four things in a deal:

  1. The app has low maintenance needs.
  2. I can get passionate about the app because it solves a real problem.
  3. The app’s monthly recurring revenue looks good on paper.
  4. The founder wants out for the right reasons.

In many ways, the last reason is the most important one. I am not interested in making a living off of someone’s misfortune. I want to buy from founders who have good reasons to move on to their next adventure.

I enjoy making good products better, and the recurring revenue is important to me because of how I define success. A successful company is one that can employ people and keep their jobs secure.

“$360,000 a year in recurring revenue sits on a table that everyone wants to leave.”

I run two digital agencies and manage a portfolio of six products, so I admit my approach to business is a little non-sequitur. Or is it?


Take, for example, Natalie and Chris Nagele at Wildbit in Philadelphia. They used to run an agency, but now Wildbit makes software. They’re not trying to irrevocably disrupt an industry; they’re just trying to execute remarkably well, and they have three products on the market.

Natalie told me recently that the real product of Wildbit is not Beanstalk, Postmark or DeployBot—it’s their team. The software they sell is just a byproduct of the team that they’ve compiled.

In fact, I just bought Sifter from Garrett Dimon (who works at Wildbit now) so he could better focus on his family and fully commit to his new job.


Andrew Wilkinson, who founded Metalab, is another example of someone who’s taken the road less travelled. In addition to being a successful agency that continues to grow and thrive, Metalab built Flow and a Tumblr theme business, which has now branched out to WordPress and Shopify themes.

Andrew didn’t follow the conventional wisdom that tells agency owners they need to shutter their agencies when they make a product that takes off. Instead, he used that success as fuel and mashed the accelerator to grow both his products and agencies at the same time.

I bought Ballpark, an invoicing and time tracking app, from him, so he could focus on the faster-growing parts of his business.

And So On…

Then there’s Nathan Barry who runs ConvertKit and Brennan Dunn who built Planscope (he recently sold it to double down on Double Your Freelancing). There’s Amy from Freckle, Cameron Moll of Authentic Jobs, and Allan and Steve from LessAccounting and LessFilms. Oh, and Ian Landsman, who’s killing it with HelpSpot. You should also check out Matt and Joelle at Hookfeed, who recently acquired Churn Buster (after I told them all my secrets on the Rocketship Podcast). If I tried to list everyone, even just the ones I know personally, I’d need to create a new startup.

And the best part is they’ve all got unique stories and different perspectives. They’re regular people, smart people, who chose the bootstrapping route.

For those who want to avoid the unicorn trap, these examples are only some of the beacons of hope: admirable people organically growing companies that don’t need venture backing.

So, why?

I want to see more smart people (like you!) set goals you can attain. Start small, stay in control, and build as you grow. Bootstrapped companies may seem like the exceptions in the tech industry, but they’re the norm in just about every other industry in the world—and they’re more common in ours than you might guess.

“A successful company is one that can employ people and keep their jobs secure.”

The point is, you don’t have to let the venture capital industry define success for you, or prescribe the formula to achieve it. I have built my little empire one self-determined decision at a time. When you own more of something, you can do that.

I think that’s the root: a handful of software startups have warped people’s perspectives on what they should do with their design or software development skills and business ideas. They could build reliable products and tools for niche markets, improve people’s lives, and make a fantastic living in the process.

“The point is, you don’t have to let the venture capital industry define success for you, or prescribe the formula to achieve it.”

I’m not saying the venture capital route is wrong for everyone; what I am saying is that it’s wrong for me, because it’s not designed around my personal values.

A mentor, who served as CEO of a large publicly traded company for over 30 years, once told me that running a business is more common sense than you would think.

If you’re considering a startup, go into it with your eyes open and know your odds of succeeding, and being there for your employees and customers long-term, are better with a common-sense approach to business.

Go follow me on Twitter.

Thanks to Patrick McNeely and Austin L. Church

JD Graffam

Written by

I own two agencies and six software businesses that employ about 30 people. My household goes through as many diapers each day. I’ll be me; you be you.

Welcome to a place where words matter. On Medium, smart voices and original ideas take center stage - with no ads in sight. Watch
Follow all the topics you care about, and we’ll deliver the best stories for you to your homepage and inbox. Explore
Get unlimited access to the best stories on Medium — and support writers while you’re at it. Just $5/month. Upgrade