How we bootstrapped a side business for 7 years, then raised $450,000 with Earnest Capital
The day we closed Endcrawl’s seed round led by Earnest Capital, I found myself jogging around downed tree branches and exposed power lines, desperately looking for phone reception.
A trio of freak tornadoes had just knocked out power and cell towers, but I was in no mood to wait another day to sign. Alan Grow and I had spent nine months putting this deal together.
The day was on-brand for a company that’s always gone off-script. We’re a SaaS for managing film and television credits. We waited seven years to raise, bootstrapping and holding down full-time jobs. We went remote-first back in 2012. We didn’t relocate to San Francisco (or L.A.). For two years, we didn’t even have a UI. The non-technical co-founder wrote the MVP. In Perl.
But stories like ours are also becoming a new normal. Tech capital for bootstrappers and indie hackers is sneaking up on an inflection point oddly similar to independent cinema in the early 1990s. If the traditional VC track is like a Syd Field 3-act screenplay, then Endcrawl is something closer to Pulp Fiction: we did everything out of order, but it sure worked.
As new funding models proliferate, they won’t replace venture capital any more than Sundance replaced the major studios. But they will assume mutual orbits.
Meanwhile back in my tornado aftermath, I finally caught a weak 3G signal, executed the final contract where I stood, then ate ice cream with my family. It was a memorable birthday.
So to any founder who is thinking of raising — but also wants to retain optionality to do what’s best for their company — here’s our story. This is not a how-to. But hopefully, it’s a useful set of data points.
Our seed round involved a few notable firsts. We are:
- first in our industry to raise on a Shared Earnings Agreement (SEAL).
- first ever to be funded by a SEAL Syndicate.
- one of the first ten Earnest portfolio companies.
We were looking to raise more than Earnest’s maximum check size, and some of our customers had already approached us about investing. Tyler Tringas from Earnest suggested we form an SPV through AngelLists’s Syndicate platform. AngelList runs Earnest’s back office, so the relationship was already in place.
This simplified things for us as founders. Once a potential investor was close to a yes, we could share a private link for them to sign up, make a commitment, execute documents, and transfer funds.
This also made it easier for us to accept smaller check sizes from a number of strategic investors. We weren’t aiming for a “party round”, but when a fellow founder like Sahil Lavingia offered to join, there was absolutely no reason to turn him down.
Our investors are a lively amalgam, falling into three groups. We raised:
- $200k from Earnest Capital.
- $150k from our own customer base.
- $100k from other film angels, tech angels, and aligned founders.
At first glance, in-person connections still seem crucial. Most of our dollars came from investors that we met in person at least once:
But our face-to-face with Earnest was a bonus, not a prerequisite. In fact, to this day Earnest has met with just 2 of their 10 portfolio companies in person. If Tyler hadn’t been in New York back in April, things would likely have swung the other way:
Yet another way to look at this:
- 4 of our 8 investors met us in person.
- One investor has only met on us video calls.
- Two investors have only spoken to us on the phone.
- I closed one check entirely over Twitter DMs.
Considering we sell to the film industry, our geographic breakdown may surprise as well:
But Endcrawl has done business with over 1,000 productions spread across 42 U.S. states and 20 countries. Remote is a superpower. Filmmakers are everywhere. So are our investors.
And, just because Power Law Distributions pop up everywhere, here are the checks arranged by size:
We’d been side-gigging for six years. The hardest part for us was the context-switching: having to constantly unload one job from our mental RAM and load in the other. Multi-tasking sucks.
We appraised our company and decided it was too early to sell. So we floated a SAFE note on the hypothesis that an industry-standard instrument like YCombinator’s SAFE would keep everything simple and legible.
It turns out that no one in the film industry knows what the hell a SAFE note is.
(Film and tech: so alike, and yet so far apart. As various digerati currently flocking to L.A. are about to learn.)
So we shifted our strategy to finding a lead tech investor first. Once we had a structure and a term sheet in hand, we could return to closing our industry angels. So the thinking went.
And that strategy worked, even if it took much longer and had more plot twists than I was braced for. We spent roughly:
- 3 months building decks, running models, and memorizing KPI;
- 3 months pitching to find a lead investor; and
- 3 months closing seven more checks, and the round.
We were still doing this all on nights and weekends.
Some things we didn’t do: we didn’t build a data room. We didn’t re-form as a Delaware C-corp. We didn’t offer any board seats.
Bog-standard things we absolutely did do: we built a pretty deck. We composed a tight one-pager. We built financial models (with help from Flightpath Finance).
We wrote something called “An Owner’s Manual to Endcrawl”. I cribbed a lot, starting with these three documents. Founders: read those. I also asked colleagues to share their decks, then shamelessly copied their best ideas. (To this day, Frame.io’s seed deck is the best I’ve encountered.)
We spoke to about 100 people. There are no shortcuts to pitching: practice, practice, practice. Toward the end, we were just starting to get the hang of it.
SaaS is a highly leveraged affair. The planet is dotted with small teams who have the skills to grow to 8- and 9-figure valuations. Some can bootstrap the whole way. Others need help to get over the hump to default-alive.
But VC is broadly predicated on hypergrowth and billion-dollar valuations. Between Sand Hill Road and brick-and-mortar bank loans, there is a substantial gap in the capital market.
The Shared Earnings Agreement (SEAL) is one answer to that problem. I don’t pretend that I can unpack it all here. But I can offer a few personal observations, entirely my own, after steeping myself in it for a few months:
- SaaS companies have a broad range of potential outcomes, but the three main buckets are: profitable concern, low exit, and hypergrowth.
- The SEAL aims to return a healthy IRR to the investor across all of these possible scenarios.
- If Endcrawl runs profitably, a certain percentage of our net revenue will pay down the Shared Earnings Cap (the “multiple”). Once the Cap is fully paid, my investors’ stake is reduced by two-thirds. That percentage remains as a long-term stake in an eventual exit.
- If we grow fast and decide to raise a series A, the investors convert to pure equity, and we’re back on a “traditional” VC track.
- In the event of a low exit, my investors are first in line to recoup a 3x return from the sale before Alan and I see a dime.
If you paused at the last bullet point, feel free to re-read it.
Unlike a SAFE note, which may offer something like an 80% discount price, the SEAL’s Shared Earnings Cap effectively creates a much steeper discount. The “multiple” is one variable in the SEAL. In our case it’s 3x, resulting in a 33% discount price.
So if you don’t feel confident that you can grow your company to a valuation larger than the Shared Earnings Cap — don’t take the SEAL. That multiple is table stakes.
The flip side to those table stakes: you retain full control of your company and gain a group of bootstrapping gurus as mentors.
Four years ago I trudged out to Kickstarter’s Brooklyn HQ on a freezing January night to hear Bryce Roberts talk about VC counter-narratives. It’s a safe bet that I wouldn’t be writing this article now without the pioneering work Bryce was doing that night.
It would also be impossible to exaggerate the levels of support and encouragement we’ve had from Earnest Capital since our very first meeting. There were many, many twists and turns between the initial yes and the final close. Earnest was with us every step.
And they didn’t just write our largest check. They dropped us into a community with 18 other founders. They pulled a group of experienced and no-nonsense mentors around us: founders from Basecamp, Gumroad, Wildbit, Dribbble, and others.
These mentors are themselves all LPs in Earnest’s fund. They have skin in the game, too.
But really, we all have skin in the game.
Endcrawl is building an industry-standard slice of the media production stack. But we’re also proving out a new tech investment thesis, and learning the superpower of being a distributed-first (“remote”) company.
The mission is to unlock entrepreneurship. And not just for ourselves: we need to pull up others behind us. That’s what Earnest is doing. That’s our mission as well.