Venture Capital vs Bootstrapping: Shawn Khorrami On How To Determine If Fundraising Or Bootstrapping Is The Right Choice For Your Startup

Uniqueness: Is there anything that makes your product or service unique? In order to raise the interest of investors, you have to be able to differentiate your product from what is already on the market.

Founders are often faced with the nagging question of whether Fundraising or Bootstrapping is the best choice for them. What is better, having access to capital or maintaining full control over your vision and profits? What is preferred, to have the seasoned oversight of an experienced investor, or to plow forward with a disruptive and pioneering ‘can do’ attitude? Of course, every situation is different, but what standards can be used to help a founder decide? As a part of this series called “Venture Capital vs. Bootstrapping: How To Determine If Fundraising Or Bootstrapping Is The Right Choice For Your Startup”, I had the pleasure of interviewing Shawn Khorrami.

Shawn is a serial entrepreneur, having started and managed more than a dozen businesses involving products and services across a wide range of verticals. In the process, he has managed thousands of employees servicing tens of thousands of customers, large and small, from consumers to SMBs and even governmental entities. He has formal education and extensive hands-on experience in business operations, strategies and planning, marketing, sales, finance, legal, and human resources. He has obtained university diplomas in mathematics, economics, and computers, and earned a law degree.

Thank you so much for doing this with us! Before we dive in, our readers would love to learn a bit more about you. Can you tell us a story about what brought you to this specific career path?

From the time that I was a teenager, I have found myself interested in creating products or services that bring value to those around me. Quite simply, I was always interested in creating something rather than just doing a job. That’s what energized me.

I believe that’s the reason that my career as an entrepreneur started when I was still in high school. Back then, I began a real estate management firm with a focus on using automation to drive expansion and revenues. I stepped away from that business in favor of finishing college where I obtained degrees in mathematics, economics, and computers, and later obtained a law degree. While my classmates were thinking about where they would find employment once they received their degree, I was busy creating my own business.

Through the years, regardless of my personal or professional circumstances, I found that I was consistently drawn to creating systems to serve various needs that I was able to identify within the industry in which I was focused. This resulted in a constant stream of ideas geared toward improving products and services so that businesses, many of them my competitors, can be more efficient and better service their clients. From this process came the businesses that I created across an array of industries. Along the way, I’ve had some phenomenal successes and catastrophic failures. I’ve learned that the key is to first continue to innovate and improve, and second to use failures as learning experiences. I’ve also learned that I love the journey of creating and growing companies and perhaps even more than that, I enjoy getting to know and work with different partners with varying perspectives.

Can you share a story with us about the most humorous mistake you made when you were first starting? What lesson or takeaway did you learn from that?

I’m not sure how humorous this is, but it is definitely a mistake. This occurred more than 20 years ago, so I am fuzzy on some of the details. I became extremely frustrated with my IT team which included a couple of people in-house and an outside contractor. Things were not working with the speed and efficiency that I believed was appropriate — both in our back end and for our public facing stuff. One morning, as I was meeting with the owner of the outside company we were using (which itself was a small business), I expressed my frustration and explained to him that things had to improve or I would have to think about terminating the contract. His response I remember clearly: “you can’t fire me because you need me.”

I terminated the contract on the spot. I also terminated my in-house team that day for a number of reasons, among them that I believed they had the same attitude. That made me the IT guy in my business. I quickly figured out two things: (1) it was more than a full time job. I literally worked round the clock until I found replacements. It was absolutely miserable trying to handle that and do everything else I had to do; (2) things had become a lot more complex in the previous few years. It was a huge learning curve. It makes me chuckle now, but it certainly wasn’t funny when it was happening.

You are a successful business leader. Which three character traits do you think were most instrumental to your success? Can you please share a story or example for each?

Regardless. I think that there are a number of traits that are important to being a successful as an entrepreneur or a founder. If I were to pick three traits that have been helpful to me in my journey, I would start with being relentless. I am extremely persistent. I have a never give up attitude. That allows me to keep going and working even in the face of setbacks, regardless of how substantial they may appear at the time. It also enables me to be constantly in search of solutions. I believe that I can always find a solution to any problem. At the same time, it allows me to be highly adaptable. After all, the only constant in business is change. And being able to recognize change and adjust to it is key to succeeding.

A second trait is that I fear inaction more than I fear failure. I am very comfortable being the ultimate person responsible; having the buck stop with me. I am also very comfortable making decisions and am prepared to live with the consequences. This allows me to take the lead when others shy away. It also allows me to move an organization forward where others may be hesitant or even become paralyzed.

Third, I am a very hard worker. I have never been the type to work 9 to 5. Those who work with me know that it is very common for me to be deep in a project at times when most people are sleeping. The point is that for me, it is not about business hours. It’s about putting in the time and effort required to get to a goal without regard to pay.

Are you able to identify a “tipping point” in your career when you started to see success? Did you start doing anything different? Are there takeaways or lessons that others can learn from that?

I think that the tipping point for me was when I became very purposeful about the way that I networked, formed relationships, and conducted my ventures, which occurred very early on in my career. By purposefully, I mean when I incorporated a written plan on what I term networking, including strategies, goals (daily, weekly, quarterly, and annually). And as things developed, I continued by including a small team that was focused on this part of my strategy.

None of us are able to achieve success without some help along the way. Is there a particular person or mentor to whom you are grateful who helped get you to where you are? Can you share a story about that?

This is a question that comes up with regularity and for me, there is one person who stands out above all and without any close second. Without question, that person is my father. Rather than try to share a story, I would share the sacrifice that my father (both of my parents) made, solely for the benefit of me and my sister. Both of them were accomplished and well engrained in Iran. My father was a 50% owner of a successful construction company and my mother was a professor at the University of Tehran. After the Iranian revolution, they decided that the political and economic climate was not appropriate for the two of us. In their forties, established in their careers, my parents uprooted themselves, leaving their careers and their lives to come to a foreign country (the US) and rebuilding their lives from scratch solely because of their two children.

For months, as my sister and I did not know any English, and while having to restart his entire life from scratch during the days, my father still found time every single night to spend hours reading our textbooks, translating them to us and working with us to complete homework.

You have been blessed with great success in a career path that many have attempted, but eventually gave up on. Do you have any words of advice for others who may want to embark on this career path but are afraid of the prospect of failure?

In my opinion, this is one of the most common reasons that people do not start their own business, even knowing of all of the advantages and the potential for great success. The bottom line is that you have to break through that fear. The biggest failure comes from not acting. Also, when you do decide to take the plunge and move forward, be prepared for setbacks. They happen. It’s part of starting your own business. That does not mean that you or your business are failures. Understand that there is a solution to every problem. Remain calm and patient, take time to think, and then act.

Ok, thank you for that. Let’s now jump to the main part of our discussion. Can you share a story with us about your most successful Angel or VC investment? Or an investment that you are most proud of? What was its lesson?

An investment that I am proud of is one that I made in a small restaurant which grew into a small chain. It is not my biggest investment or my biggest risk. However, I am particularly proud of it because I was primarily investing in the people and was very involved in the entire design and management from the very outset. To me, it is a very good example of how important it is to invest in the right people — the right team — and how those people can drive immense success. I also tend to be a very hands on person, whether I am the founder or the investor. This venture was one that we built from nothing. It was not taking over an existing restaurant space or even within a restaurant row. So, we had to not only build out the physical space to what was needed, but also create the market. And we rinsed and repeated with other locations in relatively quick succession.

Can you share a story of an Angel or VC funding failure of yours? What was its lesson?

One of the investments that I recognize as a failure is a business about which a friend of mine approached me. It was a SaaS startup. I will not go into the specifics of the business because it’s proprietary and also, it’s an ongoing business concern. Because it was a friend and he was raising relatively small sums from friends and family, I agreed to participate. I did not conduct my normal due diligence. It was in a market with which I did not feel particularly comfortable both in terms of knowledge and the economics of it. I also did not any involvement — I was a silent partner. I had to take a major haircut and get out of the deal ultimately. The lesson that I learned is not that I shouldn’t work with friends or family. To the contrary, I very commonly do and have been happy with the results. The moral for me was two-fold. First, I should not invest where I do not have the knowledge and comfort that I like with the market. Second, I should not participate unless I have at least some minimum level of personal involvement.

Is there a company that you turned down, but now regret? Can you share the story? What lesson did you learn from that story?

I don’t generally think in terms of regret. There are a lot of opportunities that present themselves and you’re going to miscalculate in both directions — some things that you are very optimistic on are going to end up failures, and others that you can’t see working become successes. In my experience, the opportunities that I rejected that end up being successes are ones that are either in areas in which I do not feel I have enough expertise or do not allow the minimum level of involvement that I like to have. For me, those are two fundamental requirements. If I believe I lack the necessary expertise to evaluate the opportunity or I am essentially a passive investor, I typically reject the opportunity as from my perspective, it is too risky, and at the same time, it is not interesting as I would not have active enough involvement.

To be sure, those opportunities have presented themselves and a number of them have become huge successes.

Super. Here is the main question of this interview. Let’s imagine that a young founder comes to you and asks your advice about whether Venture Capital or Bootstrapping is best for them? What would you advise them? Can you kindly share “5 things a founder should look at to determine if fundraising or bootstrapping is the right choice”? If you can, please share a story or example for each.

In my opinion, I would stay away from applying hard and fast rules when it comes to deciding whether to raise money or to bootstrap. There are so many factors that come into play and ultimately, when you’re dealing with angel investors or VCs, you are dealing with people. Decisions can be made based on a feeling or a connection.

Having said that, there are still considerations when trying to decide whether to seek investors. At the end of the day, looking for and pitching investors can be quite time-consuming and affects the way you position and move your startup forward. Here are five of the most important factors that I believe founders should consider in deciding whether venture capital is right for them:

1. Uniqueness: Is there anything that makes your product or service unique? In order to raise the interest of investors, you have to be able to differentiate your product from what is already on the market. Additionally, that differentiating factor, that uniqueness needs to be material. It needs to be something that helps make your product more marketable; it has to matter. This does not mean that you have to create an entirely new market. Most startups that are attractive to investors are trying to enter existing markets. Example
2. Market: Depending on the type of investor (angel or VC, etc.), the market is an important consideration. Some investors want to see a large market for your product/service. The larger the market, the more potential clients or customers. Typically, an angel investor would be more interested in the size of the market. Other investors would be looking at the potential for growth and the amount of competition. This would be more the angle a VC would be coming from. There are overlaps, and VCs are certainly interested in the size of the market as well. But these are just general guidelines. Example
3. Control: Any founder who is considering bringing on investors should be ready to relinquish some level of control. When you are bootstrapping, you are in sole control of your venture. When you bring on investors that is going to change dramatically, even if you remain the majority stockholder. Consider that you may be required to bring on additional leadership and even a new CEO — meaning that you may not remain the CEO. While there are plenty of examples where founders of major companies were able to retain their positions as CEO (think Microsoft, Amazon, or Dell), it is certainly quite common to see situations where the founders were replaced as CEO either by choice or by force (think Google, or Uber).
4. Skin in the Game: Investors are going to want to see that you are also invested in the business; that you are willing to do what it takes to make it succeed. It is even more attractive to an investor if you have your own money invested in the business. In short, they want to see that you have skin in the game. If you have an idea that you are just shopping from door to door, your chances of raising capital diminish significantly. Investors are going to want to see your commitment both in terms of your time and in terms of your money.
5. What are the Choices: To the extent that there are any potential angel investors or VCs that you are considering, you should consider carefully who they are and whether they fit into your vision both short and long term. Do they have experience in investing in startups, or in the market in which yours is? Are they willing to take the necessary risk? Are they going to be supportive, especially when things become hairy or problematic? Do they have the patience it’ll take to see the project through or will they suddenly pull the rug out from under you? This also includes consideration of the leverage that you have. I have seen so many situations where the founder brought on the wrong investors at a less than fair valuation. This can be devastating to the entire venture, and particularly to the vision of the founder.

There are obviously many additional and crucial factors that should be considered, but these are among the most important that I would recommend that a founder consider.

You are a person of enormous influence. If you could inspire a movement that would bring the most amount of good to the most amount of people, what would that be? You never know what your idea can trigger. :-)

I don’t know if one can consider it a movement or whether it hadn’t already been inspired. However, considering the enormity of the issue and what the entire planet has been through because of the Covid-19 pandemic, I believe that helping eradicate and control diseases by helping provide vaccinations and treatment across the globe is probably what would do the most good for the most number of people.

We are very blessed that a lot of amazing founders and social impact organizations read this column. Is there a person in the world with whom you’d like to have a private breakfast or lunch, and why? He or she might just see this. :-)

It’s hard picking a single person but if I were to, I think it would be Steve Blank because of his obvious knowledge and substantial experience with building startups.

How can our readers further follow your work online?

My work can be followed on my website or through LinkedIn or Facebook . I post fresh ideas on different aspects and challenges of running a business regularly.

Thank you so much for this. This was very inspirational, and we wish you only continued success and good health!