When founders bootstrap for too long
(this post originally appeared on pmeenan.com on July 19, 2016)
The strongest Series A rounds (raise how much you want from who you want at what you want) most consistently occur when founders bootstrap their startup to initial traction ($1-$2M ARR) with strong growth (consistently 10% MoM).
Its damn hard to do, but when founders are able to pull this off its sort of a magical time period and in my opinion they deserve every second of it.
For the first time you can feel the business clicking and you’re starting to see how this thing could actually be as big if not bigger than you imagined. You’re getting inbound emails from VC firms that want to talk because they are ‘big fans’ of your company. Best of all, you’re better understanding how your startup is being valued off a revenue multiple and as you continue to grow at the rates you have been you continue to be worth more every month.
Through some triangulation of wanting to push the pedal down to accelerate growth even faster, wanting to de-risk their startup to some degree having had a lot of close calls getting here and wanting to raise their profile for recruiting, many founders choose to raise their Series A here.
Others, feeling like their growth rate is showing no signs of slowing down and getting an understanding of valuation math, decide to march on with the expectation of raising their Series A down the road (“When I grow 100% again I’ll be at $4M ARR next year!”).
The problem is that for nearly all bootstrapped businesses, cash constraints start to catch up with you around the $2M ARR mark. To keep growth rates at the same levels you’ve been experiencing you simply need more people across product/sales/support/etc. than you have the cash to hire.
Your $2M ARR startup that grew over 100% last year ends up growing 50% this year and 33% the year after that. The result isn’t a $4M ARR business next year, but two years from now.
Unfortunately what makes for an incredible accomplishment also results in very disappointing financing conversations.
What was a fast growing $2M ARR startup that may have been able to get financed in the $15-$20M range ends up being a $4M ARR startup that gets offers in the exact same range and often times from firms with private equity-like terms. At the highest level their revenue multiple contracted in accordance with the slow down in their top-line growth.
To the $4M ARR founder, this seems unfathomable, but I’ve probably seen 10 examples of this exact scenario this year.
These conversations always leave me sick to my stomach for the founders given the blood sweat and tears they’ve put into building their business.
All I can say is that they bootstrapped for too long.