Simultaneously vs. Sequentially

A framework for bootstrapped founders considering their first outside capital

At Reformation, we seek to provide the best capital efficient businesses with investment that aligns with the founders’ goals for their business and maximizes their optionality going forward. Often times, the best capital efficient companies are completely bootstrapped, having achieved meaningful revenue and profitability despite never raising outside capital. As a result, the founders of these companies are (rightfully) wary of taking on additional capital and the incremental value it will add to the business. Putting the “value add” aspect of investing aside, the number one thing we tell founders to consider is that our capital can unlock their ability to do things simultaneously vs. sequentially.

The way we think about it, bootstrapped founders at the early stages have historically had two (extreme) options when it comes to supporting continued growth. On one end, they can raise venture capital (the “default” choice for the past decade), providing their company with the cash they need, but at the cost of committing to the lofty growth and exit expectations of their investors. Alternatively, these founders can continue to bootstrap and own 100% of their business, but they will have to generate enough free cash to hire the next sales person, or spend a certain amount on marketing, or invest in a new product. While either path is an acceptable solution, we’ve always been struck by how empty the gap is in the middle. (See more thoughts on this topic in our post on The Opportunity Cost of Capital.)

At Reformation, we strive to be that middle ground for bootstrapping founders. We can provide millions of dollars of equity that unlocks the ability for founders to execute on things simultaneously rather than sequentially, accelerating their company’s growth trajectory without sacrificing the bootstrapping ethos or goals of their business. In a typical situation, our capital goes toward clear ROI-positive investments, such as sales & marketing headcount and budget, that have a J-curve nature resulting in increased burn up front, but profitable growth medium-to-long term. While some companies may in fact be better served by continuing to bootstrap vs. raising any outside capital, we always encourage founders to think about the one or two key initiatives that could be prioritized now if there was some extra capital around, and how unlocking those initiatives now (vs. 1–2 years from now) would impact the trajectory (and by extension the value) of the business.

We have a deep admiration for bootstrapping founders who have proven the ability to achieve a lot with a little (capital). We encourage them to consider how much they could achieve by putting a bit more support behind what is already working within their organizations.