The New Bootstrappers: How Alternative Funding Models Are Embracing Founder Lifestyles

Matt Wensing
Nov 19, 2018 · 8 min read

I borrowed $40k to bootstrap my startup and then raised $3.3 million in venture capital to pivot to enterprise SaaS. What follows is my take on new funding options for bootstrapped entrepreneurs.

Choosing the right water and fertilizer for your sprouting business is about to get more complex.

The number of funding options for startups has taken an upward turn as of late.

Earnest Capital shared their desire to fund and accelerate bootstrappers, bravely linking to a work-in-progress term sheet (12/1/18 update: v1), Rand Fishkin open sourced the fundraising docs used to bring $1.3m of angel financing into his new venture, SparkToro, published an update to their term sheet, and Rob Walling and Einar Vollset announced TinySeed Fund.

And this is in addition to participants like Lighter Capital, who offer non-dilutive capital for founders seeking to grow without the risk of ornery owners, retaining more control and profits for themselves.

What’s really new or innovative about these offerings? TinySeed, which headlines itself as “The First Startup Accelerator Designed for Bootstrappers,” writes:

We don’t limit ourselves to “unicorns” — ideas that only have billion dollar potential.

For us (and for most bootstrappers) $1M, $5M or $10M in revenue can be highly lucrative, but there are close to zero funding sources available for founders like us.

Yet modesty in ambition isn’t, by itself, novel. 500 Startups — the founder-friendly firm that gave me my first angel check of $50k+ in 2012, pitted itself against YCombinator in 2015 by beating the drum of ponies not unicorns. In practice, this was a Moneyball approach to investing. Recruiting a stable of startups that could yield rich-enough results for LP’s, as opposed to hunting only for unicorns — a practice Paul Graham called black swan farming.

Moreover, these investors would blanch at the assertion that their returns will be modest. As recently tweeted:

SAP acquired Qualtrics for $8bn. Microsoft paid $2bn for Github. And let’s not forget Mailchimp, the Atlanta-based unicorn that, having raised no outside capital, has become the darling of the less-funding-is-just-fine movement. Clearly, investors have little reason to assume their returns will be inferior to their traditional competitors.

To see what’s truly new, you have to steep a bit in the subculture of the bootstrapper-friendly startup community. Sites like indie hackers and events like Microconf serve as dens for founders and creatives that would look at even the 500 Startups approach to funding and say “no thanks.” It’s an ethos that starts with a founder deciding that they know why they’re doing what they’re doing; and that why must be preserved, even at the expense of other things. This why is often a founder’s final say over how, where, and when they invest their time and energy into a venture based on what rewards it brings their teams personally, now and into the future.

Placing something other than share price at the top of the priorities list is anathema to traditional venture capital, because elevated share prices correlate highly with large multiples on investment through exits. And these exits do not have to be based on revenue. Rather, they are priced according to the value of the startup to the acquirer’s strategy.

And therein lies the first hint of novelty: unlike the limited partners of venture capitalists or venture partners themselves, these new funders and their portfolio founders openly share a perspective on wealth best depicted by Jason Cohen’s value of money S-curve:

For startup founders that have not yet moved to the right side of this freedom line, the road to independence is often marked by funding milestones, which bring increased fuel for growth, and a larger empire for the entrepreneur. This larger stage compensates the founder for choosing to invest the lion’s share of profits into growth, or even turning down an early exit.

But these influxes of cash bring dilution — with founders owning a smaller and smaller slice of the company they founded. As Noam Wasserman’s research into startup founder equity has shown, the challenge of remaining “King” — the one in control, becomes increasingly difficult. Eventually, this can become the bootstrapper’s greatest fear realized: the company’s reason for existence — and their own inextricable why, isn’t up to them. Even without Wall Street earnings calls, rapid growth can become the new North Star. This founder is not yet rich, and neither is he king.

For some businesses — the kind that serve markets measured in seven or eight digits, what would otherwise be considered a success can leave a diluted founder empty-handed. The opportunity is too small to move shareholders farther along their own wealth curves; in these scenarios, the over-funded startup often receives the label of zombie, as it neither flourishes, nor dies.

Whether or not this grim fate is likely, it remains plausible, and these new bootstrappers have awakened to alternative structures that can provide them with greater optionality on the rich vs king decision: investor-speak for “why not both?” Together, the founder and funder eschew the dichotomy by admitting — up front, eyes wide open, that this sharp transition between working for someone else and financial freedom exists well short of unicorn status. Indeed, $1M, $5M, $10M — are all life-changing, even though they are not attractive gains for traditional investors and their own funding sources (LP’s, or limited partners).

Therein lies the fundamental premise of these new funding options: if the funded bootstrappers (fundstrappers, as they’re being called) can create businesses that profit, they and their shareholders don’t have to wait for a strategic acquisition, or an exit, or a secondary stock sale, to begin their collective ascent. They can all realize success in increments — little installments of cash that make them richer. In parallel, their funders can also reap a reward without forcing or waiting for an exit.

… for reasons that are often very personalized, these new bootstrappers are attracted to business ideas where slower, smaller investments can be rationalized.

So are these alternative funding options, replete with short-term cash rewards, the salvific instruments that capital-starved bootstrappers have been waiting for? That depends. In the world of finance, these incremental installments are called dividends. If you have profit, you can distribute dividends to your shareholders (or unitholders, in an LLC). If you don’t, you can’t. Ergo, the key question a founder needs to answer when considering these options is whether their business model and market opportunity lends itself to enough profitability to satisfy the equations in the term sheet.

Growth equations and unit economics, later stage concerns for the VC-backed seedling, will demand rigor earlier for the new bootstrapper.

Even without being profligate, there are many reasons a business may be unprofitable. All of the good reasons to be unprofitable share a common theme: speed. The bad reasons are legion. As Tolstoy observed, “All happy families are alike; each unhappy family is unhappy in its own way.”

So what is speed? In Valley thinking, speed is everything once you’ve figured out a growth function where the faster you can push things into it (usually customers, users, or data), the larger your financial reward. This increases other risks, namely execution and profitability, but it has minted enough legends to be the dominant paradigm of venture capital.

Yet this phenomena isn’t exclusive to VC-backed startups. Natalie and Chris Nagele have referred to this side of their much-admired, bootstrapped Wildbit, as “the Beast.” Feed it … or else?

The unicorns that never bothered to flirt with VC.

Most logical individuals, when staring at the open mouth of such a promising beast, will choose to shovel as much into it as they can. But for reasons that are often very personalized, these new bootstrappers are attracted to business ideas where slower, smaller investments can be rationalized. After all, the reward may turn out to be smaller than their optimism expected, or it may become more demanding of their time and attention than they bargained, independent of its intrinsic success or failure. More servers, more problems.

Risk aversion and fear of success aside, anyone that’s built a lasting campfire knows the importance of managing oxygen inflow. Armed with patience, these founders are working with business models that burn through all the wood on the pile, minimizing waste while maximizing longevity and profits over the longest horizon. Paradoxically, these are the kinds of outcomes that all investors want, even if they happen on timelines that some can’t tolerate.

Would legendary, bootstrapped successes like Basecamp (then 37Signals) or Atlassian have been worse off had they taken VC?

If so, it’s reasonable to believe the bootstrappers that succeed using these new vehicles will join the anti-portfolio of the entire venture industry, even as they embrace their new financiers. In them is the potential to create a new class of investable assets: unicorns that never bothered to flirt with VC.

With these alternative structures, sustainability-minded founders and investors are well-aligned to reap rewards that suit their priorities. In concert with their portfolio founders, investors like TinySeed, Earnest, et al. may require, or elect to receive, cash dividends now, equity later, or some combination thereof.

While fair according to the negotiated terms sheet, these rewards aren’t free for the entrepreneur, who will be sharing some of his or her claims to cash (rich) in exchange for a more certain fate of king or queen (control). Though this sharing of profit is what he or she wanted, layering a trade-off on top of a business model profitability check will be daunting. Growth equations and unit economics, later stage concerns for the VC-backed seedling, will demand rigor earlier for the new bootstrapper.

Given these requirements, new tools for calculating the scenarios and outcomes of various terms and business models will become a greater necessity. In a future story, I’ll use my early access to a tool called Summit to calculate the suitability and trade-offs of taking investment from a variety of these alternative funding sources.

Thanks to Hrishi Mittal and Mitchellias Kessler for reading drafts of this post.

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Matt Wensing

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Founder, Summit. Believer in sustainable software businesses.

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