I don't really see the point of raising money if you aren't going to go all in and try to build a billion dollar startup.
As soon as you raise you are locking yourself to the idea you are selling for at least 7 years. If you are lucky, you can extract some money via a secondary to buy a modest house 3 years into it as a founder. You now have a heavy responsibility to your investors and employees to be a steward of their capital. All the code you've written now belongs to the company rather than yourself.
Meanwhile, if you bootstrap as a solo founder, you have optionality. If the business makes a profit you can now just deposit that in your bank account. If you get bored after 2 years you can leave the business on autopilot and repurpose the code you've written to try other ideas. If the product does take off you always have the option to spin it off into its own llc and raise money for it (or just sell it outright). The threshold for success is so much lower, you only need a few thousand paying customers to sustain one developer (you). Of course the obvious challenge with going this route is that you actually have to be able to execute on your own idea.
If you bootstrap you can also build something that actuality solves a problem and isn't focused on extracting maximum profit by becoming another middleman no one needs.
This is true, a lot of people say a business' purpose is to maximize profit for shareholders. The truth is a business' purpose is whatever the owners of the business want. If you go and raise money from a bunch of people who's literal job is to make more money then the purpose of your business will become to make more money for the new owners (stakeholders) of the business.
Not saying the profit incentive is necessarily a bad thing.
> don't really see the point of raising money if you aren't going to go all in and try to build a billion dollar startup
Angel investor here. I've had startups ask me about a $10mm exit. The team was tired. I'm not running a professional portfolio. I said go for it. I approximately 2x'd my money over as many years, while the founders became millionaires. (To be clear, I was being asked for advice. The founders had complete agency.)
None of those businesses, mind you, were compatible with bootstrapping. (And to the extent a business can be bootstrapped, I won't invest in it. Because that reflects its barriers to entry.)
Fundamentally the 'three round' model was about the risks, first was execution risk (can the team actually build what they say they can?), the second was market risk (will the market see enough value in the product to pay enough for it to give the company at least 33% net margins for R&D/growth?), and then round three was scaling risk (what is the addressable market for this product? How much has been reached so far? How much more could be reached?)
After those three rounds you are a going concern with hopefully 10 - 20% market share and an IPO will repay the investors, give you a regular way to raise capital on the open markets, Etc.
Way too many 21st century start ups were investors scamming other investors :-)
> first was execution risk (can the team actually build what they say they can?), the second was market risk (will the market see enough value in the product to pay enough for it to give the company at least 33% net margins for R&D/growth?)
The MVP condenses these risks. Building and delivering a product to a customer shows execution capacity and product-market fit. This is where angels and seed investors should live. If you have a proven tech team, trivial technology risk and a free product, however, delivering an MVP becomes a function of capital. Which means rounds go straight to scaling.
That final collapse, and the ensuing problem of future scaling rounds collapsing to the first, a direct consequence of low discount rates, which bring the future closer to the present, is where Silicon Valley's problems came from.
> We hear of a startup’s first funding round, the follow on, the next one, and one more. ... On occasion, we hear underdog stories of startups that bootstrapped to notable success, with zero funding rounds and little pomp and circumstance.
This is a side point but I have always wondered why companies publicize their funding rounds and why anybody outside the company would care? Well apart from the parasites who use those announcements as an acuse to cold call the CEO about mobile phone service, accounting software, and whatever.
Announcing important milestones (key customers, important new features, etc) makes sense. Raising money is just part of making those milestones and to me makes about as much sense as announcing a git push.
Publicizing money raises has (at least) two effects:
(1) It is a warning to competitors not to enter the market unless they're willing to put up a similar amount (all things being equal).
(2) It validates the valuation, which ultimately sets the bar for the next round or IPO.
Note that a company (with majority investors) will be wound up as soon as the prospects look bleak, even if there is plenty of money available. So in a financial environment with few alternatives (i.e., low interest rates), it makes sense to park your money as a threat to competitors, so long as the run rate roughly tracks the residual value increase in a fire sale.
Customers too, Especially B2B. If you're buying something from an early stage startup (service or product) you want to believe that they'll be around in a couple years so you haven't wasted the time/effort of onboarding or using the product.
Financing is a signal that the investors believe in the mission/product/services. It's just another a form of peacocking; the display serves as a proxy for more direct measurements of fitness.
I wonder if it is just in general market pumping up valuations. If everyone is highly valuing all companies, it means all companies are more valuable. Thus when they are flipped everyone makes more money.
So it makes sense for everyone to push up valuation number as anything they have stakes in will also seem more valuable...
> My thought-partner in crime, a former YC founder, read a draft of this essay and had a great question — is $100K actually too little given YC started with $125K?
Those numbers are quite low and would not make for livable employee salaries in Silicon Valley. Does this mean the next batch of startups have to have everyone work remotely from a LCOL?
I don't know how they can say `closer to market salary (e.g. $80K)` with a straight face. That is so below market to be laughable. Gas station managers make more.
I guess they are targeting recent college grads living with roommates and building a simple B2C product. Others need to be either independently wealthy (but then why raise this tiny round?) or live somewhere else.
“ Every early-stage founder is thinking: to raise or not to raise? Or what if I raise just a little and see how it goes? Is there a way to get the best of both bootstrapped and venture-funded paths? ”
As soon as you raise you are locking yourself to the idea you are selling for at least 7 years. If you are lucky, you can extract some money via a secondary to buy a modest house 3 years into it as a founder. You now have a heavy responsibility to your investors and employees to be a steward of their capital. All the code you've written now belongs to the company rather than yourself.
Meanwhile, if you bootstrap as a solo founder, you have optionality. If the business makes a profit you can now just deposit that in your bank account. If you get bored after 2 years you can leave the business on autopilot and repurpose the code you've written to try other ideas. If the product does take off you always have the option to spin it off into its own llc and raise money for it (or just sell it outright). The threshold for success is so much lower, you only need a few thousand paying customers to sustain one developer (you). Of course the obvious challenge with going this route is that you actually have to be able to execute on your own idea.