Should Your Startup Bootstrap or Raise Venture Capital?

Summary

The speakers discuss the debate around bootstrapping versus venture capital funding for startups. They argue most businesses shouldn't and don't raise VC, as VCs only want to invest in companies with huge growth potential to yield large returns. They see no moral argument for either approach and think the debate is fake controversy. However, some companies do require lots of upfront capital where VC enables businesses not otherwise possible. Ultimately both models can work, it depends on the specific company, goals and needs. The choice is situational, not ideological.

Takeaways

• 😊 Most businesses should not and do not raise venture capital
• 💡 Venture capital is meant for high-growth startups aiming to provide large returns
• 🤔 The bootstrap vs VC debate is largely fake and driven by those looking to profit from outrage
• 📈 Trillion dollar software companies have all raised VC funding
• 😎 You can build a very successful software business without VC funding
• 💰 Most wealthy people did not raise VC funding for their success
• 👍 It's ok to start bootstrapped and raise VC funding later if it makes sense
• 🤝 VC funding is a business transaction, not something personal
• 😠 Don't let outlier silly VC deals outrage you
• 🎯 Focus on serving your customers, not debates that don't help you

Q & A

What percentage of businesses started each year receive venture capital funding?

The speakers estimate it is definitely single digits, if not less than 1%.

What is the main goal of venture capital as a product?

To invest in something that could potentially be worth at least 100 times more, if not 1,000 times more than the initial investment.

Have any trillion dollar software companies been built without venture capital funding?

No, none of the trillion dollar software companies have been built without venture capital funding.

What mechanisms are available if you need millions of dollars upfront to build your startup?

Venture capital is one of the only good mechanisms to provide millions of dollars upfront if you need it to get your company to break even.

How should founders view venture capital funding?

As enabling entrepreneurship and startups that otherwise wouldn't exist, not as cannibalizing other efforts.

Who benefits from stirring up debates about bootstrapping versus venture capital?

People looking to build a following and monetize the controversy, even if it's not fully real.

Why might a venture capital firm say no to funding a startup?

Not because they dislike the founder, but because the potential returns don't justify the investment based on the business proposal.

What type of game does Michael Seibel prefer to play in business?

A simple, straightforward game where both parties understand the terms of the partnership clearly.

What is the main takeaway regarding bootstrapping vs venture capital?

There is no moral high ground in either approach, it depends on the specific business goals and needs.

What is Michael Seibel's perspective on the debate itself?

He hopes it continues because he sees it as largely fake and engagement-driven rather than reflecting an actual issue.

Outlines

00:00

😊 Most businesses should not and do not raise VC funding

The paragraph discusses that most new businesses should not and do not raise venture capital funding. VC funding is meant for rare, high-growth startups that can provide large returns, not most small businesses. Many founders wrongly believe VC funding is common and required for success.

05:02

😲 No major software company succeeded without VC funding

The paragraph states that no major trillion-dollar software company like Google, Amazon, etc. succeeded without venture capital funding. So people claiming you can build extremely large tech companies while bootstrapped may be unrealistic.

10:04

💡 VC funding enables ambitious projects requiring large upfront capital

The paragraph explains that VC funding enables ambitious entrepreneurial projects requiring significant upfront capital that would not be possible otherwise through loans or bootstrapping. It is meant to fund incremental innovation.

Keywords

💡bootstrap

Bootstrap refers to starting and building a business using your own funds, without external investors or venture capital. It's contrasted with raising VC funding. The speakers discuss whether founders should bootstrap or seek VC backing. Michael says most businesses should bootstrap, while VC is for outliers seeking extreme growth.

💡venture capital (VC)

Venture capital refers to funding from investors in exchange for equity in an early-stage, high-growth startup. The speakers discuss the pros and cons of raising VC money versus bootstrapping. VC aims for large returns but isn't suitable for most businesses.

💡investment returns

Venture capital aims for outsized investment returns of 100x or more from the few companies that succeed. This expectation shapes what types of companies VCs fund. If a business can't offer large potential returns, VCs won't invest.

💡growth potential

Venture capital targets companies with extreme growth potential to become huge in their market. Most everyday businesses lack this upside for VCs to multiply their investment. But some ideas require capital to reach their potential.

💡capital intensity

Some companies like Google require a lot of upfront capital to fund growth before they can monetize. Such capital-intensive businesses may need VC funding if bootstrapping growth is impossible.

💡business model

A business's model plays a key role in whether VC funding makes sense. Models with higher margins and faster payback suit bootstrapping better. More capital-intensive models may require VC backing.

💡control

Bootstrapping allows the founders to retain full control and ownership of their company. With VC money comes dilution of control and pressure for high growth and exits.

💡scale

VC backing allows companies to scale much faster by spending capital upfront on things like marketing and expansion. Rapid scale can cement competitive leads.

💡exit strategy

VCs fund startups on the prospect they will eventually exit via IPO or acquisition. Most VCs require ideas for potential billion-dollar exits before investing.

💡runway

Runway refers to the duration a startup has funding for. Bootstrapping extends the runway organically as the business funds itself. VC backing gives a longer upfront runway.

Highlights

The vast majority of businesses should not raise venture capital.

Venture capital is specifically for investing in something that could be worth at least 100x more.

If you need to be talked into raising VC, that's a bad sign.

None of the trillion dollar software companies are bootstrapped with no VC dollars ever.

There's no one trying to force you into starting a VC backed company.

Most people who are rich did not raise venture capital.

There are some businesses where you actually need money upfront and VC can provide that.

VC enables entrepreneurship that wouldn't exist otherwise, not cannibalizing anything.

Don't fall for the rage bait of cherry-picking crazy VC investments.

VC is a business transaction, not a faith transaction.

Customers are complicated enough, I want money partners to be simple.

I give you money, you give me more money back later.

Someone messed up funding that silly company, but that's not a reason to doubt all VC.

I like simple business partner games, not convincing people to like you.

I hope this debate stays controversial despite our attempt to clarify it.

Transcripts

I would watch his life on Facebook and

be like this is amazing he traveled the

world he got married he had kids I'm

like am I the idiot and like evidence

was quite possibly Michael quite

possibly this is Alon plus Michael and

today we're going to talk about should

you bootstrap or should you start a VC

backed company this is like a

confusingly controversial topic yeah I'm

not really sure why it's controvers

well it's one of those sort of one-sided

things where a lot of people don't

care about the topic versus people that

care a lot yeah does that make sense and

so I think there's a lot of people that

strongly identify and are really excited

about bootstrapping yeah that are very

like fired up about this and there's a

lot of people that this just isn't a

topic that comes up much yeah the place

we should start I think is that the vast

majority of

businesses um should not raise venture

capital and I'll extend that Point

Venture Capital is not interested in

investing yeah in the vast majority of

businesses so like one of the things I

think Founders get really screwed up on

is that VCS have become a little bit

more

marketingyoutube lot of the stuff that I

see on the television show yeah you

would never in a million years be able

to raise VC from it and so I think you

watch Shark Tank and you think that that

is no reality not this industry so I

think that um that's the first thing is

that if you're starting a business that

can appear on Shark Tank for the most

part you probably shouldn't raise

Venture Capital um but I think there's

actually like a deeper thing here which

is that let's say you want to start a

startup business you don't have to raise

Venture Capital either correct and I'll

say the same thing I don't believe

Venture capitalists want to invest in

all software businesses and I don't

believe all software Founders should

raise Venture Capital yep so yeah let's

talk about the map I think what's really

going on um is I think if you looked at

how many businesses are started every

year yes what percentage of those are

Venture funded Co we could ask chat gbt

but I would guess definitely single

digits if not less than 1% and so if you

just look at businesses that are started

in the world yes it is like a weird

outlier freak occurrence that is a VC

funded business and so but I think if

you're just consuming content you know

you're watching media watching YouTube

Twitter you don't realize that yeah okay

and Venture Capital as a product is

specifically for investing in something

where their investment could be worth at

least a 100 times more if not a thousand

times more yes and so trying to put that

jet fuel into something that um isn't

going to grow to be big everyone is

going to be sad and lose yeah and so you

shouldn't do it and the investor win and

the user no one no one wins no one wins

and so again like I don't think that

there's this push that I can see from

from investors to try to convince people

to raise VC money um for something that

is not has like no chance of of growing

like that it just doesn't make sense for

anybody okay I'll go a step further I

think the whole argument is fake news

right I don't think this is a a real

argument right I don't think that anyone

thinks it's more moral or good or right

to start a VC pack company or a non-vc

pack company I don't think this is an

actual debate yeah I think that like

starting a VCB company really hard not

the best way to get rich not the best

way relatively small number like the

numbers are not huge not a good path

like I always like to equate it to like

Athletics it's like getting into the NBA

is really hard like not like the best

path to have a good career is to be like

oh I'll just I'll just make the NBA yeah

that's simple right it's like 4 or 50

guys I'll just be one of those guys and

then game on right right they recruit

from all around the world I live in the

world yeah very straightforward I like

that play yeah no so it's this is not

the only way to get rich Let's Take a

further step most people who are rich

did not raise Venture Capital dollars

did not start real estate investing

stock market investing being lawyers

being doctors again go num investors

yeah there's so many people right so

this is not we get rich I think the

other thing that's funny is like there

is no one trying to force you or cadol

you into starting a VC backed company

like if you don't want to do it don't

don't do it correct it's also a decision

that you can revisit if you don't want

to start a VCB company now but like your

bootstrap product starts doing well and

you want to do it in the future great

you can there's no one who is going to

say no you said you were bootstrapped on

Twitter I will not give you money like

no I'll get another truth empirically

none of the trillion dollar software

companies um are bootstrapped with no VC

dollars ever yeah so if you if someone's

telling you you can make a trillion

dollar company maybe you can just no

one's ever done it yeah I'll say fact

based and again like to look at the

numbers even if you look at software

companies yeah even if you look at

iPhone apps if you actually did an audit

of the App Store and you said what

percentage of the apps in the App Store

are VC backed it is Tiny tin but if you

said what percentage of dollars that are

spent in mobile apps go into VC backed

companies I think that that's right

because dollars are going into Amazon

and eBay and like all that kind of stuff

right yes and by the way I don't I want

to be clear neither of us are saying you

should want to make one of those

companies yes like or you that should

come from inside of you not from YouTube

no no right like I actually kind of try

to convince people not do it well if it

is because if you need to be talked into

it that's a bad bad so I like to talk

about why it sucks yeah so um I think

the other thing is that no one is trying

to say in our industry that if you make

a great software product that allows you

to make enough money to live a good life

and it's not PC back that you haven't

won you won yep like I had a friend who

made one of these companies um you might

have used his product his product

generated about $30 to $50,000 a month

and took about 7 to 10 hours a month of

Maintenance the entire time I was

working on my startup he was living life

like I would watch his life on Facebook

and be like this is amazing he traveled

the world he got married he had kids I'm

like he won like that's like like good

for him like there's no again this is

the one-sided thing is that we're like

great like we're like high-fiving that

versus that there's this um two-sided

battle 97% of the time I was watching

that Facebook I was like am I the idiot

and like evidence

was quite possibly possibly yes um and

he's still doing great right and so like

this is really clear it's like building

a great small business software small

soft even the term small bothers people

it's just non-venture back non it could

be big non Venture back you making

millions and millions of dollars yes

totally fine I think the other thing

that's kind of maybe a dirt dirty kind

of underbelly here is who is spurning

this argument like who who is who who's

incentivized for this to be a big issue

yeah think that this has been just like

a topic that gets a lot of Engagement

online yeah and so yeah you know if you

want to get people agitated about

something this is a pretty good topic

and then you can use it to

promote stuff and so yeah I'm not going

of name any names but I can think of

folks over the years yeah that are like

kind of um built a following around

encouraging people to do this and to the

extent it is helpful and more people are

improving their lives it that's great

yes but there's a little bit of like

creating a fake controversy and then and

then monetizing it little bit and so

maybe maybe people may have this

question watching this video Michael why

should I apply to YC like why should I

do a v you guys just did a great job of

explaining why not to do it well why why

should I do Venture so I think that um

there are some businesses where you

actually need money

upfront yes and if you you need money up

front and you're building a software

business The Venture Capital industry

can help you get money up front if you

don't need it they'll take it yes I

think that what's so interesting about

this is that um there aren't many other

good mechanisms if you need millions of

dollars or 10 million dollars to get

your company to break even yeah there

aren't other mechanisms in our economy

to give that to you if bu an example of

Google I don't know just cuz famous B

companies the world you know I don't

know how you could have bootstrapped

that and so again maybe the audience is

saying well I don't want to build Google

great you no one is saying you have to

build Google but if Google wants to

build Google but if the founders of

Google wanted to build Google yeah it

doesn't seem mathematically possible

there's no route they could have done it

without raising money there's no loans

they could have gotten to buy the

servers and do the things they did no no

and so we should just be thinking about

VC as enabling incremental

entrepreneurship that wouldn't to be

around otherwise yep not as

cannibalizing anything like it's just

enabling that incremental founder and

the other thing is you have to

remember if you want to raise a lot of

money but you can't explain to the

investor why you might IPO and give them

a lot of money

back then you you can't raise VC we want

to be explicit like it is a business

transaction it's not a faith transaction

correct it it is I give you money now

you give me a lot more money later or at

least you try really hard to and if you

can try really hard but the result can't

be a lot of money I shouldn't logically

give you money now not because I don't

like you or because yeah you're not a

great person or these users you're

trying to serve aren't great it's just

because it's not a good business

transaction it's literally nothing

personal and I think sometimes Founders

kind of are very confused when VC say no

well it's because again if we're we're

trying to stoke outrage you let's Stoke

some outrage you point at something

silly that raised a lot of money yes the

most extreme silly thing in the world

you always pointed youo that' be one

right or we were whatever like you point

to something that is like on face silly

and then you say well if they funded

that why won't they fund my social

network for dogs yes and so it causes a

lot of emotions

yeah um and I understand I relate but

it's don't fall for the rage pillar

don't let yourself get enraged by

obvious engagement bait yes which is to

cherry-pick the craziest silliest thing

yes and use that to get all worked up

and take that personally like that

somehow hurt you like like you were hurt

by that thing over there happening well

and what's so funny is like you are

actually cluded on the real Troop real

truth which is that they screwed up

someone someone messed up like you're

right they shouldn't got there that

money like you you you nailed it that

person who funded that company is an

idiot you're exactly right but like hey

that doesn't mean we should all bets are

all yeah it's like okay this dumb thing

happened therefore Up Is Down black like

like forget everything we know those are

those that doesn't follow that logic

doesn't make sense that person should

probably be uh spoken to about their

investment strategy so yeah so just

understand that game and I have to be

honest like I like games like this like

I don't like games where you have to

like convince people to like you or to

align with your views those are games

that are way harder to play I like games

where it's like hey if I want to serve

this customer and you can be a good

legal partner to me and I I give you

money and you give me Legal Services you

can be a good funding partner for me I

give you a check of my company you give

me cash right if you can be a good

partner to me a simple to understand

partner to me so that I can spend my

time working my

customer that's what I want yeah the

customer complicated

enough Jesus customers complicated

enough I like the idea that the money

people are like so if I give you this

money maybe give me a lot of money back

yes yes okay okay we're good okay

all right end of conversation I give you

money you don't give me any money back

no no

good come back when I come back when

this is all that way

hopefully this helps clear up the debate

but I secretly hope this like I don't

know like doesn't at all cuz this this

is like so silly uh I hope we get

somehow flame word for this anyways

great good chat love it okay sounds good

thanks

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