The next generation of companies will be built on top of bootstrapping, not lavish vanity rounds
I started writing this post with wild metaphors about the public markets, sprinkling in some anecdotes about the Coinbase IPO, trucks filled with Teslas in the 101, and general imagery depicting plentifulness and obscenity. I deleted it all and started over. No time for cynicism today and not the message I want to convey.
We’re headed into a recession. It’s not going to be a soft-landing, and it’s not going to be nice. (It already isn’t nice)
But. But now it’s when a lot of assumptions are going to be challenged. Assumptions that got us here in the first place about the way you should run a company, markets, and valuations. Assumptions about the meaning of value and what is worth it. If you keep your mind open for the next few months and beyond, amongst a sea of uncertainty you are going to learn a lot.
Those who triumph will be the ones mind-bendy enough to challenge themselves and everything around them and throw the rule book out of the window.
I’m here today to give simple advice to new founders: don’t raise money until it is necessary. Just don’t. This sentence may sound simple, but you’d be surprised how controversial it may be depending on the circles you frequent. Why would you raise money if you don’t need it? Well, collectively, we have done that as an industry. Vanity rounds are precisely that: vanity. Pre-seed, pre-market fit, pre-MVP rounds are that: unnecessary. Harmful.
With the recent market down-turn, you may actually not have a choice anyways. I’m here to advocate this is good. For you, for your company, for your future investors, and for society.
Pre-market fit money is harmful
The unfortunate reality of raising money is that every fundraise is a flip of an hourglass. Investors expect their capital to be deployed and they expect a return on their investment, most frequently in the form of an exit. Makes sense.
Deploying capital means, most likely, hiring, especially in tech. This means a bigger team, a team you probably have no idea how to manage or coach. It means process, it means team culture. These people you hire now also expect a return on their investment. You’re now spending most of your time managing the monster you built, rather than building value for the company. At pre-market fit stage you should be nimble, bright-eyed, passionate, and iterative. You should be deploying product every day, not every week. You should be talking to users every day. You should be breaking builds. You should be doing pivots.
Doing all of those things gets progressively harder the more money you raise and the more you hire. You don’t flip the hourglass until you’re ready to flip it, but that’s precisely what the industry has done, repeatedly, for the last 10 years.
Long live the bootstrap
“Bootstrapping” a company is nothing but building a company the way normal companies are built. It’s funny. Most companies on Earth aren’t built on top of lavish pre-seed rounds; they’re built on top of a progressively increasing cash flow. Tech startups are the exception, not the rule.
Let’s approach this from first principles. A successful company is one that has market fit and is able to generate revenue. The only way to do that is by relentlessly grinding it out, working with users, researching, coding, delivering, continuing to do more research until you figure it out. There’s no secret formula to building value and succeeding at it other than being relentless at execution. No seed money or incubator can help you achieve that in your first, decisive few months of this adventure.
Learn from our mistakes. Raise money when you’ve hit product market fit and have a clear plan of what to do with that money. A clear plan comes after getting good initial results, not money.
If you do things right, every one wins. Your team, your company, your investors, society, and you. You will be creating a company with a strong foundation, a healthy cash flow, and the past mistakes and learnings of having built success.
Your investors will thank you for it. They’re investing in something that is already proven and needs to grow.
It will take you longer to get there, but the result will be much better, more solid, more meaningful.
So is angel investing broken? Early-stage incubators?
It’s not. Some of the best and most helpful investors out there are angel investors. I’m advocating you raise from them, or anyone else, much later than people have been.
And as always, everything should be nuanced. Moonshots are capital intensive from the start. Non-technical founders need technical help (though I’d advocate you get a really good technical cofounder instead of hiring that technical help). So don’t take this blindly. Some companies, some projects, may need to raise sooner, and that’s alright, but be very judicious about it and delay it as much as possible.