While this all may be a good plan it is not the only way to go. My startup, engineyard.com is only two years old. But we built something people wanted and started selling it to them in September of 2006 with only $120k seed money raised from friends and family. We were profitable by January 2007 and had 50% growth month over month for most of 2007.
We could have just left it at that but we had plans to become an open source company as well as a hosting company. Developing new software projects like Rubinius, Merb and Vertebra take time and money to pay top notch engineers. So we decided to take a gamble on going big and we took some VC money. The thing is, we already had a profitable business and the VC's came to us, we never sought them out.
So we were able to accelerate our strategy by taking the VC money and we got excellent terms since we already had a profitable business. And we took money from Benchmark that was less then other VC's were offering us because Benchmark's contacts and knowledge has been a huge strategic advantage for us.
We have been able to grow our 3 person startup to over 80 employees worldwide, and through our VC's contacts were able to secure a series B from Amazon, NEA and Benchmark.
We would never have been able to accelerate our growth and ideas as fast as we have if we never took money. By taking money we have cemented our place in the Ruby landscape as the 800 pound gorilla ;)
So yes maybe it is the safe play to not take money and try to sell a product that people want and thats great! But sometimes it really is worth taking big risks with big money working toward big goals.
This is not an either or scenario and both ways of doing things are equally viable
Well we were starting a new clustered, virtualized hosting environment so we had hard cash needs to get our first set of servers and equipment and data center space. So it's a little different then starting a software company without the same hard costs.
We basically built something like ec2 but with more advanced features like load balancing and clustered, posix compliant filesystems. And we shipped before ec2 came out or was even known about publicly. This kind of system costs $$ to do right so the 120k went mostly to hardware and data center costs to bootstrap us to the point where we could take customers.
We started planning in february of 2006 and shipped in september 2006 and it's been a wild ride since then.
ps - sure, no problem. Let me know if anyone has any other questions.
pps - yeah one of our founders started Parallax who made the BASIC stamp.
We leached off of quality humans inc, which was a rails consulting shop some of our founders ran and also used savings and personal credit to get through the first 6 months or so after we all quit our day jobs ;) But lots of the planning stages, from Feb06 to August06 happened while I still had a full time day job somewhere else.
$120K is a lot for a YC-style startup (ramen noodles, web app, and no non-founder employees), but isn't isn't unusual in the larger world. Our seed funding was similar to that, and was basically a F&F round. And for a hosting company, I'm impressed that Engineyard was able to get going and get profitable on $120K.
"Taking money from someone else kills more start-ups than anything else does."
Overfunding does kill some startups, but it's an exaggeration to call it the number 1 cause of death. What kills the most startups is building lame products.
Overfunding does kill some startups, but it's an exaggeration to call it the number 1 cause of death. What kills the most startups is building lame products.
I think their point is that those factors are related. If someone gives you a huge pile of cash, there's a temptation to answer any criticism with "you think it's lame now, but just wait -- once we're done you'll love it".
If you don't have a lot of money, you can't use that excuse -- you have to build something which people want from the start.
VC will also often refuse to allow you to build simple products, or products that already exist in the market, or to go to market with a product that does not have a hockey stick projection behind it.
in a settting like 37s is talking about, funding probably means seed/angel funding. How much control/influence do you think these types of investors have? They have a minority stake, rarely have a board seat, etc.
It's easy/popular to blame bad products on investors, but usually that's pretty unfair. I think (at the seed stage) it's usually due to the founders.
I think better advice might be "don't take so much money that you have to give up early control."
It seems to me that a well-run angel funded startup will get to market quicker and have a slightly bigger (and potentially quicker) exit if the founders play their cards right. So you trade a small minority stake for getting "there" (wherever there is) months or years sooner as well as having a slightly better shot at a win due to investor influence.
This all assumes a goal of eventual liquidity, of course.
You know, people talk about "angel" and mean a bunch of different things. Maybe you're right, but maybe not.
There are "angel rounds" like YC that just get things started. I'm not worried that Paul Graham is going to exert undue influence over your company. Once the 20k is spent, what's he going to do? Write a nasty essay?
But there are also a lot of "angel rounds" that provide runway. They're much smaller than "A Rounds" --- mid-low hundred thousands --- but it's just like an A-round, for 2-4 people. Those investors control the agenda.
And in both cases, the real issue isn't what happens after you get funded. It's what they make you do prior to funding you.
Whether you call it an angel round or a seed round, I don't quite understand how the investors control the agenda. My experience (which at this point is fairly intimate) with sub-$1m rounds is that you generally give up 20-30% of your company and no board seats. In the rare event that an investor takes a board seat, you can generally argue for the board should reflect the cap table and there will be 2 co-founders on the board and 1 investor.
Of course, all things are different and some investors can be predatory.
Now, when you get into big Series A/B country, I think things change. Board seats start flying around and the founders can lose control.
But in the first round of mid-low hundred thousands? Not that I've usually seen.
Prior to funding (an interesting point) I haven't seen any influence whatsoever. We've marched to the beat of our own drum, clearly explained the vision we have for the company, and taken advice/feedback when we agreed with it. I HAVE heard of investors saying stuff like, "I'll invest IF you go in the direction that I want".
Not lots. Only a tiny fraction of startups have the luxury of being overfunded. Most are underfunded. And poor startups produce lame products at at least the rate that rich ones do. Therefore overfunding is responsible for at most a tiny fraction of lame products.
That might be true in consumer web products. I wouldn't know. But it's wrong in enterprise IT products. Venture funding pushes people towards rube goldberg contraptions that overcome "defensibility" hurdles by sounding unlike anything else on the market and, not coincidentally, unlike anything anyone would want to buy.
In enterprise IT, the buyer isn't the user, and purchasing decisions are based on many factors besides quality of the software. It's unrealistic to blame all of that on VC funding.
This is a myth about enterprise IT products. I'm calling the whole space "enterprise", because that's what Graham would call it, but we're talking about all products that sell for over the ~$60k to justify direct sales.
That may include crazy stuff like SAP or PeopleSoft --- ew --- but it also includes Splunk and Palo Alto Networks and pretty much every security products. The buyer is the user for almost all of these products. Quality is very much an issue, although it's again stunted by VC.
I know this might sound like just whining, but these type of self-help posts from 37 signals kind of bother me. Step 1 isn't building something people like, in their playbook step 1 is build an influential blog and consulting service and leverage those to sell your newly built product. I'm not saying its a bad plan, its a great plan, but its not the plan they are advocating others adopt.
So what you're basically saying is, when launching a product, step 1 is to figure out how to bring your product to market and promote it, and step 2 is to deliver the product.
We tend to hyperfocus on lines of code here, but any product manager at a software company would assume step 1.
Fair point - what I'm also saying though is that this step, and the unique manner in which 37signals accomplished this step, is not part of their advice for others. 37signals offers workshops on keeping it real, but not on building the hype. Before you start bootstrapping make sure you aren't wasting your time or you could end up yanking on those straps for 3 years and little to show for it.
I think the democratization of software, of the ability to build websites etc, is a wonderful thing, but I also think that it has tended to undervalue the marketing aspect. Perhaps its because for so many years the coders worked under the yoke of 'business types' who didn't know why a baby couldn't be delivered in one month with 9 mothers and now we feel like we can break free.
Hopefully someone will come along with some open source marketing AI and I won't have to worry about it.
Yeah, you and I agree 100%. I'm reacting to the tendency people have to discount 37S because "they had a popular blog". As if building a popular blog was something they were able to do only by being bitten by radioactive spiders.
"Write a blog that people want to read and provide consulting services that people want to pay for" is a special case of "build something people want", right?
I guess it is - though the amplifying aspect of said blog and consulting contacts have kind of been undersold. The term 'special case' is fitting - I think that 37signals is in many respects a special case, though they offer advice as if they are not. One of their amplifiers I forgot to mention is 'Step 2 - build the hottest open source web framework on the planet earth.'
I want to point out this: the costs of startups has dropped considerably, while investors are being tighter with their money. It's sort of a catch22, but I have to throw this "advice" out with the rest because there isn't a single reason for WHY I should actually follow it.
Bootstrapping isn't easy, the definition of the name simply implies it, and these kinds of posts are sort of reminding me why, even in the beginning I kind of doubt 37s. Getting Real appears to me a bunch of quotes with "I agree" type paragraphs after it. Can ANYONE here tell me why I shouldn't take money if it's given to me and focus on growing my ideas instead of doing it and taking the results afterwards with a proverbial "grain of salt"?
feels to general to take seriously - having a little cash in the bank is not a bad thing, lusting over a vc round before building something is also a bad scenario in most cases. Instead of right vs. wrong in the boostrap vs. funding argument, I would much rather find about about how to determine the right amount you need and some useful advice in finding investors that will help beyond writing a check. otherwise its just more useless one size fits all advice that i ignore.
ec2, (I consider them my biggest competitor, they probably don't know I exist, and, well, my product is somewhat different) has lowered the cost of hosting dramatically. and there are places that are even cheaper than that (such as my company) - unless you are doing something like video sharing, hosting costs are simply not a huge deal anymore compared to programmer time. At what I bill out for as a contractor, for every hour of my time, you can run a amazon ec2 small node for a month and have enough left over for a cheap lunch.
At most (USian, at least) startups, pizza for the meetings should cost more than the hosting fees.
Even if you are running an application where hosting is a big cost, there are plenty of people (such as myself) who have hosting resources they'd be happy to trade for some small slice of equity. Actually, yeah. let's make that a standing offer. if you have a startup and need SysAdmin/hosting stuff and are willing to trade a silver of equity for that, let me know.
We could have just left it at that but we had plans to become an open source company as well as a hosting company. Developing new software projects like Rubinius, Merb and Vertebra take time and money to pay top notch engineers. So we decided to take a gamble on going big and we took some VC money. The thing is, we already had a profitable business and the VC's came to us, we never sought them out.
So we were able to accelerate our strategy by taking the VC money and we got excellent terms since we already had a profitable business. And we took money from Benchmark that was less then other VC's were offering us because Benchmark's contacts and knowledge has been a huge strategic advantage for us.
We have been able to grow our 3 person startup to over 80 employees worldwide, and through our VC's contacts were able to secure a series B from Amazon, NEA and Benchmark.
We would never have been able to accelerate our growth and ideas as fast as we have if we never took money. By taking money we have cemented our place in the Ruby landscape as the 800 pound gorilla ;)
So yes maybe it is the safe play to not take money and try to sell a product that people want and thats great! But sometimes it really is worth taking big risks with big money working toward big goals.
This is not an either or scenario and both ways of doing things are equally viable