It’s the most wonderful time of the year in the Denver startup community: Denver Startup Week. The Denver Founders crew put together a panel of veteran entrepreneurs to discuss the merits and drawbacks of fundraising and bootstrapping.
The all-star panel consisted of Bart Lorang, CEO and co-founder of Full Contact, Jim Franklin, former CEO of SendGrid and mainstay of the Denver startup community, and Josh Dorkin, founder and CEO of Bigger Pockets.
Getting Into The Game
All three men took different paths on their way to starting companies. Lorang actually bootstrapped a number of other projects before ultimately deciding to raise money for Full Contact. That decision emerged from an honest conversation with his co-founder.
They originally planned to bootstrap the company, but ultimately got to a point where their personal financial runways wouldn’t allow them to grow the company. Lorang famously recounted the trials and tribulations of his foray into fundraising in his “126 no’s and one big yes” blog post.
For the witty and mordant Franklin, the decision to fundraise stemmed from his desire to start a company without liquidating his assets and putting every last cent into the company. When he started his first company he was already the VP of sales at another company and founded his on the side.
For Franklin the key to success was finding the right combination of co-founders. He was able to find one who had access to a large customer base and another that had access to some seed money. They managed to raise $5 million in their series A, built the product in 45 days. When asked if that was still possible in today’s startup environment Franklin said he thought it was possible but that it takes a lot of work.
Dorkin admitted that there have been plenty of times when he considered fundraising, but followed through with it. He started with a personal problem: the need for good, relevant information about real estate investing, and created a community around it.
For many years Dorkin’s company was essentially a full-time hobby, taking up all of his nights and weekends. Once he shifted to working on Bigger Pockets full time he regularly clocked 100-hour workweeks. By trying to do it all himself, he nearly destroyed himself, but that’s a problem that a lot of bootstrappers face.
When To NOT Take Money
The question arose as to whether it ever made sense to not take money offered to your company. Dorkin noted that he’d been offered money plenty of times, but never took any of it. Having been on the opposite side of the situation, giving thousands of dollars to a project that yielded no return he understood firsthand how badly that sucked. Doing that to others didn’t appeal to him.
Franklin, who has steered many startups in Denver, noted that every financing option has its pros and con, and different games to play. The big thing to remember is that if you take money there are consequences to doing so. If you don’t want to deal with the consequences then don’t take the money. If you do take the money, don’t complain when the piper comes calling.
Franklin also noted that the decision to take money requires self-reflection, and the need to know yourself and your work style. If you don’t play nice with others or take direction very well, then having investors trying to steer the ship in a direction that you don’t want to go can be a major headache. Again, be aware of those consequences.
Dorkin explained that his decision wasn’t based on ego; he simply didn’t want anyone crawling up his buttocks. He argued that once you take money, your responsibilities change and that can potentially have a major impact on how you run your company.
There’s an ethical component to this situation as well. While a cash infusion is certainly a good thing, it also makes you beholden to your investors. Whether you like it or not, your directive changes after taking money and the new goal is to provide ROI, and failure to do so isn’t ethical. The problem here is that you end up serving your investors and not your customers.
Lorang suggested that his company was more flexible and opportunistic when bootstrapping. It became more difficult to focus on custom solutions for customers and instead he had to think about what’s best for the business. This shift from an external center of influence to an internal one can be significant.
The Colorado Condition
As the evening progressed Franklin identified and pontificated on an interesting thread: the difference between local Colorado investors and “coastal” investors, e.g. those in Silicon Valley, Boston, New York, or even Chicago (hey, Lake Michigan has a lot of coast!).
There’s a different scale for success for Colorado companies who “make it” on local, Colorado funding. Growing a company and selling for $100 million in Colorado is considered a major success; the veritable “local kid does good.”
However, the moment these coastal investors enter the picture, the scale of success changes. A $100M exit isn’t enough. Getting to $450M, $500M, or the fabled tres commas ($1B) becomes the expectation in those circles.
Dorkin reminded the audience that there are only so many unicorns; that’s why we call them that. You have to think about your motivation for starting a company and the goals you want to accomplish. If you’re dead set on becoming a billionaire, you’re probably setting yourself up for failure. But building a company that will allow you to live comfortably, even if that means only a $100N exit, is more feasible.
Money and Corporate Culture
If money changes everything, does that include corporate culture? Lorang said that culture changed immediately in his experience. When you take money you have to take bigger bets and take more risk in order to succeed and provide that ROI.
Fortunately, nowadays, there are lots of resources for entrepreneurs that make it possible to establish corporate values from the word go. Franklin noted that if you establish your values early and stick to them then it doesn’t matter if you bootstrap or raise money then your culture should weather the storm.
With bootstrapping there tends to be less extravagance vis-à-vis corporate culture. That’s not meant as a pejorative, merely a descriptor. Dorkin opined that in order to get talented people employees need to know and trust that you won’t be off the map in 6 weeks.
By necessity boostrappers tend to be penny pinchers. Anyone who’s seen Silicon Valley knows that companies that raise money can burn through big bucks fast. And it’s even worse when it happens in real life. At the end of the day it’s about recognizing and understanding your needs and being cheap where you need to be and spending where you need to, said Dorkin.
Both Lorang and Franklin noted that a similar shift occurs in the role of the founder when you decide to take money. Fundraising is a fulltime job. That’s time you don’t have to commit to actually working on your product. Lorang was a programmer but had to put that work on the backburner when it came to fundraising.
If you’re mission-critical to the success of your company you need to ask yourself if you can honestly afford to stop doing those things that make the company function and pursue full time fundraising. If the answer is no then bootstrapping might be more of a necessity than a preference.
As the evening drew to an end, Franklin reminded founders to be aware that taking money had unintended consequences, especially toward urgency and innovation. It’s not uncommon for companies to take their foot off the gas once they have some financial security.
Dorkin reiterated the relationship between hard work and success. “You have to hustle if you want to succeed,” he said.
Perhaps the most relevant point was the last one, coming from Lorang. His advice was straightforward and poignant: “the most important job is simple,” he said, “DON’T F#!&ING RUN OUT OF MONEY!”