Here's a model that exists in Germany, which I like:<p>You can present a business plan to the state's investment bank and apply for several financial aides, including:<p>* 1.5 years of universal basic income for you plus up to 2 other people. It's a tiny amount of money, but the point is to free you up to invest your actual time an money into the business. You do not have to pay this back.<p>* up to 20k EUR in "consulting fees", for which the bank will contribute up to 50%. Again, you don't have to pay it back, but obviously you need money for them to match.<p>* discounted loans, amount depends on business plan outlook<p>I've worked with an accelerator that helps founders write the required pitches and plans for this program. And while the majority don't make it (because they mostly realize their idea won't actually hold up to business planning scrutiny), some do. And those don't become hyperscaling unicorns, they become normal companies, growing organically as stable, solvent employers in the region.<p>Every once in a while a VC would stick its head in and encourage the startup to take on VC funding, and for an even smaller percentage (one in my time doing this), this worked. But for me, the organic growers are the best success story.
I live in a country (Germany) that is famous for having a lot of "mittelstand". These are basically family owned businesses. Some large German companies fall under this. Aldi and LIDL for example, which are super market chains that at this point have a global presence. And some large companies (Bosch, Siemens, VW, etc.) are actually a multitude of smaller companies. Much of the German economy is smaller and bigger specialized companies doing their thing. Only some of them are public companies.<p>What these companies have in common is that they start small and then grow organically. The main issue from a VC point of view is not that these aren't good companies but that it can take decades for them to turn into big companies. But from the point of view of the people founding these businesses, it's a good, honest way to succeed in life.<p>There's nothing wrong with the principle of starting a company to make money from whatever it is you do at whatever scale you are doing it. But it should drive your decision making as to whether or not you give chunks of your company away to an investor. It might stop being your company if you do.<p>Also, if you go down this path. Stop calling yourself a startup. It scares away customers. They don't want to hear that you are a flaky wannabe that is still figuring it out. They want to hear about your other customers and how awesome whatever it is you are selling is. They want to be re-assured that it is safe for them to enter into a multi year customer relationship with you. Projecting that you are new to all this company stuff and might not be around in six months is exactly the wrong message for them. They don't want to hear about what you are going to do, they want to hear about what you have done already. The stuff that gets VCs horny will scare away customers. If you are pitching customers and VCs at the same time, make sure you have two very different pitches. And if you are going to pitch VCs, it actually helps if you have customers. The more business you have the stronger your negotiation position.
I do like the idea in general and feel there's a lot of room for improvement between the (VC / bootstrapping) extremes.<p>However, the middle path from the article presumes the existence of VCs willing to join you on that path. The article waves this away with:<p>> angel investors are generally more open to a 2-3x ROI<p>For a $1M round you'd need to find 10-20 such angels (assuming $50k-$100k average check size) willing to accept small upside, for which you'll have convince them there's commensurately smaller risk. This will probably mean you have some revenue and some sense of where PMF might lay or some kind of brand/pedigree.<p>Do not underestimate the value of YC brand and being able to present on Demo Day gives you. A random Jane from Ohio building her tech company would have a <i>lot</i> harder time finding those 10-20 angels, to put it mildly. I'd be more careful when extrapolating path-dependent success into a general strategy.<p>That said, my gut feeling is there's room for the next Paul Graham to fill that space - somehow.
I'm always conflicted about this because it's like saying the sky is blue.<p>Stepping outside of the VC startup bubble, we see small self-funded businesses are the norm. It's the neighborhood businesses all around us.<p>82% of all US business have <10 employees
<a href="https://forstarters.substack.com/p/for-starters-10-the-three-risks-of-entrepreneurship" rel="nofollow">https://forstarters.substack.com/p/for-starters-10-the-three...</a><p>99.976% of new businesses don’t raise venture capital.
<a href="https://forstarters.substack.com/p/for-starters-32-start-with-a-professional" rel="nofollow">https://forstarters.substack.com/p/for-starters-32-start-wit...</a>
> even a relatively small deal would produce a life-changing outcome for the founding team.<p>I run a SaaS with a business partner and this is basically our thesis for getting rich. My saying around this is "This amount of revenue/profit will cause a company of 500 or 1000 to go bankrupt, but it will make a company of 5-10 filthy rich"
It's obviously better to raise the optimal amount and no more. But things are not always so clean, and the best time to raise is when your company is killing it, not when you're running out of cash and trying to make it to profitability.<p>I think one option this approach ignores is the ability to raise, but not spend profligately and not give up board seats.<p>E.g. if you raise $10m, but still have $8m in the bank, a $10+8m exit is still possible. You do lose whatever percentage on top of liquidation preferences you sold, but the $10m in insurance can be helpful.<p>Another thing to keep in mind is that once you have competitors, the pace at which your invest and ship is not entirely up to you. If your competitors raise more and manage to ship more or out-market you, your product is going to get squeezed out of the market.<p>Slack is sort of the prime example in my mind here of a pretty unimpressive product dominating the space through fundraising. None of their erstwhile competitors had good outcomes because Slack just sucked all the oxygen out of that space and the only company who could really compete with that turned out to be Microsoft.
<a href="https://paulgraham.com/growth.html" rel="nofollow">https://paulgraham.com/growth.html</a><p>"A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of "exit." The only essential thing is growth. Everything else we associate with startups follows from growth."
Someone investing $1M for 10% might better off buy gold or a property.<p>It sounds good for me as a founder, but from investor point of view, this is pointless. Why taking a huge risk for 10%?
> For most B2B SaaS businesses, you shouldn’t need more than $1M in capital to get to PMF<p>I'm not sure that's true today. Author is a one-time founder that had some success. He exudes selection bias. Note: i'm not poo-pooing him that "oh he's only founded one company". Don't read into it that much. I'm just expressing that he has the standard hubris that any one-time successful founder would have. After that single success he's already enlightening us with his wisdom.<p>Of course there are such businesses, but "most" of those aren't startups. I don't think PMF is a term that even applies to such SMBs. PMF implies scale and repeatability of the sales process -- becoming a unicorn is baseline now.
This is what we did for Sudowrite. Took a small seed and got to profitability within 2 years by hiring within our means and laser focusing on our users. Happy to answer questions!
I am a big believer in Seed-Strapping. You need some initial capital to get you started (can be as low as a few months of your own salary). But you should aim to bootstrap your solution.
The company I work for is a small company that has enabled above-market results for everyone employed. Almost 20 years ago the founder saw a specific niche, and went after it aggressively, having software built out of his own savings. We've never taken a dime of outside funding (aside from PPP loan in 2020, allowing to us to lose no employees despite our income being decimated). He's very aggressive about keeping expenses low, but he takes care of his employees, knowing they are the most valuable part of his company. (Self-serving for me to say I know, but it really is his value system)
I think the post is off.<p>How exactly is a VC—or any investor, really—supposed to make money from a startup that’s aiming for a “middle of the road” outcome? That just doesn’t add up. In that case, wouldn’t it make more sense to invest in something safer or more traditional?<p>From what I understand, the very definition of a startup is tied to ambition. Founders need to be aiming for the moon—or at least something close to it. If you’re not taking big risks with the potential for big rewards, can you even call it a startup?
Hopefully, over time, we will get better and better in creating the world of software from small interoperable pieces that can be maintained by small teams or even solo entrepreneurs.
> so if you're aiming for a $10M outcome, they won't be interested<p>VCs won't be interested if you're aiming for a $100M outcome because what you aim for is generally loftier than what you hit. If you're aiming for $100M you might sell for $25M or $50M, which is generally uninteresting to VCs.
A VC will build a portfolio of startups that each have the potential to do massively well. After that they don’t care which of the portfolio companies lives or dies, as long as one explodes and compensates for the others.<p>As a founder you care very much which of your companies succeeds, as you only have one.
> Your Startup Doesn’t Need to Be a Unicorn<p>yes it does. <a href="https://paulgraham.com/growth.html" rel="nofollow">https://paulgraham.com/growth.html</a><p>> —say, less than $1M—<p>why not go for an SBA loan then instead of VC?
The problem with this idea is that capital markets exist and capital seeks compounding. If there is a market to be addressed and it has size, someone will go in and displace you with a cash flywheel.
I usually compare them as sharks vs bottom feeders. Either you become the predator that eats all the big fish. Or you go somewhere the big fish won't go.<p>There's the 'crab' model, but this isn't for startups. They're old, companies like Yahoo who have a moat and can't leave it. They're at evolutionary peak or rather a local maxima. They're too difficult to change and a major change would make them too vulnerable.
Although it's good to look into alternatives to bootstrapping vs VCs, the funding source isn't the only factor to consider. Balancing how quickly you need to enter the market and how much ownership you feel comfortable having over the final product will ultimately drive the decision on how to fund a venture too.
Also the other thing that I realised after working with a bunch of VCs is that they are all incredibly dumb. Few VCs are founders themselves and you will have better luck with them but the majority of VCs have simply no idea about product and technology and they are simply pattern matching. What that means is that they will cargo cult everything and if your startup doesn't fit the mold they will not respond to you favorably and the sad part is that the actual 10x, 100x returns that their VC firm needs comes from those type of investments but they simply cannot see them.
Currently in a seed funded by a very simple cap table, pre-series whatever SaaS company. This post resonated with me as we will have to raise money later this year and I'm dreading having to take institutional capital. There is another way.
“Startup” implies VC-backed company.<p>And VC’s invest in companies to get a 100x return.<p>Which almost by definition means, if you run a startup - you <i>need</i> to get it to become a unicorn for it to be successful.<p>Otherwise, why take VC money … and just bootstrap it instead.
I don't know much about the fund itself, but <a href="https://www.indie.vc/" rel="nofollow">https://www.indie.vc/</a> seems like their whole thesis is this middle path.
Yes it does. The definition of a startup is that it's high-risk and fast growth. If you want slow growth, it's a small business (which is fine), but not a startup.
I was being called a unicorn in a professional setting... unfamiliar with the term, I immediately thought I was being insulted, because unicorns exist just in people's imagination and fairy tales.
We are currently fundraising - and we consider this a valid path if VCs don't bite. We have customers and no matter what - we are building something valuable. Nice post!
Glad someone is talking about the option other than selling to VCs or ramen diet start ups. The tech community might have collectively forgotten the other option.