Venture backed or bootstrapped? There's a third way: just raise one round

This is what we did with my company. Raised a $1.1m seed in 2015, and still running the company today. It's a very profitable modest company now with 25 employees.

At the time we raised the seed round, we thought we were going to go the regular VC funded path, but somewhere along the way (probably when we became profitable) we changed our operating model to one similar to a bootstrapped company.

Some investors got annoyed (some probably still are annoyed), but we've offered to pay them back their original investment. I used to get angry emails from investors telling us it's terrible that we're not burning money, because you have to invest and burn money in order to grow fast.

I really like the position we're in now, with 100% total control over the company, no board of directors other than founders, destiny is in our own hands. No pressure to raise since we're profitable, and we continue to grow by reinvesting profits back into the business (hiring more people).

This strategy 100% will not work if you tell investors this is your plan from the start. VC-backed and bootstrapped companies operate very differently and have very different long-term goals. Bootstrapped companies typically aren't compatible with the goals of investors. I have trouble seeing how you would pitch "raise 1 round" to seed investors successfully. And I absolutely would not recommend being dishonest about your intentions if you know this is your plan from the start. (For us, we truly believed what we told our original investors and the vision we painted, and only changed our operating model a couple years later after burning nearly all of our seed capital)

This "third way" is only really possible if you're strategically aligned with the "one round" investors you have. It's easy to point to a few companies that have gotten buy-in from their investors and generated a multiple of 100x returns, but for the vast majority of companies that raise one round, their investors are still going to push for "swing for the fences" returns - which usually means recommending raising more money.

Consider:

- Venture capitalists are generally funded with a 2% management fee and a 20% carry. AKA their limited partners (investors in the VC fund) are looking for returns over 10 years that are better than an index fund, even burdened by those extra fees. In other words, they've only achieved the most modest of success if they have a 3X overall average return, and are incentivized by the carry to aim for much much higher returns.

- VCs only make money if they can sell the shares. I.e. there's an M&A event, an IPO, or a secondary market.

- Even without a majority share, VCs generally get "preferred share" rights, which include the ability to force a company to have a public offering/sell itself (These are called "registration rights" in the Investor Rights' Agreement). Granted these haven't been used frequently in the last decade and a half, but it's a potential hammer that VCs can wave if a founding team/management decide to try to just run a company as a smaller profitable enterprise.

I was naive when I started out talking to VCs and made the mistake of saying that we might only need to raise one round. Of course, this is not what any VC wants to hear, since it doesn't align with their goals.

It is possible to just raise one round, but it requires that you use the right kind of instrument, and that you don't give up too much voting control. My guess is that if this sort of thing becomes popular, VCs will insist on certain key terms that will allow them to prevent this sort of strategy, and any founders who resist the key terms will be viewed as suspect.

This has been our strategy. We bootstrapped as long as we could. We got 1 & 1/2 products live. But with a long sales cycle, and security certificate requirements, we needed funding to cross that chasm. We’ve raised one round and our goal is to get to break even. Our competitor have gone the other route, VC after VC, and while it’s enabled them to grow, it’s left a bad taste in their customers mouths (who’ve effectively been burned and churned). It’s made it easy to differentiate ourselves, and our motivations, and ultimately win their business.

Do you think we will see any bootstrapped companies become billion dollar corporations? Companies that start close to or are profitable from the get go. Obviously small revenues.

Starting small with a specific market and conquering it and then ramping up the product to go after bigger and bigger segments.

Or is that just impossible in today’s landscape?

Like for example as a swe I have an enough of money I could use to self fund myself. If it goes wrong I just need to work 2-3 more years and I have another 500k.