Do you have a great idea for a new company? And a founding team of bright, intelligent people with the right skills to bring it to market? You may think now is the time to pitch angel investors, but you'd be dead wrong.
That viewpoint comes from Ryan Smith, founder of Qualtrics an online survey platform. Qualtrics has raised about $220 million at a valuation that puts the company well above the $1 billion unicorn threshold. He got there by bootstrapping the company for a decade, building up its customer base and business model before he ever pitched a VC.
That's the right approach, he says, and too many founders these days are taking the wrong one. He characterizes it like this: Step 1) Scrawl app/software/drone idea on a napkin. Step 2) Raise boatloads of VC cash. Step 3) Spend the cash. Step 4) ??? Step 5) Profit!
A big part of the problem is the Silicon Valley mentality that tends to treat companies like wannabes until they've gotten at least an A-Round of funding, he adds. "We created a bootstrapped business that was making $50 million in sales and $30 million in profits every year," he says. "But no one ever took notice. No one ever congratulated us. One day we decide we're going to raise $70 million, and all of a sudden we've arrived! It always felt like like that was backwards. Wasn't the holy grail what we'd already created?"
Here's why Smith believes most startups should bootstrap for as long as they can before accepting VC funds:
1. It's a mortgage, not a prize.
Too many people pop the champagne after they sign a round of funding, as if that in itself was the goal, he says. But getting VC funds is like getting a mortgage, he says--it's a piece of financing for a very specific purpose that imposes huge and long-term obligations on the people receiving that funding.
2. Exit strategies ain't what they used to be.
The best get-rich-quick process for a tech startup used to be to raise VC funding, get large and visible, and then be acquired by a tech giant. Lots of founders have taken this exit, but it's getting a lot more difficult--especially for unicorns.
"There are about 11 buyers out there that could digest a billion-dollar company, and they're not buying," Smith says. That leaves IPO as an option, but that too may be challenging for a company without a long track record. "That will be hard for those that don't have the data points to show how they would perform as a public company."
3. It's better to prove yourself before funding, not after.
"You should be raising money to build out your team, add new products, or enter international markets," Smith says. You shouldn't be raising money to create a proof of concept. Why not? "You don't want to raise a bunch of money and then have to pivot." At that point, your failure and change of plans will be a huge, public deal, as opposed to part of the natural growth process of a new company.
4. You'll be scrappier.
When things get tough, you'll need that scrappiness to survive, Smith says, and you won't get it if you've had a million or more in VC funds right from the start. "You're going to need to know how to be scrappy, and you don't want to be learning after you've raised a bunch of money or when you're public," he says. "You want to be able to say that you've done harder things than this. You've had the experience of recruiting someone to work for $8/hour when they had been a $70,000-a-year employee."
5. You'll be more innovative.
"If you think back to when you were in college and didn't have any money, that's when innovation happens," Smith says. "You get resourceful. You go against conventional wisdom."
For instance, he says, a bootstrapped Qualtrics went after the low-paying academic market because the company lacked the resources to sell to more attractive customers. "Nobody would touch it," he says. "I don't think we would have gone to that strategy either if we'd had money."
In the long run, though, it set Qualtrics up for success. "All those students every year are graduating, going out into the workforce, and taking our product with them."
6. Equity matters.
"As you scale your company, it's important to own as much of it as you can," Smith says. In fact, he says, if he'd raised money too early, it's likely Qualtrics wouldn't exist at all. Founded in 2002, Qualtrics survived and even grew through the lean years of 2008 and 2009. But it didn't have the kind of impressive performance VCs look for.
"If we'd given up 57 percent of our company in 2004, I don't think we'd be here today, because it didn't look sexy," he says. "It didn't start popping until 2010 and 2011."
He adds: "If you raise a bunch of money, someone else is going to write your story for you. I want to write my own story."