angel investing

Mike: In this episode of Startups For The Rest Of Us, Rob and I are going to be talking about whether bootstrapper should raise money or not. This is Startups For The Rest Of Us episode 406.

Welcome to Startups For The Rest Of Us. The podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products, whether you build your first product or you’re just thinking about it. I’m Mike.

Rob: And I’m Rob.

Mike: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s going on this week, Rob?

Rob: We have new iTunes reviews.

Mike: Oh, cool. What do we got?

Rob: This one from Find Fitness Pros. It says, “This is my go-to podcast every Tuesday morning. Rob and Mike continue to give their insights, not just info on exactly what to do,” and from Nathan Bell, he says, “Great information. I listened to one episode and I’m hooked. It was full of great information I can easily implement. Some of the info was a little bit advanced for me currently, but I’m confident that by selectively listening to more, I will pick up more.”

Those are a couple of new iTunes reviews that we have. I used to keep a worldwide tally of it using CommentCast and when I moved to my new computer, I don’t have the .exe or what is it called, it’s a .app I guess in Mac. I don’t have the executable anymore and you can’t download it anywhere. So I moved over to mypodcastreviews.com but it only gives me reviews, not ratings. We’re up to almost 600 worldwide ratings, I believe. People don’t necessarily need to write sentences or whatever, but I don’t have that tally anymore. Certainly, we’re above 600 at this point.

Now, what I have is I have 347 worldwide reviews and that’s a lesser number. I want to get back to the world’s rating. I think the guy at My Podcast Reviews says that they are going to add ratings but neither here nor there, the more reviews or ratings we get, the more likely people find the show, the more motivation it gives us. If you feel like we’ve given you some value as a listener to the show, it would be awesome if you can open iTunes or Stitcher and just give us a five-star review. Really appreciate it.

Mike: The solution to not having that app that gives you the numbers is just make up a number. So we’re at 3000 reviews I think.

Rob: That’s right. 3422 reviews. That’s great. How about you, man? What’s going on this week?

Mike: Well, this morning, I published a public API for Bluetick. Of course, I say it’s a public API but there’s actually only one person who actually knows about it.

Rob: It’s in beta?

Mike: Yeah, basically.

Rob: Early access, good.

Mike: I had a prospect who wanted to sign on and they’re like, “Yeah, I really need to have a public API that is available for me and Zapier wasn’t going to work for them. Basically as I said, I spun it out because I heard from a bunch of customers that I currently have, and I started talking to them about, “What is it that you need?” and trying to figure out what’s the minimum that I could build that this particular prospect or customer would need to get started. They only needed four things. Build those, put them into it, and then there’s all the infrastructure changes that needed to go into it.

It took a week-and-a-half just to do the infrastructure changes but now the best stuff if all taken cared of. I got that published out there and waiting for them to start using it, and then figure out what needs to change. I already made it very clear upfront, like, “Hey, here are some things that I know we’re going to change, and then over here, based on what you tell me, other things could change, so treat this as an absolute beta. Eventually at some point it will become stable, I guess, and then I’ll start pushing it live to everybody.

Rob: That’s nice. It’s nice to do. You’re basically doing customer development on what is its own little product. You can say it’s a feature but really some entire products are just APIs. You want to get it right from the start, and by start, I mean by the time you publish and people start hooking into it, you can’t change it at that point. I think it’s really good to take this approach of roll it out slowly, roll out one endpoint at a time and really think through how you want to structure it.

I was just on your site trying to guess the URL. I was going to just type in a bunch of stuff so you’re going to see a bunch of 404s in your error logs. Not a hacker, it was me, but I didn’t find it alas.

Mike: No, that sucks. I would tell you if you asked for the right price. Other than that, I also got my first fraudulent charge from Bluetick. It took a lot longer than I expected it to but somebody signed up, then they logged in, and absolutely they didn’t pay any attention to the onboarding emails. Come time when their trial is up, they got charged, and then I forget how long it was later. I was maybe probably three or four days later, I got a notification from Stripe saying, “Hey this charge looks fraudulent,” and I looked at it. I think it’s a debit card too and I was like, “Oh great.” Three hours later though like, “Oh you’ve had a chargeback.” I was like, “Wait, I didn’t even get a chance to decide that to do with this potentially fraudulent charge,” and they already converted it into a chargeback, which cost me an extra $15. Well that sucks, but, oh well.

Rob: Was it a person not using or was it a stolen credit card? Is that what you think? Or do you think that they just went in with the intention that it was their own credit card and they just intended at the whole time?

Mike: I’m not sure. It looks legit. The email address, I couldn’t quite tell whether it was real. I think it was a Gmail email address. I couldn’t really trace it back to a company or anything like that but the name on it seem to match what the email address was. I don’t know. I’m not entirely sure but I think it was from a real estate company or something like that. All right, well, whatever.

Rob: Yeah, that sucks. It’s going to happen. It’s definitely a milestone you don’t want to hit but you’re going to hit it eventually.

Mike: Yup. Certainly not a milestone to celebrate but I definitely hit it.

Rob: Yeah, exactly. Cool. What are we talking about today?

Mike: Today, I thought we would have a discussion about whether or not bootstrapper should be raising money. I guess by definition if you’re raising money, are you no longer a bootstrapper at that point? I think there’s maybe a time during which you are bootstrapping a company and self-funding it. I almost called it self-funding, like should people who are self-funding raise money, but again that would go against it.

The idea came because I saw Justin Jackson had tweeted out a link to an article he wrote over on Indie Hackers called The Bootstrapper’s Paradox. In that article, he shows a graph or what they’re doing for transistor.fm, which is the new startup that he’s working on. Basically it shows a graph of over the course of 60 months was 10% exponential growth and 5% turn. The MRR will get to $21,000. But 60 months is five years of time.

I thought it would be interesting to just have a conversation about this because when I was reading through the tweet that he had put out, there were a bunch of people who chimed in on it, mostly people who were listening to the show would have heard of like Des Traynor, Jason Collin, and Natalie Nagel. They’re giving their thoughts on this stuff and I just thought it would be interesting to talk about it.

Rob: Yeah, that’s for sure. 10% growth every month sounds like an impressive number but when the number starts very small, like $1000 a month, that means you’re growing $100 MRR a month. You just can’t do that early days or if you do, it’s going to take five years. You either need to figure out a way to grow faster or you need to be really patient.

This is a struggle. It’s funny that, Justin called it The Bootstrapper’s Paradox. I don’t know that it’s that as much as this is the reason people raise funding. We know people who are just bootstrapper through and through, you should never raise funding and 37signals used to say that and even mentions it that DHH and Jason Fried took funding from Jeff Bezos two years after launching Basecamp. It wasn’t even funding that went into the company. They took money off the table. If I recall, I think that number is public. I think it’s $10 million that he invested, was my memory and maybe I don’t think I’m making that up. It’s either rumored at that or it was announced.

They had essentially at that point had FU money and it’s really easy to make different decisions or just say, “Hey, we’re going to grow as slow or as fast as we need,” when you have that kind of money in your personal bank account and you’re just running this business day-to-day.

Justin’s article is a bootstrapper’s realization of “Oh Sh*t.” This is why people do raise money. It’s coming to that realization at this point and I think it’s a good thing to call out for sure. I’ve been thinking about this so much so I’m looking forward to today’s episode because in my Microconf talk this year, I talked about things that I learned bootstrapping and then self-funding and then in a venture back company after Leadpages acquired us.

In the last five to seven minutes I did just a little snippet about fundstrapping, which is this term that Colin from customer.io coined, where you’re kind of in-between. You bootstrapped a little bit and you raised a small round. I say it’s between 200,000 and 500,000 and you raise it with the intention of getting to profitability. Without, you’re never going to raise institutional money, or raise it from friends or families or angels, so you don’t give up control, you don’t give up a board seat, you really have the benefits of funding without the institutional chaos of it, the headache.

It wasn’t a throwaway piece but I almost didn’t include it in the talk. That piece has gotten me more emails, more comments, more thoughts, more people came up to me, ask me what that’s like, asked if I would invest or find new people who were doing fundstrapping. It’s just fascinating response to this, this thing that’s been percolating. It’s a long rant on it to start but I just think this is becoming more and more of a viable option and potentially even a necessity as the SaaS market gets more and more crowded.

Mike: Yeah. That’s the part that I think has changed over time, where five or 10 years ago, you could come out with a SaaS and you’d launch it to the public and you would start to grow by virtually the fact that there was nobody else out there or there were very few competitors out there doing what you were doing. Now if you launch anything, you probably got a couple of competitors just right out of the gate. If you don’t, then you probably don’t have a product that’s going to go anywhere. But if you have any competition, it’s probably substantially more competition today than you would’ve had five years ago or 10 years ago. Just by virtue of having launched five or 10 years ago, you were going to be more successful quicker than you would if you did the exact same thing now. It’s going to take longer, which means that you’re going to burn through more runway and it’s just going to be harder.

Rob: Right. Now, five or 10 years ago, there was less competition but the expenses would have been higher, 10 years ago especially because you literally needed a rack server. There was no Amazon EC2. In addition, there was still like when Basecamp first launched on their homepage, they were like, “You don’t have to install any software. No downloads needed.” They were still educating on just the concept of being in the cloud and there were hurdles there.

Mike: That was almost 15 years ago.

Rob: Yeah, that’s true. No, you’re right. That was 2005 or 2006? You’re right, 12 or 13. You’re right. But even with that, say 10 years ago, even with that, it’s still I believe was easier back then. But that doesn’t mean you shouldn’t start something today. It just means you got to house some more, you got to pick a better niche, you got to have more skills, or you need a little more money in the bank.

Whether that means you raise it yourself out of consulting efforts, which is what I did, or if there’s definitely more money being thrown around as funding these days that is, I’m not going to say no strings attached because it’s certainly they take equity, but 10 years ago if you took half-a-million bucks, boy that was typically institutional money, it was a pain in the butt to raise, you are giving up a lot of control, you are giving up a board seat, that is no longer the case. There really is this viable option, this in-between.

Mike: I think if you look at the businesses that, in the past have tried to figure out how to raise capital, one of the things that most people, 15-20 years ago, it was common to say, “Okay, let me go to a bank and get a loan from the bank.” But that is a non-starter for most new businesses. You got SBA loans and things like that where you can use the money to take over an existing business where they’re able to evaluate.

But if you have a business that you’re trying to get off the ground, a bank loan is basically a non-starter, especially when it comes to SaaS because they don’t understand how to calculate how much that business is worth. There isn’t any inventory and with software, it’s going to lag in terms of the revenue over something like a physical goods business, or a coffee shop, or a fitness studio where they know how many people are coming in and they can put a value on the equipment whether it’s the coffee machines or the spin cycles on a fitness studio. Banks are okay with that. They understand that.

But when you got a software business, the expectations today are much higher than they were five or 10 years ago. You have to do a lot more in order to make your product a lot more polished, which means it’s going to take time to do that which burns through your runway. It burns through that money a lot faster today. I guess you wouldn’t burn through it faster. It’s just you burn through more of it than you would have 10 years ago to get to the same point.

Rob: Even if you can get a loan, you have to send a personal guarantee. Now, all your personal assets are on the line. And if you decide to shut the company down, you owe them money. If you borrow $100,000 it’s a big deal. To me, that is more of a risk than I think an entrepreneur should take, unless you’re at the point where you already have, “All right, I’m at $10,000 MRR,” in which case you may or may not need the money, but if you’re at $10,000 MRR, you should raise equity funding anyway.

But if you know the business is going to succeed, that’s fine. When I hear that people charge $50,000 or $100,000 on credit cards to start a SaaS business, I’m like, “Oy vey.” That is going to be catastrophic. That is a really, really stressful way to live and it’s something I would not do, especially when we’re in a space where raising equity capital is relatively inexpensive. Raising a small angel round and selling 10% or even 20% of your company to reduce a lot of stress and to get there faster, I think it’s a pretty reasonable idea these days. It’s not impossible to do, I’ll say.

Mike: I want to talk about that specifically right there. What you just said was raising capital is relatively inexpensive. The reason I like the way that you put that is that when I think of the way I thought about raising funding years ago was that, “Oh, I’m going to have to give up a lot of control, I’m going to have to give up a lot of equity, and I don’t necessarily want to do either of those things.”

But if you’re thinking about putting together a business and you have anybody who’s helping you—a partner or a co-founder, something like that—your immediately giving up 50% of the company anyway, and then there’s a whole lot of difference between doing that and giving up 50% when there’s really nothing there, and yes, it could grow up to be something huge, but you’re giving up 50%.

So there’s like a mental block there of you saying, “Okay, well I’ll raise $250,000 in exchange for 10% of this,” and you don’t want to do that but you’re willing to give up 50% to somebody else when there’s really nothing there that’s being invested except for their time. Do you know what I mean?

Rob: Yeah. It’s cognitive dissonance I believe is the term where two things that don’t agree or paradox, I guess. It’s something in your head you’re rationalizing one way but then you turn around and give away 50% to a co-founder. That’s what you’re saying, It’s like you can give a small amount to get a big chunk of money, or even if it’s a small chunk of money.

Here’s the thing. Let’s say you live in the middle of Minnesota, or the middle of Nebraska, or something and you have an idea and you raised even $100,000 or $150,000 and you paid for your salary for a year or a year-and-a-half. That gives you a year or a year-and-a-half to get to some point of revenue that makes sense. Even if you gave away 15% of your company, you’re valuing it at $1 million right off the bat, or if you give away 20% or $750,000, it still makes your life a lot easier.

I think that’s the realization I’m coming to, is that at Microconf, or through this podcast, or whatever at different conferences, we meet smart people who are trying to launch businesses and something that stands in their way often is that, “I have a wife and kids. I have a house. I can’t do this nights and weekends. But I don’t want to raise funding because it’s really complicated. I don’t know how.”

What’s funny is you outlined this episode and you brought the topic up. But this is something I’ve been thinking a lot about, and there’s a gap here in the space. We do have folks like indie.vc which, if you haven’t heard my interview with Bryce from indie.vc, it’s episode 310 of this podcast, and it’s a more realistic approach to funding. It’s kind of a fundstrapping model. I’d recommend you go listen to that.

In addition, I feel we’re coming to an inflection point where there’s this gap and there’s a level of interest in something, and no one is filling it. No spoilers on what I’m up to next, but I’m starting to feel I might be the person to tackle this, to take it on. I’ve been spreading the word about it. I have been talking about it for years and I’ve been investing in startup like this.

We talk about Churn Buster, LeadFuze, CartHook. These are all small angel investments. I’ve done about 12 angel investments and I think three or four of them were essentially fundstrapped. it’s where they took money from a handful of folks and they never planned to raise a series A. I put my money where my mouth is, but now I’m thinking I only have so much money, how is it that I can take this to the next level in a realistic way. It’s something that’s definitely in the back of my mind and it’s something that I’ve been thinking a lot. Hopefully, we’ll dive into more in the future.

Speaking of that, if you listen to this and your thinking, “Oh, this is an interesting topic,” go to robwalling.com. Enter your email because it’s going to be something that I’m going to be thinking more about in the future as well as on this podcast for sure.

Mike: One of the comments that jumped out of me on the Twitter post that Justin had put out there was from Des Traynor and he said, “I think a second piece people don’t really internalize is that 60 months of the best years of your career is a substantial upfront investment too. Like a seed round but instead of money, it’s your life.”

That’s a fascinating way of looking at this because even back n the day, I would always say, “Oh, well. You know you’re basically trading money for time,” and I don’t think that I really equated time with years of my life. It sounds intuitively obvious. That’s exact same thing. But when you’re in the middle of working on stuff, you don’t think, “Oh, I’m trading five years of my life away of hard toil to get this thing to where it could be a lot sooner if I were just to take some money and trade some of that equity for it.”

Rob: Right. It could feasibly be a lot sooner. It may or may not. Money doesn’t solve all the problems but it certainly makes things, I’ll say less stressful and you having done it with true bootstrapping with basically nothing and doing nights and weekends, to then self-funding with revenue from HitTail going into Drip, and then venture funded. I’ve done all three of these. I will tell you that having that venture money, I didn’t have to raise it and I did attend the board meetings but I didn’t necessarily have to report to the board. My life was less stressful at that point than either of the prior two scenarios.

I think it’s a good point, man. I don’t want to come off. You can tell, I’m coming off kind of pro-raising a small round, and I don’t want to come off too one-sided. We’ve never been anti-funding ever. From the start, Microconf, I think in the original sales letter. It was, we’re not anti-funding. We’re anti everyone thinks the only way to start a software company or a startup is with funding. That maybe from the introduction of my book, actually—Start Small, Stay Small.

Even back then in 2010, I was saying, “Look, raising funding is not evil in and of itself. It’s the things that you have to give up by raising funding. Just know what you’re getting into.” Yes, we have seen founders that get kicked out of their own company. There was, I figure what that app it was. Was it Tinder? Something sold for $460 million. No. It’s FanDuel. It’s sold for $460 million and the founder who started it, and I believe was CEO when it started, he got no money because of liquidation preferences and he’s suing them.

That’s a huge exit. He got I believe it was zero dollars from the exit. There was an article or something that was like, he’s suing them now. If the contract say this is what the liquidation preference is, that’s one thing but he’s suing them because he thinks they screwed with the valuation intentionally and there was fraud or something. He’s not going to win if he just says, “No, that wasn’t the deal,” because he signed the papers. These VCs are not stupid but he’s trying to do that.

Yes, that does happen. But I believe there is a way to do this and I’m seeing it with these smaller SaaS apps. A way to do it without that much stress, without giving up that much equity. Brennan Dunn, RightMessage. That’s another one. I also wrote a check. And Rand Fishkin’s SparkToro. He’s doing the same thing. He’s not calling it fundstrapping, but he said, “Hey, we’re going to raise around, and we’re going to get to profitability, and we don’t want to do institutional money. If you listen to Lost and Founder which is his book, he talks about the perils of all that and you couldn’t read that and say, I can see really they didn’t like – once they raise funding, he really didn’t like it.

You can look and say, “Well, Rand’s anti-funding now.” But no, he’s more anti-institutional money, and there’s a difference. Venture capital is institutional money. These angel rounds tend not to be.

Mike: But I think even back, we’ve talked about it on the podcast before. As you said, we always had the position that, it’s not that we’re anti-funding, we’re anti-this-is-the-only-way-to-do-it. That’s always been my thought behind it. I’ll say the majority of my career and thought process has been like, “Yeah, I really just don’t want to take funding in this more because I don’t want to necessarily give up control.” Back then there weren’t really the options for that. Now, things have changed a lot. It’s not, say, front and center on my radar, but it’s something I’m definitely looking at niche and exploring a little bit more.

I definitely think that—like with Bluetick for example—there’s ways to go further faster, but I just don’t necessarily have the money to be able to do it, which sucks but at the same time, it’s always a trade-off. I think that’s what you always have to consider is, what is the trade-off and what am I going to have to give up in order for me to get X amount of influx and then what are you going to do with that?

You have to have a plan. You can’t just say, “I want to raise money.” You got to have a plan for not just raising money but also what are you going to do with that money when you get it? How are you going to deploy it? How are you going to build the company and how are you going to grow things? You can’t just drop $100,000 in your bank account or $500,000 and say, “Okay great. I’ve raised money. Now what?” They’re not going to give you the money if you don’t have a plan.

Rob: And if you don’t know what you’re doing, money’s not going to fix that. You’re just going to make bigger mistakes. This comes back to the stair-step approach. No chance I would have raised money in 2005-2009 with ,DotNetInvoice, and Wedding Toolbox and just beach towels and stuff. Even if I could have made the case that DotNetInvoice would grow to something, I would have made huge mistakes because I made small ones back then. But I learned and I gained experience and I gained confidence.

By the time I get to HitTail, I remember thinking, “Yeah,” because remember, I bought HitTail for $30,000 and then I grew it up to basically that much MRR per month but end and I value at it. Maybe I should raise a little bit of money in it. It would make this a little easier. But to me, it was the headache of it. I was like, “I do not want to slog around and spend months asking people and the paperwork.” It just felt like a pain in the butt to me. I don’t know if I could have. Did I have the name recognition? Could I have raised enough?

Arguably, yes. By the time I got to Drip, it was definitely like it. If I haven’t had that HitTail money, let’s just say I’d had none of it. I basically used a bunch or revenue from HitTail to fund Drip. If I hadn’t had that? I absolutely would have seriously considered doing what we’re talking about raising a small round. I knew Drip was ambitious, I knew it was going to get big at least by the time we are six or eight months in, and it had a need for that.

That’s what we’re saying here is the words always, never, and should, they’re not helpful words. Don’t say, “I should always raise funding.” “I should never raise funding.” “I should raise funding other people think I should or shouldn’t.” These are not helpful words. Just evaluate things and look at them, and like you said, look at the trade-offs. Pluses and the minuses, and the realities of them, not the FUD. Not the fear, uncertainty, and doubt.

I can tell you the story, “Oh, look. The founder of Fandle. He got screwed by his investors. Therefore, I’m never going to raise investing or I’m never going to raise funds.” That’s dumb. Actually look at the black-and-white of it. I think that’s what we’re talking about today. We;re not saying you should or should not, but it’s look at the reality of it.

Now, you and I talked about this in-depth in episode 211, When To Consider Outside Investment For Your Startup. We went in-depth on what are funds and family round, an angel round, or often called a seed round was. We talked about series A, B, C. Once you get to the serieses, that’s when you get to institutional money, which is when things get way more complicated. Once you raise a series A, it’s the point of no return. It’s implied you’re going to raise a B, a C, and go on to either have this huge exit or an IPO, and it’s growth at all cost for the most part.

But if you’re able to stop before that series A and stick to people who are on board with you, angel investors and such are on board with, “Hey, let’s build a $5 million, $10 million, $15 million company with it, it’ SaaS. Let’s do a 30%, 40%, 50% net margin on this thing.” That’s great. That’s the kind of company I want to build and that’s the kind of company I want to invest in.

But venture capitalists don’t want to invest in that. If that’s not your goal, to go to $100 million and do what it takes to do that, then you don’t want to go down that road. You want to have those expectations clear both in your head upfront, as well as anybody who’s writing you a check.

Mike: Right. The problem with that is that episode 211 when we talked about that, that was four years ago. That’s a long time in internet time.

Rob: I might need to go back and listen to that episode to hear what we said. How much you want to bet? Oh, I’m going to go search it and see if the word fundstrapping if I mentioned it in there.

Mike: I don’t think so. Oh, it is.

Rob: Is it?

Mike: Yup. About 20 minutes in, you said, “I heard the term fundstrapping and I really like it. It was from Colin at customer.io.”

Rob: There it is. In 20 minute then boom. This is 2014, November of 2014 even back then.

Mike: But you were in the middle of Drip at the time, were you?

Rob: Yeah.

Mike: Was that right?

Rob: Yup. In the middle of Drip and I was probably already thinking about because at this point, we were growing fast and I was dumping all the money I had into it, both from that revenue and from HitTail, and I was thinking, “Boy, if I had half a million bucks right now, given our growth rate could have raised it. If I had half a million bucks right now, we could grow faster. I can hire more and have more servers and not shut down EC2 instances on the weekend.”

We used to do that to save money that’s insane, that lengths. I remember valuating Wistia versus SproutVideo, and Wistia, for what we need, it was $150 a month and Sprout was $30. It’s a nice tool but now way it was Wistia. I went with SproutVideo because I needed that $120 bucks to pay something else. We had to migrate later and it was a bunch of time and all that stuff. I never would have made that choice if we’d had a little more money in the bank. It’s the luxury of having some investment capital.

Mike: Yeah and unfortunately, you have to make a lot of trade-offs like that. You spend a lot of mental cycles and overhead making those trade-offs and just making the decisions because you don’t have the money, which is a crappy situation to be in. All that said, part of the problem is, you don’t necessarily want to raise money if the idea itself or the business model just simply doesn’t have merit. Maybe that’s partly what those investors are there for is to make sure that they act as something of a filter.

That’s always the problem that I’ve seen with angel investors is that they’re the ones who are in control, not you. Maybe angel investors isn’t the right word, but outside investment where they basically end up getting control of enough of it that you don’t get to make the decisions anymore. They’re the ones who make the decisions whether or not your business is going to succeed based on whether or not you get the money. If you can’t set aside the time, like nights and weekends, to be able to do it, it’s just not going to work out. You need that money in order to make the business work, then it’s going to be a problem for you down the road.

Rob: And that’s the thing is the losing control of your business tends to be if you raised multiple rounds because each round you sell, let’s say, 15%-20% is typical. May 15%-25% and if you do one round, you still have control. You and your co-founder or you if you’re a solo founder still own that 80%. But if you do another round, another right you get two, three rounds in, it’s typically by series C or D where the founders are the minority shareholder and investors now own most of it. If you don’t been on the path, it’s unlikely, or if you just make bad decisions.

I saw someone on Shark Tank where they had no money upfront and they sold 80% of their company to an investor, to an angel investor. Shark Tank was like, “We can’t fund you because you’re working for nothing.” All the work is for the investor. If you make a bad choice, that’s another way to do it too. You do need to educate yourself about it and I think that’s something that some people don’t want to do because it is boring stuff.

I really like the books that Brad Feld does and this one is maybe like venture funding or like a guide to venture funding. I got four chapters in and I just couldn’t stand it because it was all terms. He didn’t write it. It was more of a series that he’s involved in. The terms were just so boring that I stopped. I understand if you don’t want to learn at all. You need to learn enough about it to do it.

I want to flip back to something that Natalie Nagele responded to Justin Jackson and then it was actually just what I was thinking when I saw his graph. It was five years to $21,000 MRR. In all honesty dude, I would shut that business down before I wait it that long. I forget how long it took Drip but it was maybe a year. I don’t think it was even a year from when we launched and it was probably 12-18 months from when we broke around on code, that we had $21,000 MRR.

Drip was admittedly a bit of a Cinderella story. It was fast at growth than most but if you’re growing $100 a month in the beginning and you continue that 10% growth like that, you can’t do that. You need to get it up—

Mike: But I don’t think that’s a fair comparison, though, because if you look at the way Drip was funded into, you said 21 months or so to get to that point? He’s talking about a completed self-funded company versus something where you put money in from HitTail. Those are two entirely different things. I don’t know all about the details of Transistor but my guess is that there’s a huge disparity in terms of the amount of code and the quality of code that needs to go into something like Drip because of the sheer complexity of it versus something like Transistor.

Rob: Yeah, that’s true. I was for the long entrepreneurial journey too, I would say. I had successes that I’ve parlaid into it. You’re right. It’s not a fair comparison. I shouldn’t say with the Drip but…

Mike: I was just arguing about the point of, if it was five years to get to the $20,000 in MRR, should you shut that down? I think it’s a very different answer based on what it is that you’re putting into it. If you’re dumping $200,000 into it, yeah, you probably should shut it down if it’s still going to take you five years to get to that. But if you put nothing into it, or $10,000 into it but it takes five years to get there, it’s like, “Uh, well, I don’t know.” It’s a judgment call.

Rob: It’s interesting and that’s the thing. When I think back in 2005, I started with DotNetInvoice, making a couple of grand a month. It took me until late 2008 to get to where I was making about $100,000 a year, between $100,000-$120,000 a year and that’s when I stopped consulting.

So it took me three and a half years. But again, I did it with no funding and I cobbled it all together myself. That’s the situation we’re talking. I wasn’t doing SaaS. I did it with these multiple products. I think if I was less risk-averse, I’ve could’ve done it faster. I think that’s probably what we’re talking about here. It’s getting a little bit more ambitious and trying to speed things up. How do you do that?

Mike: Part of being more ambitious these days, I think, is because you’re forced to, because of the level of competition that’s out there. You have to do something that’s quite a bit above and beyond what you would have done three or five years ago because the competition is there and people are going to be asking for features that they see in other products that you’re trying to compete against. If you don’t have those features, they’re going to say, “Well, I could pay the same amount of money to you versus this other product and they’ve already got those features so why would I go with you?”

You’re just not able to compete unless you have those features there that you can demonstrate. It’s not even just about the marking. It’s about having the things they need. If you don’t have them, they can’t go with you. It’s not even that they like you. They just won’t do it.

Rob: Yeah and that’s true. Again, funding even the way we’re talking about it, it’s not going to fix all ills. If you pick those markets that’s too small or you don’t build a good product, you’re not going to get to action. Or if it’s a market that people aren’t interested, or you don’t know how to market, you don’t have the experience, you don’t suddenly become an expert startup founder just because you raise funding but if you have the chops and funding is a big piece.

Time is a big piece because you’re only working nights and weekends. You can only put 10 hours a weekend or rather 15 hours. It’s a big difference if you can suddenly go to 40 or 50 hours with two co-founders. It doesn’t fix everything. In addition, does it come with complexity? Yes. You have to report to your investors once a month with an email. You can feel the stress of that.

That was actually something that I asked Justin McGill, Jordan Gal, and Matt Goldman, those are the co-founders of those three businesses that I mentioned earlier, CartHook, LeadFuze, and Churn Buster, and I said, “Hey, do you feel raising this money made things more stressful or less stressful?” They each have their own take on it. If I recall, Justin McGill was like, “It’s more stressful because I feel like if we don’t grow, we’re going to let you guys down.” A lot of the investors he has a lot of respect for. That’s one way it cut through. It can make it more stressful.

I don’t want to put words in people’s mouths but I think Jordan had said, “It’s more stressful but better because it motivates him to succeed.” you got to think about how your personality is and if you feel like it’s going to add more stress, if suddenly five or 10 people that you really respect, that are friends, colleagues, and fellow Microconf attendees write a check to you, how does that make you feel?

Mike: Yeah. I think the answer’s going to be different for every person, especially depending on what your product is like, what the expectations are, how you’ve position it, and how the investor views it. Some investors just say, “Yeah, I may lose all this and that’s totally okay,” and other ones may say, “I have these expectations and you’re not meeting them,” if you miss a deadline or something like that.

There’s a lot of dynamics and complexity there. Some people will thrive in it and some people won’t. I think at the end of the day, I also feel having money has the potential to make the downsides of your product or business model worse. It will just exacerbate some of those issues. If you don’t have a market that you can actually go to, if you think you do but you don’t, and you get a bunch of money in, I think it’s just going to make it worse because yes, you can try a bunch of things and you’ll be able to throw money on it, but then you’re burning more money than you would have otherwise.

Rob: That’s the thing. I know we’re going long on time but really important. I would not raise any type of funding before I have product market fit. That’s a personal thing because (a) your valuation is way last before then, and (b) no one is going to give you money if you don’t have a product, period. You have to have a product these days. You can’t raise money on an idea unless you’re Rand Fishkin, or Jason Cohen, or a founder who’s been there and done that.

You have to have a product, you have to probably be live or at least have beta users, your should have paying customers. That’s a bare minimum to even think about trying to raise funding. You have to get there. You have to write the code, you have to beg, steal and, borrow to get someone to write the code. But the valuation is going to be way less and you’re probably going to burn though a lot of that money just trying to get to product market fit. From the time you launch until you’re part of market fit, I’m going to say it’s 6-12 months if you know what you’re doing.

You see founders like Shawn Ellis, you saw Jason Cohen, you saw me do a Drip. You see people who are pretty good at it and know what they’re doing, and it still takes them six months, and ours still takes 9-12 months to do it. At that point, once you do it and you do kick it in a little bit of that growth mode where it’s like, “Okay people, are really starting to uptick it.” That’s when you pour gasoline on the fire.

But before that, I have seen at least one startup in the last year raise a small round before product market fit, and just burned through it really fast because they staffed up, do a lot of marketing and do a lot of sales, and it just that their churn was so high. That’s typically where you can tell his people aren’t converting to pay it or they aren’t sticking around. There are dangers there. Like a samurai sword, like a said in the past, it’s a weapon that you need to know what you’re doing with to wield well and I think you need to be smart about when you raise.

Mike: Yeah and it sounds like there’s obviously different takes on it. If you want to go down like the VC or angel route, series A funding down the road, I think it’s possible to probably raise money if you have any sort of history or relationship with them, like if you don’t have a product yet. But you’re still also going to get eaten alive in terms of the equity shares and everything.

I think that point that you raised about you have to have a product and you have to have paying customers before you start to go raise money, that’s how you maintain your equity, a fair amount of the equity, enough of the control to be able to what you want, need to with the business, and also be reasonable sure and confident that you’re not going to just waste the investor’s money and burn those relationships. You can use that money for good, and you know what that money will do for you versus you’re still trying to get to product market fit. You don’t know who’s going to but it or who uses it, or why.

Rob: Yeah and the once exception as I’m thinking about it is if you raise a big chunk, let’s say you raise $250,000 or $500,000 and you feel like you need to spend it, and so you staff up but your not part of market fit, you’re going to treat their money. But the exception I can think of, is like I said earlier. What if you just bought yourself 12 months of time and you didn’t staff up but you just worked on it, or 18 months. You didn’t raise this huge amount of money or raise a small amount to just focus on it and work, I could see doing that before product market fit. That would get you to the point where then you can raise that next round.

I’m not trying to be wish-wash but I’m realizing I never said never raise before product market fit but I did say I wouldn’t personally. But I have the resources to get me to product market fit and I could work on a full-time to do that. It’s an exception. If was I doing it nights and weekends, then I would take money before I see I have to think about where the advice is coming from or where the thoughts are coming from. I’m just thinking it through as if I were literally doing this nights and weekends, I would consider taking money as soon as I could. If I was going down this road because going full-time is a game-changer. Being able to focus full-time, being able to leave everything behind is a big deal. It really is and a night and day difference.

Mike: I know there’ll be a range of opinions on it, but I wonder what most investors would think about, somebody saying, “Hey, we got this product. I’ve been working on it and I’d like to get some funding and money in the bank, basically to extend the runway because I got a little bit of something going here, I got partial product in place, I got some customers, but it’s not a lot. I need runway in order to make it work but I don’t know specifically how much runway I necessarily need or how I’m going to get to having $10,000-$20,000 MRR, but I need time to get there. There’s something here but I don’t know what.” I think it’s hard to evaluate for anybody what that looks like.

Rob: Yeah. I don’t know of any investors today that would work with that. I think that’s a good thing to bring up. It’s like, is that a gap in the market then? Could that be a successful funding model of looking at people who essentially have the potential and have, like you said, pre-product market fit but have something to show for it and looking at backing them for a period of time.

Anyway, I love this topic and I think that we’ll probably talking about it again, just soon you’ll be hearing more on it from me, but I feel we might need to wrap this one up today.

Mike: Yeah. Great talk. I like it.

Rob: Me as well. So if you have a question for us about this or any other topic, call our voicemail number 888-801-9690 or email us at questions@startupsfortherestofus.com. Our theme music is an excerpt from We’re Outta Control by MoOt used under Creative Commons. Subscribe to us in iTunes by searching for startups and visit startupsfortherestofus.com for a full transcript of each and every episode. Thanks for listening and we’ll see you next time.