Blindsided by Bootstrapping

Is it possible to start a software-driven business and entirely bootstrap the company to success?
To answer this question we first need to define success. We start companies for many reasons, but in this case, let's define success as building a business to a scale where it changes the lives of the founders and their families.

A couple of weeks ago, an ad-tech company called AppLovin was sold for $1.5 billion. More notable than the acquisition price, was the news that the company had only raised $4 million from investors since inception. In the article, the founder stated, "I couldn't find anyone to give us an investment at what I thought was a reasonable starting point valuation (maybe $4 million or $5 million) and, by the end of our first year of operations, we were profitable and doing over $1 million a month in revenue," he explains. "So I put together a round with angels not really because we needed the cash, but because I thought these were influential people who could help us grow."

This week, the founders of MailChimp published their financial performance and revealed that they have bootstrapped to a $400 million run rate and 550 employees. MailChimp is a huge bootstrapped success, and similar to what we're doing at Castle, the MailChimp founders bootstrapped the business inside a digital agency, using the capital from services to grow their startup.
The stories of AppLovin and MailChimp are incredibly enticing legends. But it's incredibly rare that a business can get that far without raising meaningful capital. AppLovin was a magical startup with perfect market timing and product-market fit. MailChimp was also the right service at the right time. With these legends in mind, many of us entrepreneurs start in bootstrap mode (either by choice or because we have no other options), hoping that we can overcome the low odds and find a path to success.

What I'm now learning is that for most startups (excluding the special situations like AppLovin's perfect product-market fit and MailChimp's agency incubation) bootstrap mode can only go for so long before it starts to hurt your chances of long term success.
At a specific point in time, you can get blindsided by bootstrapping.
As some background to our bootstrapping bias, there was a time long ago that I was founder and CEO of a software-as-a-service company that raised over $30 million in venture capital. While we created a great product, had incredible customers, and were a very early leader in the SaaS space, we sold the business way too early, at the wrong time (.com slump), to the wrong acquirer, and the outcome for our team and investors was not good.

As a result of this outcome, I became committed to limiting external capital investment and maintaining control of our business destiny. I was converted into bootstrapping.

It's now several years later, and we have a handful of businesses that we're bootstrapping at Castle. We're bootstrapping our internal ventures — House Account, Glass Factory, our video games, and we're bootstrapping Castle itself. We even help entrepreneurs bootstrap startups by investing our product teams in their business in exchange for equity. Castle is in its eighth year of business and we've grown to over 100 employees and have solid revenue growth each year, but we have not hit my definition of success yet.

To achieve this success target, we certainly have a plan and we certainly can continue bootstrapping our way to this plan. But let's say that we (Castle) are not the only company trying to achieve this success. Every market has competition, so we know there are others with our same vision, executing down a similar course. If Castle is bootstrapping and the other company has raised capital to achieve similar goals, we're going to fall behind. And eventually we're going to get blindsided.

Like Cam Newton getting sacked from his left side, we're going to get some intel in a meeting or in the press and think "shit, that other company that was side-by-side with us not long ago just leaped way ahead."

Our first blindside moment this year happened when one of our portfolio companies was approached by a potential acquirer. During these discussions we learned that a certain competitor was blowing up — and the only reason that we were at the table with this suitor was because the other company was now too expensive to buy.

Not long after that, there was another situation where inside another bootstrapped startup we were checking out a competitor's website. We noticed they had a new company video added to their site. After watching it, the collective response in the room was "whoa… they've made a ton of progress lately."

Time goes by quickly in startups and in a short amount of time, a competitor can make giant leaps ahead. As time goes by, these leaps are compounded and the bootstrap business falls further behind from market leadership.

Picture a big boulder that has to be moved up a hill. The bootstrap team has less people pushing. The company with capital has more people pushing to get the boulder up the hill faster. Their boulder starts rolling downhill while the bootstrap team is still pushing. By the time the bootstrap team reaches the top of the hill, the competitor has already raced ahead.
This analogy works really well in software startups because in the very beginnings competitors are pushing uphill in parallel. In the same market, in the very early stages, you are making similarly slow progress as your competition. But as the funded company uses capital to build up a team, and this team works together to get to product market fit, the funded organization moves faster, solves challenges faster, builds revenue faster and at the end of the day, achieves success first.

It's very clear to me this year, that bootstrapping has been great for us, but we've reached the time limit where further bootstrapping will damage our outcome. I think we've been taking bootstrapping too far and we're going to course correct.

The ideal time for bootstrap mode of a software-based startup seems to be 12-18 months. During this time, it's entirely possible to get a product into market, get initial customers, and prove that you are operating in a viable market. You may not have all the challenges figured out inside this timeframe, but bootstrapping further is risky, because your competitors will have capital and solve these challenges faster than you. 12-18 months looks like the right limit.

At the same time, we're going to step on the gas at Castle. We've proven our model works well and we're way overdue to scale it.

This does not mean that we ditch our bootstrap mentality. We can still be capital-efficient and lean, but our lean organization should not block the achievement of our vision — which is so clearly in front of us for the taking. Fellow bootstrappers — it's time to raise some money. Somewhere between my rookie over-funding and our recent bootstrapping run, we're going to find a nice balanced use of capital.