There are many advantages to bootstrapping first and raising money later. This is something you should build into your thinking as you build your business. Don’t go to venture capital firms as beggars; go as kings.
- One of the core philosophies that I follow in my coaching with the One Million by One Million entrepreneurs is this mantra of "Bootstrap first, "raise money later." For a variety of reasons, and I've talked to you already a little bit about my philosophy that "Do not go to VCs "as beggars, go as kings," and that "VCs like to come to the rescue of victory." All of those feed into my core belief that as entrepreneurs, this is something that you should kind of build into your system of thinking, your mental model of how you think about entrepreneurship going forward.
There are many advantages to bootstrap first, raise money later. The first and foremost is that you have to do it. You don't have a choice, because VCs do not fund concepts, but VCs fund validated businesses. So you have no choice but to bootstrap first, to some sort of a product-market fit, before VCs are going to be willing to work with you. So that's kind of like the ground level of reasoning.
The next bit of reasoning is around valuation and ownership. If you start raising money very early in the cycle, you start losing control of your company very quickly, and if you raise many, many rounds of funding starting with very low valuations, you end up with what we call a cap table, you know who owns how much of the company, shareholder ownership chart. That's the term for that in the industry's cap table.
The cap table, by the end of multiple rounds of financing for you, will look terrible, and in the event of an exit, you're gonna make very little money. So, ownership matters. Unless you have a level of success like a Facebook or Google, where numerous people actually end up making tens of millions of dollars because it was such a large exit, that is like once in a lifetime.
It doesn't happen that often. So from your point of view, unless you are basically thinking of entrepreneurship as a casino game, which I don't think about it, and I'll tell you why I don't think about, but setting that aside for a moment, you do need to pay attention to ownership. You do need to pay attention to valuation and so on and so forth, and if you can bootstrap further in the cycle of adoption, the later you raise money, the more money you end up making because you have better ownership in the company.
And then, my other mantra is that if you go later with more validation, more traction, more customers, you've got a business that everybody is chasing. Everybody wants to finance you. They are calling you instead of you go with a begging bowl. So, whichever way you look at it, bootstrap first, raise money later is the way to go, and one of my favorite case studies, I told you already the right now story.
Another of my really hot favorite case studies actually is Tableau Software. Christian Chabot founded Tableau Software. It was his second company. Christian founded a company before. It was very low capital investment, you know bootstrap company, and he very quickly within 18 months, sold that company, and made some money. It wasn't huge amounts of money, but it was enough money such that he could afford to bootstrap his second company, which was Tableau Software, and has big success.
Now Tableau did not raise any financing until they had 200 customers. 200 customers is a lot of customers and a lot of revenue. So when they raised money from NEA, they already had 200 customers and they got a very large OEM deal from Hyperion. All of that added up to a Series A valuation of $20 million, which at that time, the valuations were like $5 million pre-money in Series A.
So $20 million was already way out there from a standard deviation point of view, industry average point of view, and the company went public in 2013 at a $2 billion valuation. Very successful story. Incredibly capital efficient company building. This company only took a little bit of financing to have a very, very large exit, and even after their IPO, they continued to build up and build value, build valuation market cap and so forth.
But I think the genesis of that story is in that discipline of bootstrap first, achieve product-market fit. 200 customers buying your product means that you've got product-market fit. That means there are gonna be another 200 customers buying your product, and that's what the VCs are financing as opposed to some unproven assumption. Some power point. That's why bootstrap first, raise money later is a sound guidance that I'm gonna give you forever, and this is a piece of advice that I don't believe you can go wrong with.