Joseph Flaherty
Venture capital is a hell of a drug, and it’s possible to overdose on VC, but for most founders that is a champagne problem. More often the question investors hear is “how do I get a VC to back my startup?” These founders aren’t worried about how overcapitalization will make their IPO prospects trickier — they’re scrambling to get someone, anyone, to sign their first term sheet.
There’s a widespread belief among founders that venture capital is a precursor to success. VC is a common denominator of the most successful tech startups, but it isn’t a prerequisite, especially at the early stages.
Entrepreneurs can prove out quite a bit with little to no capital. Capital won’t make your company insightful. If you can’t creatively turn $1 into $10, why do you expect to be able to turn $1 million into $10 million?
To help illustrate how startups can move forward, here are 35 examples of companies that started with a few thousand dollars, or even just sweat equity, and went on to become exemplars of what I call “efficient entrepreneurship.”
Many of these companies have subsequently earned billion-dollar valuations, some even have billions of dollars in revenue, but none started with anything other than what would be considered a seed round. Most of these startups raised money from VCs, but only after they established the fact that their success would come with or without a wire transfer from an investor. Even now, many of them aren’t widely known — they are the invisible unicorns of the tech industry.
So before scrambling to schedule meetings with investors, read these stories. They provide a counterbalance to the VC-centric outlook held by many founders, and provide alternative ways to think about funding.
What follows are brief and simplified descriptions of these companies (categorized by approaches they share) and links to stories where you can read more about them. Remember, taking venture capital should be a choice, not a compulsion. These companies show how it’s done.
Figure something out, then ask for money
You don’t need venture capital to get started in most industries if you can solve a real problem for customers and charge money for it. Here are three ways to think about this:
Automate your workflow
The easiest way to build a useful product is to automate some part of your daily workflow. This will ensure you’ve got proven demand for what you’re building and a pre-existing funding source for your project.
MailChimp: Co-founder/CEO Ben Chestnut was running a design consulting business in the year 2000 and had a stream of clients who wanted email newsletters created. The only problem was that he hated designing them. So, to spare his team the tedium, he decided to build a tool that would streamline the process. MailChimp, a $400 million run rate business, was born.
Lynda: Lynda Weinman started as a teacher in need of tools to instruct web designers in the late 1990s. The offerings at bookstores were bland, so she began producing training films that better educated her students. Tutorial by tutorial her company helped software developers and designers improve their skills. She spent two decades building a content library and tech assets that had enough scale to entice LinkedIn to pay $1.5 billion to acquire the company.
Start with a capital-efficient product
Many entrepreneurs make frontal attacks on industry leaders, usually resulting in failure. This is especially true in the case of hardware. Instead of trying to compete with a company like Apple, these scrappy startups filled the gap left by RadioShack and built businesses worthy of respect and emulation.
AdaFruit Industries: Limor Fried started her DIY electronics e-commerce empire as a student at MIT by assembling DIY kits comprised of off-the-shelf parts. Fried merchandised the same building blocks found at electronics stores, but also crafted quirky content that made the prospect of soldering a replica Space Invaders cabinet seem reasonable. Now she has 85 employees and earns $33 million per year.
SparkFun: Similar to AdaFruit, Nathan Seidle started SparkFun out of his dorm room by selling electronics kits and oddball components to a coterie of engineers who wanted to explore exotic new sensors and systems. Now his e-commerce empire employs 154 and has revenues of $32 million per year.
Solve an existing problem and leverage an existing business model
Startups don’t have to be particularly innovative in terms of business model. Building a better mousetrap on top of a more modern technical platform, or with a UX layer, can be enough. None of the companies that follow reinvented the wheel, but all wound up creating real value.
Braintree Payments: Exchanging money online, without being fleeced by fraudsters, is one of the oldest problems on the web. All parties to a transaction happily agree to pay a fair “tax” for a superior experience. Braintree built a better tech solution and survived on the proceeds of those transactions for four years before raising $69 million in two rounds of venture capital, which preceded an $800 million acquisition.
Shopify: Shopify’s founders were looking for a shopping cart solution when they were starting an e-commerce site for snowboarders. Unable to find one, they decided to scratch their own itch and built a bespoke solution on the then red-hot Ruby on Rails framework. It turned out to be a perfect solution for plenty more people, and the founders ran the business independently for six years on the revenue they generated. They ultimately raised money from VCs and later IPOed, which rewarded them with a billion-dollar valuation.
Self-reliance rules
Many entrepreneurs waste their time “playing CEO,” crafting a strategy and drawing up a dream org chart for what their business might become. Don’t do that. Instead, figure out what you can do, today, to advance this idea using only the resources you have.
Ipsy: Sending boxes of makeup to amateur beauticians has become a growth industry thanks to pioneers like Birchbox. YouTube star Michelle Phan didn’t have first-mover advantage, but she leveraged her online celebrity (8 million+ YouTube subscribers), relationships with cosmetics brands and <$500,000 in seed funding to build a subscription box startup that generated $150 million in revenue before raising $100 million in VC.
ShutterStock: Jon Oringer was a professional software developer and an amateur photographer. He combined this set of skills and used 30,000 photos from his personal photo library to start a stock photo service that is currently worth $2 billion. His capital efficiency paid off and ultimately turned him into a truly self-made billionaire.
SimpliSafe: People scoff at the idea of trying to bootstrap a hardware business, but SimpliSafe’s Chad Laurans did it. He raised a small amount of money from friends and family and then spent eight years building a self-install security business, literally soldering the first prototypes himself to save money. Eight years later, the business has hundreds of thousands of customers, hundreds of millions in revenue and $57 million in VC from Sequoia.
Everyone’s money is green
Funding doesn’t always come millions of dollars at a time. Founders can scrape together money from grants, incubators and angels, or even pre-sales. The savviest entrepreneurs design their business model so they collect payment before they deliver their product, turning customers into a source of growth capital.
Tough Mudder: Track & field entrepreneur Will Dean turned $7,000 in savings into a company with more than $100 million in annual revenue. The secret was pre-selling registrations to races and then using those funds as working capital to construct the electrified obstacle courses that have made Tough Mudder a global phenomena.
CoolMiniOrNot: CoolMiniOrNot started out as a website where geeks could show off their ability to paint Dungeons & Dragons figurines. Eventually, the site’s founders decided to design and distribute games of their own, leveraging Kickstarter as a channel. They have run 27 Kickstarter campaigns which have raised $35,943,270 million dollars of non-dilutive funding. Game on.
Sell! Sell! Sell!
Usually the best source of capital is a customer, and selling has two benefits. First, you make the cash register ring immediately. Second, you quickly learn what resonates with customers and can use those insights to refine your offering.
Scentsy: DNVBs are hip, but they are over-reliant on twee launch videos and Facebook ads to drive revenue. Scentsy sold candles at swap meets when they couldn’t afford to buy ads. It wasn’t glamorous, but it did give the founders a solid grounding on the messages that resonated with buyers — now they have more than $545 million a year in revenue.
CarGurus: This app leverages data analytics to help customers find the best deal on used cars, but the company’s CEO credits its $50 million a year in revenue, and profitability, to hiring a sales team early in the company’s life cycle. Nearly half the company’s 350 employees are busy making sales calls, not writing software.
LootCrate: LootCrate had more than 600,000 customers and $100 million in revenue before they raised institutional capital. Part of the reason they were so efficient was that the company started charging customers from its first weekend in existence. The founders were at a hackathon, set up a landing page, collected orders and used that capital to buy the geeky goods that would fill the packages.
Be miserly with marketing
Startup marketers might not want to waste time with unmeasurable brand marketing. Efficient entrepreneurs need campaigns to be additive, immediately.
Wayfair: The home goods e-commerce company was profitable from its first month of operation because they skipped brand advertising and bought up hundreds of domain names that were exact matches for common search terms. This model kicked off a decade of profitable growth until they ultimately raised a Series A — worth $165 million — shortly before going public and earning a market cap that is currently over $4 billion.
Cards Against Humanity: With just $15,700 in funding from Kickstarter, the Cards Against Humanity team built a business that grossed more than $12 million in its first year. They’ve also sustained their brand with a series of canny marketing stunts, selling cow poop, cutting up a Picasso, digging a big hole representing the ennui of a post-Trump America, then selling Trump “bug out” bags and simply asking for money. These promotions aren’t cheap to run, but they make enough money to defray costs while earning a disproportionate amount of free media.
GoFundMe: Viral marketing is dismissed, rightfully, when it is tacked on to a business model, but it can be a powerful driver when properly integrated into a business model. Paired with hyper-efficient conversion rate optimization (CRO), it can be unbeatable. The founders of GoFundMe were able to use these twin forces to bootstrap a business to the point where it was valued at ~$600 million.
Efficiency > Capital
Startups are often measured by how much money they’ve raised. It’s more important to ask how efficiently those companies use the capital. Efficiency doesn’t mean penny-pinching, but instead, finding entrepreneurs who orient their business around a technology or business model that is intrinsically more effective at multiplying capital.
PaintNite: The idea of combining Monet and Merlot has been around for a while, but the founders of PaintNite wanted to make the model more cost-effective. While their competitors relied on a slow, expensive franchise sales model, PaintNite paired art teachers with existing bars that wanted to sell wine on weekdays and created a business that did $30 million in revenue the year before it raised venture capital.
Plenty of Fish: The dating site was founded in 2003 and didn’t change dramatically regarding functionality or aesthetics over the next decade. Other sites had more features, flashier graphics and copious amounts of venture funding, but PoF was free and spent most of its resources fighting spam accounts. As with Craigslist, Plenty of Fish’s biggest asset was its reputation as a well-stocked pond. The company iterated on the product over time, but never needed massive infusions of capital. Ultimately, the company sold for $575 million.
Mojang: The masons behind Minecraft never raised any venture capital, employed just 50 people and earned nearly a billion dollars in profit before selling to Microsoft. The Swedish studio never got sucked into fads like Zynga-inspired social spamming and predatory microtransactions. Minecraft grew by charging users a flat fee, resulting in a $2.5 billion acquisition.
Fortune favors the “boring”
Boring isn’t a value judgment. Many of the most impressive, successful companies that managed to grow without capital thrived by solving acute, if somewhat dry, problems. If you solve a hard problem, customers will happily fund it.
- SurveyMonkey was founded in the dot-com bubble of the 90s and though it wasn’t as disruptive as peers like Kosmo, it was more durable. It survived the dot-com crash and steadily grew into a nine-figure run rate, only raising $100 million 11 years after getting started.
- Protolabs does for plastic injection molding what Vistaprint does for business cards, and is currently worth $1.2 billion.
- Cvent, worth $1.3 billion, builds event management tools and Textura, acquired for $663 million, handles construction management — neither typically considered a hot or hip market.
- Grasshopper is a phone networking company that had 150,000 customers and more than $30 million in annual revenue, but no VC on the books, and was eventually acquired by Citrix.
- Epic was founded by Judith Faulkner in 1979; the Wisconsin-based electronic medical records provider may be the largest bootstrapped software company operating today.
- eClinicalWorks was founded in 1999 when the mantra was “get big fast,” and many of its contemporaries crashed and burned. By focusing on excelling at the dull, yet profitable work of managing clinical data, the company survived and now employs more than 4,000 workers and generates $320 million in annual revenue.
- Unity became a backbone of the mobile gaming industry by focusing on all of the unsexy aspects of game development, like cross-platform compatibility and “bump mapping.” They went years without raising capital, but now have a valuation over $1.5 billion, and are more successful than the majority of branded game startups.
- GitHub took the pain out of version control and became a critical part of the tech ecosystem before raising capital.
- Qualtrics started as a tool to administer surveys for schools and businesses in a basement in Utah and now employs 1,000 and rakes in $100 million a year, profitably.
Blessed are the unfundable
Sometimes raising capital is almost impossible. We’ve seen companies with tens of millions in revenue, triple-digit growth rates and other advantages struggle to raise even small amounts of money. Fortunately, these startups tend to prevail in the end, despite this apparent disadvantage.
Atlassian: One of the benefits of building a startup outside Silicon Valley, NYC, LA or Boston is that there isn’t much VC available. This may sound like a curse; after all, how could it be helpful to have no access to capital? It can be a blessing in disguise.
This kind of isolation prevents you from daydreaming about what you’d do with millions of dollars and forces you to make happy the paying customers you do have. Atlassian, based in Australia, bootstrapped its way to a $4 billion market cap. If it had easier access to funding, they might have found themselves chasing low-quality growth and gone under before they figured out how to scale efficiently.
Campaign Monitor: One of the odd features of capital-efficient companies is that their first rounds of funding tend to be eye-popping sums that look more like proceeds from IPOs. This is the case for Campaign Monitor, whose first round of funding amounted to $250 million. Sydney-based Campaign Monitor didn’t have easy access to venture capital, so they bootstrapped the business and built a unique technology that offered superior email analytics to companies like Disney, Coca-Cola and Buzzfeed. Time will tell if raising a quarter billion dollars helps or hurts the company, but it is certainly a validation of the progress they’ve made so far.
The Trade Desk: While he had a unique view of how to power the programmatic advertising industry, founder Jeff Green started The Trade Desk late in the funding cycle for modern adtech. This overcapitalization of the market, combined with investors getting burned by bad performers, made every round of funding a struggle throughout the life of the company. Green was a consummate startup CEO, who raised only $26.4 million in venture capital during the company’s first six years and turned it into a billion-dollar business traded on the NASDAQ. How? By embracing the constraints of having less capital, focusing on the highest return activities and building a culture of innovation powered by ideas rather than infusions of capital. (Disclosure: Founder Collective is an investor in The Trade Desk.)
VCs aren’t perfect, and even the best miss out on ideas that seem like sure things. It is shocking how common it is to hear founders talk about how they couldn’t sell investors on an idea that went on to become a billion-dollar business. AppLovin founder Adam Foroughi sold his business for $1.4 billion, but found it hard to raise venture capital, even with serious revenue. “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.” The rest, as they say, is history.
Takeaway: Avoid designing your business around VC
Too many founders orient their businesses around venture capital from day one. Startups used to figure stuff out and then ask for money. Today, they ask for money to figure things out. Outside of drug discovery or aeronautical hardware, this is usually the wrong decision. In fact, making progress without resources is the best way to get VCs to take an interest in your company. The companies mentioned above chose not to raise money for protracted periods of time, but when they did, they had their pick of investors and could set the terms.
Our advice isn’t to try to bootstrap a business in perpetuity. Venture capital has powered nearly every major tech company from Apple to Zappos. Just remember that you don’t need a penny to get started. You don’t need permission from funders to found and scale a startup. So the next time a VC tells you they “pass,” remember these three principles:
- It’s possible to get a tech-enabled business off the ground with no capital.
- It’s feasible to scale a tech business rapidly with very little capital.
- It’s often in the founder’s best interest to limit the amount of capital they take.
If you know of some other companies that self-funded their way to an extraordinary outcome, please let me know.
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