Who Needs VCs? Seattle Entrepreneurs Say Bootstrapping Is the Way To Go (Part 2)

12/2/08Follow @gthuang

What are the arguments for and against bootstrapping a tech startup? When should a company raise venture funding? And what have Seattle entrepreneurs experienced in taking various different paths? I interviewed three prominent local entrepreneurs in the past week to get their thoughts. Yesterday, in Part 1 of this story, I gave some context and a quick preview. Today, I’ll give some more background on each entrepreneur, and let them tell their remarkable (and sometimes surprising) stories in their own words.

—Steve McCracken of CultureMob has experience with venture and angel funding, as well as bootstrapping. In 2000, McCracken co-founded Seattle-based Serials Solutions and bootstrapped the library-software company to an $18 million acquisition in 2004. “We started the whole thing with $8,000,” he says. “Unlike Web publishing stuff, you’re selling and getting money from Day 1. The hurdle to clear to get to profitability was lower.”

“I’d been at a VC-backed startup, and I’d seen the time that went into fundraising,” McCracken says. “When I looked at the time and effort required, basically I thought, I need to develop domain expertise in fundraising. Or with that same time, I can develop expertise in developing and selling my product…That was the basic math. Also, secondarily, in an unsexy thing like library [software], I didn’t think I’d get the money.”

“As a result of that, we were obsessed with revenue, just obsessed with it,” he continues. “The next thing you’re obsessed with is A, making clients happy, and B, selling. When you get to business fundamentals, that was really powerful. The whole organization could say, ‘Listen people, your paycheck is coming from selling the product. We are earning our paychecks.’ There was absolute clarity of objective to the team. It highly encourages focus and discipline on the key metrics.”

On the flip side, McCracken says, “Good investors bring more than just money. They bring connections, and an outside perspective, sometimes a challenging perspective—is this the right course, and why? By reporting to an outside set of investors, it sets higher bar on reporting. It prepares you for presenting your business. More money gives you runway and resources, if time to market is key. Maybe the product can’t be built without outside cash.”

In early 2007, McCracken co-founded CultureMob and has been in the process of raising angel funding. “The difference is that Serials Solutions had revenue from Day 1. CultureMob is primarily ad-driven—it’s got to get to a lot of traffic to make a lot of money. [Angel] capital is allowing us to grow rapidly,” he says. “It’s about being super-efficient, and getting us across the chasm and over to profitability.”

McCracken sums it all up: “We try to do with the least amount of angel funding possible. What are the considerations? If nobody is investing, bootstrapped is the way to go. Or if you’ve got early revenue…My goal is not to walk around town saying, ‘I got X million from the coolest investor.’ I care about building a great business…I’m not knocking VCs, I think there’s absolutely a great role for VCs in the economy…Massive capital isn’t, in this industry, the defining factor. It may be in pharmaceuticals—I’m not going to launch a new drug with bootstrapping.”

—Josh Petersen is the co-founder of Seattle-based Robot Co-op, the developers of popular social websites like 43 Things (which was funded by Amazon). A veteran of Microsoft and Amazon himself, Petersen has a unique perspective on fundraising. “We decided not to pursue the VC route mostly out of disinterest in convincing anyone about our idea or our team,” he says via e-mail. “In our minds, the Robot Co-op is more like a band than a company and going to work each day is more like band practice than working in an office. We sit at one common table, riffing off ideas and trying to put something together that we can be proud of. There really is no room in this approach for a VC/record exec. And what is the point of trying to prove yourself to a bunch of record execs until you’ve had a chance to play some shows and write some good songs? Pitching the band before it is actually playing live is how boy bands (think N Sync) get assembled, really the creation of producers and record execs rather than talent that fronts the band. Funny, a lot of funded companies (not all, by any means) remind me of boy bands, where it is not too hard to see … Next Page »

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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  • http://www.buzzfund.com lthompson

    Grfeat approach, permits sharing more equity amongst employees, teamwork, sense of we are all in it together, and ultimately, it slike going a shore and burning the boats, you have to stay and fight! Amazes me how fully funded and complacency are directly correlated.