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Bootstrapping vs Venture Capital.pptx

Presentation from the 8th TestDome Product Talk, held Nov 28th 2023: https://youtu.be/CZ8nZymQLW4 *Description:* Mario, cofounder of TestDome, talks about his views and experience and try to show benefits of bootstrapping route for the founders that is overlooked in media. Why this topic? Media loves fairy tales (rags to riches, bold, brave bets, winning against all odds). Investors love founders buying into those stories (founders are scarcest input to their business model). But, we love entrepreneurial people (especially young) and want the best for them 🙂

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Bootstrapping vs
Venture Capital
Mario Živić
TestDome Co-founder
Definitions
● Bootstrapping
○ Self-funding a business using personal resources and revenue.
● Venture Capital
○ Acquiring external funding in exchange for equity.
○ To keep it simpler, we’ll call all equity funding venture capital.
● Build the product/service - Angel and seed
○ Pre-seed - Validate the idea, develop MVP, get initial user feedback
○ Seed - Build early-version product/service, prove product-market fit
● Build the company - Early-stage VC
○ Series A - Hire key people, complete the product, improve
distribution
○ Series B - Scaling of working business model
● Scale everything - Late-stage VC
○ Series C/D/… - New markets, acquisitions, new product line
Definitions - Funding rounds
● People love stories about rags to riches and winning against all odds.
● Media loves what people love!!
● Investors love founders buying into those stories!!!
… BUT …
● We love entrepreneurial people!!!!
Why this topic?
“VC story” as portrayed in media
● Smart student obsessed by an idea drops out of
college
● Lives frugally and works 20h/day
● Large competitors try to destroy him but fail
● He succeeds and IPOs and becomes a billionaire
“VC story” from founder’s perspective
● I have potential, motivation, energy and an idea.
● No business experience, industry connections or capital.
● I’ll pitch for a year to get seed funding (1 in 100 are funded).
● If funded, I’ll put my life on hold for 3-5 years and work whole days.
● I’m pushed to optimize for a higher potential return instead of
a higher chance of a return (I need millions, VCs need billions).
● I need to become industry, business and strategy expert.
● In total, I have 10% chance to reach an exit netting $5m after tax
(median share of 15% and median valuation $40m).

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Bootstrapping vs Venture Capital.pptx

  • 1. Bootstrapping vs Venture Capital Mario Živić TestDome Co-founder
  • 2. Definitions ● Bootstrapping ○ Self-funding a business using personal resources and revenue. ● Venture Capital ○ Acquiring external funding in exchange for equity. ○ To keep it simpler, we’ll call all equity funding venture capital.
  • 3. ● Build the product/service - Angel and seed ○ Pre-seed - Validate the idea, develop MVP, get initial user feedback ○ Seed - Build early-version product/service, prove product-market fit ● Build the company - Early-stage VC ○ Series A - Hire key people, complete the product, improve distribution ○ Series B - Scaling of working business model ● Scale everything - Late-stage VC ○ Series C/D/… - New markets, acquisitions, new product line Definitions - Funding rounds
  • 4. ● People love stories about rags to riches and winning against all odds. ● Media loves what people love!! ● Investors love founders buying into those stories!!! … BUT … ● We love entrepreneurial people!!!! Why this topic?
  • 5. “VC story” as portrayed in media ● Smart student obsessed by an idea drops out of college ● Lives frugally and works 20h/day ● Large competitors try to destroy him but fail ● He succeeds and IPOs and becomes a billionaire
  • 6. “VC story” from founder’s perspective ● I have potential, motivation, energy and an idea. ● No business experience, industry connections or capital. ● I’ll pitch for a year to get seed funding (1 in 100 are funded). ● If funded, I’ll put my life on hold for 3-5 years and work whole days. ● I’m pushed to optimize for a higher potential return instead of a higher chance of a return (I need millions, VCs need billions). ● I need to become industry, business and strategy expert. ● In total, I have 10% chance to reach an exit netting $5m after tax (median share of 15% and median valuation $40m).
  • 7. ● Research ○ Average age of a founder of a successful startup is 42. ○ Looking just at high growth VC-backed startups, average founder is 45. ● Ideal company to start ○ In an industry where you are an industry expert, ○ where you have industry connections (potential buyers, partners, acquirers), ○ when you have management skills (people, process, strategy), ○ when you have seed capital of your own. Bootstrap your entrance to entrepreneurship, don’t jump into it! Founder’s best interest
  • 8. Traits of a good bootstrapped idea: ● Low initial investment needs ● Can generate revenue quickly ● Slow and steady growth model ● Flexible timeline for scaling up Choosing an Idea Traits of a venture-scale idea ($100m/year in revenue and $1b+ valuation within 10 years): ● Large ($5b+) total addressable market ● Scaling through technology/people/assets ● Growth 2-3x per year ● Clear way to turn extra cash into growth ● Plan for exit
  • 9. All companies start by bootstrapping but some come to need capital: ● to develop a product, prove product-market fit, find scalable sales model ○ Seed funding ● to scale all operations, sales, infrastructure, etc. ○ Early-stage funding (Series A/B) ● to enter new markets, acquire other companies, prepare IPO ○ Late-stage funding (Series C/D/…) Delay raising funds as long as bootstrapping does not increase your risk level! It’s usually AND, not OR
  • 10. Bootstrapping Capital is the limiting factor. ● Focus on the right things. ● Difficult to hire proven people. ● Limited to organic growth. Venture Capital ● Hire and motivate right people FAST! ● Define and instill culture FAST! ● Define and implement scalable operational processes FAST! ● Manage stakeholders LIKE A PRO! ● Lead marketing, sales, product, tech… You are the limiting factor! Challenges
  • 11. Risks specific to Venture Capital ● If all goes well, founders and VCs are both happy ○ But when it doesn’t, VC investments come with protections ● Downrounds (30% of deals in 2023H2) ○ Anti-dilution provisions ● Liquidation or acquisitions (90% of exits) ○ Acquisition is a liquidation event ○ Liquidation preferences ● Exercising control rights ○ Special voting rights (veto) from seed round ○ Investors control the board after Series B (sometimes even after Series A) ○ Selling the company, raising funds and replacing the CEO are board decisions
  • 12. ● Founder-friendly investors ○ The Calm Fund (calmfund.com) - We invest early in profitable businesses that want to maximize their chances of success and build for the long-term. ○ TinySeed (tinyseed.com) - Remote accelerator for SaaS founders who want mentorship, community and funding without the pressure to IPO at $1b or just give up. ● Mission-driven investors ○ Purpose (purpose-economy.org) - Help purpose-driven companies grow on terms that will not undermine their mission or independence ● Revenue-based financing ○ Capchase, Clearco, Lighter Capital - Loans where payments are percentage of revenue Alternative Venture Capital
  • 13. Personal story - Željko ● Education ○ 10+ years - Creating own software projects ○ 5+ years - Programming competitions ● Microsoft (Croatia) ○ 2 years - Marketing and sales of developer tools (selling to developers) ● Infragistics (United States) ○ 1 year - Creating developer components ● Founded GemBox ○ 7+ years - Starting a business, selling software globally from Croatia ○ GemBox earned enough money to live off and finance a new startup
  • 14. ● Education ○ 10+ years - Programming competitions ○ 3-4 years - Creating tests for national high school programming competitions ● Ericsson Nikola Tesla (Croatia, Sweden, Japan) ○ 3-4 years - General business experience, technical sales support (enterprise sales) ○ 2-3 years - Technical consulting (delivery and sales of consulting services) ○ 2-3 years - Intrapreneurship and management (people and project management) ○ Saved 4 years worth of life expenses (modest to moderate lifestyle) Personal story - Mario
  • 15. ● We met on programming competitions ● We both felt the problem of assessing developers’ skills as managers ○ Mario’s experience - Creating programming questions for 20+ competitions ○ Željko’s experience - Building a company selling globally to technical people ● Co-founded TestDome - Pre-employment testing of developers skills ○ We worked 2 years for free ○ Invested profits from GemBox We chose TestDome as everything we did before was preparing us for it! Personal story - Željko and Mario
  • 16. ● Infobip ○ Late-stage funding of $200m at revenue of $700m and 14 years ○ Funding for acquisitions as preparation for IPO ● Mailchimp ○ Profitable from start, acquired for $12b at revenue of $800m and 19 years ● GitHub ○ Profitable from start, raised $100m at 100 employees and 5 years ○ Late-stage funding to develop enterprise-ready solution ● Atlassian ○ Profitable from start, raised $60m they didn’t need at revenue of $60m and 8 years ○ Funding for employees to cash out and to make their board more legitimate ● Mojang (Minecraft), Hotjar, Typeform, MessageBird, Zoho, Patagonia, Shutterstock… Successful bootstrapping stories
  • 17. Q & A

Editor's Notes

  1. Equity - ownership interest in a company Pre-seed - you have 2-5 people, working prototype of a MVP, in some cases just a proven founding team and a clear market opportunity - need money to develop a product/service Seed - you have 2-10 people, early-version product/service, user feedback, 1-2 contracts, indication of product/market fit - need money to launch a product/service, find and prove product-market fit Series A - Need capital to hire and improve distribution Series B - Scaling of working business model Series C/D/E - New markets, acquisitions, new product line
  2. Fairy tales - rags to riches, bold, brave bets, winning against all odds. Founders are scarsest input to investors business model.