Tracy Osborn (TinySeed): Why Most SaaS Companies Don’t Need VC, and What Works Instead

26:26But the talk itself was talking about my process of building Wedding Lovely and flip-flopping between bootstrapping and venture capital raising. And absolutely do not recommend this to anybody because the ways that you build a business for each of those tactics, if you're going to go after venture capital, you have to build your company in a certain way or have a certain attitude around your company at growth at all costs. You have to like have like, you know, you know, be very tactical, have a big market size, all that kind of stuff. When you're bootstrapping, you can build it in a different way.

26:59You could build it a little bit slower, but it just, it kind of changes what's happening underneath. And so for me going from launching this thing, being like, all right, cool, I'm going to build it this way. I'm going to start bringing in money immediately because that's what you need to do as a bootstrapper to bring in, start bringing in some kind of revenue. and then I got into 500 startups which has a whole demo day and that whole that whole process and I was like okay cool I'm gonna I'm gonna raise money and then things happen at 500 which I think is a whole other podcast essentially another startup in my batch pivoted into my space they they were able to put up all the stuff to make them look way more awesome than me so it pretty much discovered any chance of me raising any money because if they're gonna if there's an investor that's gonna invest in a wedding startup they're gonna invest in them not me there's a whole thing there.

27:46But regardless, I wasn't really able to raise money at Demo Day. I then went into the potential Etsy acquisition, and that fell through. And then the co-founder I brought on ended up leaving me at that point. So I said, you know what, screw it. I'm going back to bootstrapping. I don't need money. I'm just going to build this myself. So I did that for maybe four years back into the bootstrapper mindset. I'd just taken that money from 500 startups, which was 50k at the time, you know, so, so small compared to today's races. And, you know, after a few years, I had an investor come into me being like, I actually really believe in what you wanted to do.

28:21I want to put money into this. And then I got stars in my eyes. I was like, okay, here's an investor coming to me. I ended up, I ended up taking their money and what was another person's, but I never raised any other money beyond that. No, everyone continued to tell me no. And I was like, Hey, fine, I'll just take this money. And then I'll go back to bootstrapping. It was just, it's awful. As for me trying to like grow this company methodically, switching between those modes made it really hard because if every time I moved back into VC mode, everything had to be upended. The other issue is when I wanted to get out of the business.

28:54And if I had just, if I just taken 500 startups money or perhaps not their money at all and bootstrapped, I probably still could have sold the business for some amount of money, not a life-changing amount of money but I could have had that glorious acquired business check mark next to my name however because I took in 500 startups money and then these two other investors yeah it made it really hard for me to sell the business for anything that would be meaningful for me the kid it would be just a lot of pain and then all that money would go to the to the investors and none of it back to me and I was like I don't want to do that I just want to shut this down so I ended up just shutting it down you know all the investors were very they understood that was basically, you know, a non starter in their books at that point.

29:38So there was no awkward conversations there. But I really would have loved to have that like, you know, because a lot of founders out there do that in Silicon Valley, they say, Oh, I, I sold two businesses. And then we dig into it, they just like, you know, sold it for peanuts, but they're able to take that title to everything they do in the future. And so I lost out on that opportunity Youth Wedding Lovely because I took that those very relatively small bits of money and I really shouldn't have taken any of that because it never getting this nine years of running it in hindsight being 2020 never really mattered probably should have stayed bootstrapping didn't do that and therefore you know I ended up to a point where I couldn't sell my business and I ended up just shutting it down I mean it's a really common story I mean I I spend a lot of my time as a VC trying to encourage people not to take VC money because you are setting yourself on a path that, as you say, you know, if it goes really well, it can be amazing, but it's not right for most businesses.

30:36You know, like as an individual, building a business worth$10 million sounds great. As a VC, that's a failure. And so trying to get people to encourage them to realize that maybe VC money isn't right for them because it might take an amazing business and smother it with expectations. And so a lot of people don't really get that. But there is a trend at the moment. If you come across this trend of like, people call it sort of seed strapping. The idea being like, hey, it's really difficult to kind of build a business with nothing and go to profitability really quickly. So maybe you raise a single check.

31:08You know, maybe nowadays you raise 100 or 250K. And that is just enough for you and maybe a co-founder to get the product off the ground and to start becoming wrong and profitable. And the goal isn't to kind of be a huge exit, but to kind of be a profitable business that maybe does a million or two million in profit a year. And over time, you pay the investor back, maybe not through shares and an exit, but through dividends. So I'm curious what your thoughts are of that kind of seed strapping kind of process. Is that something you come across? I am a huge fan of it because that's what we do here at Tiny Seed.

31:44So Rob Walling is the founder of MicroConf. That was the conference I spoke in 2016. And in end of 2018, he put out a tweet. This is right when I was going to shut down Wedding Lovely and saying that he was hiring for a program manager for this new accelerator who's running. For me, I was in startup. I was like, I'm going to shut this startup down. I'm going to figure out my other startup. I am unemployable. I don't want to work to anyone. I don't want to have bosses or anything like that. But I need some money in the meanwhile. And so I came across that right at the right moment. And thank goodness I did.

32:14because everything that I've learned with Wedding Lovely and Bootstrapping and VC and again, also my very strong opinions about how some things should be done, all came into play with TinyC. So TinyC is founded by Intervolsa and Rob Walling. And the thesis was, especially for B2B SaaS startups, we have a very narrow set that we invest in because these businesses can be very capital efficient. But when you're bootstrapping, forget who coined this phrase, but when you're bootstrapping, there's the long, slow SaaS ramp of death. It's something like, you know, you see a graph and it goes for like two years.

32:55And you're bootstrapping, you're just like chugging along for years upon years upon, you know, up until the point where it suddenly takes off. And, you know, that kills a lot of people who are trying to build or bootstrap a B2B SaaS startup. And so the thesis was, all right, there's a lot of people out there out here that are building these really cool platforms for other businesses to use. What happens when you give them just enough money? And then you also set up the terms so that they don't necessarily have to raise again. There are so many businesses out there that you don't see in TechCrunch.

33:26We did a blog post called like the iceberg of kind of showing how like how vast this B2B SaaS industry is that you don't see if you're reading TechCrunch. And the theory for us as investors, because we have to be tactical about this, is that if we can index into B2B SaaS, if we can invest into a lot of these little businesses, then we as a VC firm could be successful without requiring them to go on to be unicorns. So we invest around$150K for about 10 % of their business, 10 % to 12%, which is actually very high. But we decided to bring in an educational component because those bootstrappers are coming in, building something really cool.

34:05what can we do to help increase our chances of success we can help them learn about marketing learn about funnels learn about hiring give them all this information have this accelerator program to help them get off the ground but then also the terms are very founder friendly we set a salary cap which is something that's kind of unusual and it's pretty high it's at 250 000 us dollars And so if a person takes in our money, yeah, if they take in their money, they can still pay themselves a very decent salary for a very long time. We don't do profit sharing or revenue sharing because we want people to invest their profits back in their business as long as they need it.

34:46But if there's any point where they're like, hey, my business is successful enough, I want to take more money off the table, then they can, that salary caps limits them to a certain level. And then they issue dividends and we share in those dividends. So the terms are unique. I really want to see these terms be used by other VC industries. Because when you start learning about VC economics, I think this is something every founder should do is understand what is going on behind the scenes on the VC side or the angel side. What are the things that they are looking out for in startups? And it's like, oh, they're pressuring me to grow big.

35:19And it's like, yeah, because that's like part of the economics. For every person that goes on to raise more money, the VC themselves can add a markup and they look better. And VCs have to do well, because they have to raise in more funds, because as soon as the fund is deployed, they have to go through and raise a new fund. Otherwise, the whole thing is over the way the management feed work. And so all this stuff was really fascinating to me coming in from working at startup, because I was like, I had no idea it worked like this under the hood. But then also like being able to create this new path for folks.

35:49So if you, you know, this is what would have been perfect for Wiley Lovely, absolutely perfect, of Wedding Lovely. I wanted to build a business that worked with other businesses and having a small capital infusion to help get me through that SaaS ramp of death, get me to a point of being able to invest in growth and then continue to own the decisions in my company and grow it the way I wanted to. I truly believe that Wedding Lovely would have been more of a success had it been Tidy's Kneeback. I mean, I think you're absolutely right. I mean, I think this is one of the reasons why I really wanted to speak to you because it feels at the moment that there's a big gap in kind of fundraising.

36:25It used to be the case, you used to be able to maybe raise funding from banks or friends and family. A lot of that's gone. And so everyone is just forced into this funnel of VC. And you're absolutely right. The way most VC funds work is they are looking for at least two or three of the companies that have invested to effectively return the fund. Return the fund, as you know, means effectively bringing back to that company the value of the fund. So if you're a hundred million, you know, a dollar fund, you need two, three, four companies that will each be worth a hundred million to you in your portfolio.

36:55And a hundred million to you, if you earn 10 % is a billion. And so you are in the business of hunting billion dollar unicorns. This is why the term unicorn is so, you know, bandied around. And so if you have, you know, 20, 40, 50 companies in your portfolio, you're expecting three or four of them to grow really, really big but the other ones probably aren't going to do that and some of them will carry on being small sustainable businesses many of them will kind of like you say kind of die in those first couple of years and fail to raise follow-on funding and then obviously what the big VC funds do is you know at the end of that they'll have a couple of big exits or a couple of IPOs or whatever and they will return a big chunk of the money back to their investors and usually they're They're committing to return, you know, 3x what you've put in.

37:41And so I'm curious, like, how I get that model in VC. How does that work with you? Like, what are you raising? What are you returning? How are you getting that money? Because if they're not IPOs and they're not, you know, maybe there's a few sales, but is it mostly coming through long-term revenue, through dividends? Or, like, what's the model exactly? So we're still relatively new. Fund One was raised six years ago. sorry for interrupting but one of the reasons i'm asking is you mentioned a while ago that you're you're only six years in but already you're considered sort of top five ten percent percentile for your vintage because we return you've had some carry already yes yeah exactly and so that's a that's a huge moment for me as an employee to like because you don't really get equity when you're working in vc and so to have some sort of upside from businesses um once you return the funds only because whenever the other thing i didn't really realize before i i jumped into vc is that you know say a VC firm has like a few startups that go big, that money doesn't come back to be being used by the VC firm.

38:42It goes straight to the LPs. And so, you know, when one of our startups get acquired, us as the management, like for the employees that I work with, it's not like we suddenly have more power to hire more employees. It's all based on the future raise. So the metrics, being able to like continually raise new funds is very important. And having good results on our earlier funds to make it easier for us to raise new funds is very, very important. So Fund One returning was a huge milestone, especially because we did it in only six years. And that primarily is through a few big acquisitions. Now, Fund One was not that big.

39:14It was only around 5 million. So you can imagine, you know, we invested in, oh gosh, what was it? I think it was 20 startups in Fund One. And so of those 20 startups, there has been a few people who've died as a startup rather. but there's been a few very significant acquisitions in that batch, which meant that we were able to return the funds to the investors. Now they're starting to get returns above what they put in. I got Carrie as an employee, which was kind of amazing. And it happened to coincide with us raising our fourth fund. We're currently fundraising right now, actually, if anyone wants to be an LP, but it came at the right time for us to say we've returned the fund so we can roll that into our fundraising for Fund 3, which is going to be around$15 or so million.

39:59So not anywhere near where some of these other VC firms are raising. I think our total assets under management is around$50, if I recall, with all of our funds. So we're still relatively small, but we are getting acquisitions. And we do have a few startups who are giving off dividends. But the other reason why we invest into B2B SaaS is that it's a very sticky business. and because we don't need unicorns there's a lot of folks who are in fund one and fund two our earliest funds that haven't gone under but they haven't been acquired but they are still just chugging along and we track all of everyone everyone's metrics and we can see every month they're still growing and there's quite a few folks we're now like six years in they're at finally at like a million ARR, which when you look in the VC world, six years to get to a million ARR, they're a failure.

40:55But for us, it's like they're just going to continue chugging along and, you know, grabbing more market share and getting themselves put into a place where that can be acquired. And their acquisition, the amount that they'd be acquired for is still a win for TinySeed when it wouldn't be for other VC firms out there by the way that we've structured our fund. So we have a lot, even though we've already turned, there's still a lot more upside to come with the current startups in FundOne. I guess it's also you're looking for a different kind of founder, aren't you? I think a lot of the founders that the VCs have, they want to grow really big or go home.

41:33And so if they're kind of taking three or four years to kind of get to a million, there's a really good chance they'll quit and go and join Google or some AI company. was it sounds like you're finding founders that have got a real passion for the business. And actually, they want to build a business. If they get acquired, that's great. But if they're doing two or three million a year and they're taking half a million in profit a year, for them, that's a really good outcome. And for you, that would be a good outcome. And I guess also, to some extent, because of that, maybe you have a smaller hit rate in terms of really big outcomes, but you also have a massively smaller failure rate.

42:12You know, with a VC, it might be 95 % of their companies fail. With you guys, it might be 50 % or 40%. So yeah, it's an interesting model. Yes, yeah, totally. I'm curious sort of what your previous experience as a designer, as a founder, bring to your role now as a VC. Does it help you pick the right people? Does it help you give better advice? Like what is it that's unique that you bring to the table? that's also a really good question i think we have been lucky to land in a place like tiny seed because the program itself needed to be designed uh it needed to we need to figure out like how we were not like what's the education we wanted to give but how we wanted to give it and i had a very strong idea in terms of what did that what is that experience going to be how how is it message to the folks who are in our, um, our portfolio?

43:05How do we make it easy for them to respond? How do we make it easy for them to attend these events? Because I know like the more I can do to make this process of learning and getting it, uh, like learning and connecting with other founders and, uh, being a part of this community and just, just sucking in as much as you need, you can, like I can affect that as a designer. I can affect that in the way that our messaging works. I can affect that in the way that the process goes in terms of how you get onboarded into Tiny Tiny Seed. And I think we've done a really great job with that. It's very important to me.

43:42We want to invest in startups and the kind of folks who are down to earth and super friendly and very willing to learn from others, but also have this undercurrent of ambition. There's a lot of folks out there who are bootstrappers that want to build to, say, $1 million. And then that's when they want to sell. And we do have some amount of VC metrics where like, we can invest in you if that's your goal. You know, you were like, Godspeed, have fun with bootstrapping. We think that's a really great option for them. But people come in the tiny seat, there has to be some level of ambition. And then for me to kind of think through, all right, cool, these are the kind of folks that we're working with, how do I design this experience to work best with them?

44:19And so this involves, you know, when I say design, I'm using it very broadly. but it's a thought it's like thinking through the the the attention to detail that you need running something like this how do we run our our in-person events to attract the kind of founders that we work with um we do something a little bit different than most folks out there our our events are very tactics oriented they're very like lots of information they're very focused around community they're not tony tony robbins there's no like get into a room and everyone stands up and rah, rah, rah and all that kind of stuff.

44:51There's other folks who do that and they do it very well. And there's a certain kind of startup that is attracted to something like that. That's not Tiny Seed. Like we are down to earth friendly people who are ambitious. We as a team, we're very ambitious people. The people we work with are very ambitious. And there's like this thoughtfulness in terms of how is our website going to look when we do this? How is the process for all of our programs going to look? How do we attract people like this? So I'm not doing like a lot of like work, like design work. I built in our backend that we do for all of our LPs.

45:24That was fun. For a brief moment, I got to like build a new platform. It's where all our metrics come in for our startups goes into this platform. Everyone can read, can see all the LPs can see the metrics on the funds and how things are going and where the startups are going. That was super fun to build. And I got to flex my design muscle on that. I also built our application process. And so it's a custom application form built off of Python and Django, because I wanted to have that experience of filling in an application to be as seamless as possible. And have these little moments of like, ooh, okay, these people care, because this application is so well designed.

45:59I didn't want to like just throw in like a fill out form or anything like that love fill out use them for something like an application process, I got to flex my design muscles to make sure that experience was as well designed as possible. But I'm not doing a lot of design work nowadays, but all of that has translated into thinking about how we run as a company. And I feel like that attention to detail, that attention to experiences, that plays a role in everything I do at Tiny Seed. Yeah, I mean, I hear you. I mean, I haven't designed in anger for 10 or 15 years, but I have that kind of design thinking, kind of problem thinking mindset and thinking about how people experience things from first principles.

46:38I find that really, really valuable when I'm talking to founders a lot of the time founders are thinking architecturally they're thinking in terms of systems but they're not thinking in terms of how people actually experience and whether it makes sense a lot of the time they're super users and so they're building a product with that super user mindset and often like the people who are onboarding the people who don't understand their their language and their kind of um you know nomenclature and and organizational structure really really struggle and so it's just kind of getting them to think with a beginner's mindset I think is a real useful skill just before we move on like in terms of how tiny seed works so you're part VC and part accelerator like how do the two elements kind of blend together and like can I just take your capital and not be part of the accelerator program or does everyone have to kind of go through a process and what does that process look like and what do I get out of it as a as a cobalt yes so yeah it's all through the accelerator we just invest it like technically think that we have a syndicate.

47:36And so there's other like kind of ways you can, you can be a part of tiny seed. Um, but largely if you are coming in to take investment, then you must go through the accelerator because we believe so strongly in the accelerator process and how, how that year goes. So it's like, you know, a lot of accelerators out there are three months. Ours is a full year and nothing really changes at the end of the year either. I think it's like a year of training people to be tiny seed founders, training them in the way that we want to, um, to think. We have three months of modules that we have them go through learning about, like I said before, marketing and sales and hiring whatnot, because it's like the platform of information we want everyone to have.

48:17And then we start pulling in the experts that we have in our network. And because we are B2B SaaS, it means we actually can have some very specialized folks as mentors. So people who are like copywriters and people who are like user experience designers and all the all the little pieces of B2B SaaS that you need to learn. And we try to speed up that information gathering process for when people are jumping into a new area. Say they're jumping into, how do I hire a customer success person? We have a person who specializes in customer success that we connect them over and they can get all the shortcuts they need to be as effective as possible, as fast as possible.

48:53So the year program is very important to us. There's no way of taking investment from tiny seed outside of the accelerator. We are building other programs because, you know, the accelerator investment is not for everybody. You know, because we work with bootstrappers, there's quite a few folks out there where they might want to be part of TinySeed but not take investment because, like I said, our terms are 150 for 10%. And if you're making a million at that point and you want to have access to our expert roster and you want to have access to the team and get a part of this community, there's no way you're going to take investment because that's a very bad deal at your size.

49:28So we've just launched a new coaching program. So that's a paid program outside the venture capital thing. It's called SAS Institute, where it's like taking everything we've learned from the accelerator, but bringing it to folks who have bootstrapped B2B SAS and grew it to that level. But it's still, it's all about this, like, how do we, for both accelerator and SAS Institute, it's like, how do we work hand in hand with startups to bring them not only as much information as possible to help them transform, or at least like, I guess, use the shortcuts to build their business quicker, but also how do we, how do we encourage a mindset?

50:03And you've kind of, you've talked about this before where it's like, you know, there was a mindset of, of, you know, breaking out of your tunnel vision. And there's a mindset around like being able to ask people for advice, but like not necessarily take all the advice you get, but being very strong and like figuring out how to do this information gathering. There's a mindset of like, you know, you grew to a certain level and you've, it's so down, like, what do you do at that point? It really sucks, But you have to have this like, I thought about getting a t-shirt with relentless forward momentum on it for everyone at Tiny Seed, because that's what you need.

50:33Just relentlessly figuring out how to continue your forward momentum. And if a marketing channel stops working for you, there's this mental aspect of being like, all right, cool, whatever. I have to move on to the next thing. Let's try the next thing, you know, and not just give up at that point, which is mentally very hard. It's very hard to do as a human. So we've, as in, I think Tiny Seed has really created a founder community. that is both encourages a, you know, not a growth at all costs mindset, but a very growth focused, but sustainable mindset. And both of those things play a part in that.

51:14And that's what we've tried to do with all of our programs is to encourage that kind of mindset. I mean, it sounds great. I love what you're doing. It's clear that what you've done is you've thought really deeply as a team around the skills that founders need, the things that trip them up. And you've created this program that kind of helps guide people in the right direction. Like you say, give them the momentum and support they need. I mean, it's kind of where my book came from. It sort of plugged over my shoulder. Like for the last four or five years, I've been working in VC as well. And I've seen the same kind of problems and issues trip people up time and time again.

51:46Rather than using a training program or producing an accelerator, I put it all into a book. And actually, we should probably chat about getting the book into the hands of a bunch of your founders at some stage. That's true. I think they really value it. But I'm kind of curious, like, what are the things that you see trip founders up all, you know, time and time again? Like, what are the common patterns that you are desperately trying to kind of educate founders to avoid that you see all the time? So the funny thing about the kind of founders we work with, we aim for folks who are information hungry.

52:18And, you know, when we're doing our application process, you know, we accept actually a very low amount of folks from it's something like 5 % of our applications get accepted. It kind of varies by year. This year was crazy pants with we just said we just closed our application around and a number of AI rapper, AI rappers that came through was kind of kind of hilarious. And it's also just kind of shows, you know, where the industry is moving towards. But we want to work with people who are information hungry. But there's also the kind of folks that come to us are tend to be and again, this is kind of person I was someone who like, loves to learn and their process of, of sitting down and trying something and they want to just like do it their way first, before they start asking questions.

53:05And what we want is people who are like very excited about sitting down and doing it their way. But also has questions first, like you got, you got to do this information gathering process in the beginning rather than, you know, say, again, designing a sales process. Some folks would be like, cool, I'm a founder. I'm going to leap myself into the sales process. I'm going to read a bunch of articles and just jump in and do it. And we were like, pause just for a little bit and just do a little bit more information gathering. You know, can you talk to experts who've done sales before? Can you talk to peers that are also in this process?

53:37There's this balance that needs to happen between, I guess it's like, you got to move fast and break things. But you also have to do as much information gathering as possible. Where is that balance? It's going to be different for every person. But a lot of founders tend to not do enough information gathering before they leap in and do and start running things. I think they want to learn it for the hard way to like you go into sales process, you lose a bunch of things, you learned a lot of that process. But maybe you didn't have to do those first three disastrous calls. If you heard from like three other voices first, that's it's that's something I'm constantly thinking about is like, how do I do that myself when I'm trying to jump into new things?

54:18Because I always just want to like jump in and do it the hard way. And all the founders that we work with are kind of the same way. But you also don't want them to like spend forever doing the information gathering process. And so there's like a weird way of encouraging, you got to encourage some amount of flexibility, but always encourage the like, break out your tunnel vision, learn as much as possible about these areas. The worst thing would be is if someone doesn't want to, like, they don't want to do sales whatsoever, so they're not going to do it. And that's, I think the flexible mindset needs to come into play where it's like, okay, cool, product-led growth isn't working.

54:54Maybe you need to try doing sales. Yes, sales is very uncomfortable. What can you do to learn as much about sales to make it not uncomfortable anymore? And so, you know, that's where the information gathering process could help that as well. It's just like to just demystify something for a founder who is learning a new area? Well, brilliant. I could chat for ages. I think I've only gone through about half of the questions I had for you, but I'm conscious that we've already hit the kind of hour mark. So it's been fascinating hearing first about your early journey and your startup experience, then obviously what you're doing at Tiny Seed.

55:25I think it's a really useful and valuable thing as well, as we talked about, like there are far too many like VC companies looking for huge, you know, kind of unicorn exits. And I think there's a real gap in the market. And so I would encourage lots of people that want to build kind of, you know, small but successful, sustainable businesses. And small could be like 10 million, 20 million in valuation or revenue or whatever. So it's not tiny in the grand scheme of things, but in the VC things, a scheme. Where can people find out more? Where can they find out more about you? Where can they find out more about TinySeed?

55:56Yeah, let us know. Yeah, so not really on social media nowadays, but you can find me on most places under Tracy makes blue sky, Instagram and whatnot. But for tiny seed, or tiny seed.com, we have a sister business called micro conf. It's actually the same team, which is under a different website. Microconf is usually where people find most of our information because it's our pub, like our public programs and our big founder community. And then tiny seed is our the two programs on top of the what we do at micro conf that are selective and we only work with a few different founders. So I've came in with tiny seed, but now I'm the head of product for TinySeed and MicroConf.

56:33So you can find me in both of those places. So if you're in B2B SaaS and you want to build a sustainable business, but you still have some amount of ambition and wanting to grow to a life-changing exit, take a look at MicroConf. There's a lot of bootstrap businesses out there that have that same mindset and a lot of people who are just really willing to help out and talk to folks. We have a mastermind matching program. We have a private community. And if investment's right for you, we have our accelerator. If investment's not right for you and you're a certain level and you just want coaching, we have this new program called SaaS Institute that helps people coach.

57:03But Tiny Seed is the program side of things. MicroConf is the public community. Amazing. Thank you so much, Tracy. It's been a pleasure chatting to you. It was great to catch up with you, Andy. See you soon. Bye.