Should Your Startup Bootstrap or Raise Venture Capital? | Dalton & Michael Podcast

0:00I would watch his life on Facebook and be like this is amazing he traveled the world he got married he had kids I'm like, am I the idiot? And like, the evidence was quite possibly, Michael. Quite possibly. This is Dalton plus Michael. And today we're talking about should you bootstrap or should you start a VC backed company? This is like a confusingly controversial topic. Yeah. I'm not really sure why it's controversial. Well, it's one of those sort of one-sided things where a lot of people don't care about the topic versus people that care a lot. Yeah. Does that make sense? And so I think there's a lot of people that strongly identify and are really excited about bootstrapping that are very like fired up about this.

0:47And there's a lot of people that this just isn't a topic that comes up much. Yeah. The place we should start, I think, is that the vast majority of businesses should not raise venture capital. And I'll extend that point. Venture capital is not interested in investing. Yeah. In the vast majority of businesses. So like one of the things I think founders get really screwed up on is that VCs have become a little bit more marketing-y, right? Talking to people and they might be confused. Well, I want to start a restaurant. VCs don't want to fund your restaurant. Yes. Well, I think another thing that's confusing is a side note is a lot of the stuff on Shark Tank.

1:25Oh yeah. I would argue is not venture capital backable. You know, a lot of the stuff that I see on the television show, you would never in a million years be able to raise VC from it. And so I think you watch Shark Tank and you think that that is reality. It's not this industry. So I think that that's the first thing is that if you're starting a business that can appear on Shark Tank for the most part, you probably shouldn't raise venture capital. But I think there's actually like a deeper thing here, which is that let's say you want to start a startup business. You don't have to raise venture capital either.

1:58Correct. And I'll say the same thing. I don't believe venture capitalists want to invest in all software businesses. And I don't believe all software founders should raise venture capital. Yep. So. Yeah, let's talk about them. Yeah. I think what's really going on is I think if you looked at how many businesses are started every year. Yes. What percentage of those are venture funded? Cool. We could ask chat GPT. but I would guess definitely single digits, if not less than 1%. And so if you just look at businesses that are starting in the world, it is like a weird outlier freak occurrence that is a VC funded business.

2:39But I think if you're just consuming content, you're watching media, you're watching YouTube, you don't realize that. And venture capital as a product is specifically for investing in something where their investment could be worth at least 100 times more, if not 1 ,000 times more. Yes. And so trying to put that jet fuel into something that isn't going to grow to be big, everyone is going to be sad and lose. Yeah. And so you shouldn't do it. The founder and the investor. No one's going to win. And the user. No one. No one wins. No one wins. And so, again, I don't think that there's this push that I can see from investors to try to convince people to raise VC money for something that has no chance of growing like that.

3:29It just doesn't make sense for anybody. I'll go a step further. I think the whole argument is fake news. I don't think this is a real argument. I don't think that anyone thinks it's more moral or good or right to start a VC-packed company or a non-VC-packed company. I don't think this is an actual debate yeah i think that like starting a vc back company really hard not the best way to get rich not the best way relatively small number like the numbers are not yeah huge not a good path like i always like to equate it to like athletics it's like getting into the nba is really hard like not like the best path to have a good career is to be like oh i'll just i'll just make the nba yeah that's simple right yeah it's like 450 guys i'll just be one of those guys and then game on, right?

4:21Right? They recruit from all around the world. I live in the world. Yeah, very straightforward. I like that point. Yeah, no. So this is not the only way to get rich. Let's take a further step. Most people who are rich did not raise venture capital dollars. That's right. Real estate investing, stock market investing, being lawyers, being doctors. Again, go look up the numbers. Bankers, investors. Yeah, there's so many people, right? So this is not the way to get rich. I think the other thing that's funny is like, there is no one trying to force you or cajole you into starting a vcu-backed company like if you don't want to do it don't don't do it correct it's also a decision that you can revisit if you don't want to start a vcu-backed company now but like your bootstrap product starts doing well and you want to do in the future great you can there's no one who is going to say no you said you were bootstrapped on twitter I will not give you money.

5:12Like, no. I'll get another truth. Empirically, none of the trillion dollar software companies are bootstrapped with no VC dollars ever. Yeah. So if someone's telling you you can make a trillion dollar company, maybe you can. Just no one's ever done it. Yeah. I'll say fact-based. And again, like to look at the numbers, even if you look at software companies. Yeah. Even if you look at iPhone apps, if you actually did an audit of the App Store and you said, what percentage of the apps in the App Store are VC-backed? It is tiny. But if you said, what percentage of dollars that are spent in mobile apps go into VC-backed companies?

5:54I think that's right. Because dollars are going into Amazon and eBay and all that kind of stuff. Right? Yes. And by the way, I want to be clear. Neither of us are saying you should want to make one of those companies. Yes. That should come in from inside of you, not from YouTube. No, no. I actually kind of try to convince people not to. It is because if you need to be talked into it, that's a bad sign. So I like to talk about why it sucks. So I think the other thing is that no one is trying to say in our industry that if you make a great software product that allows you to make enough money to live a good life and it's not VC backed that you haven't won.

6:37You won. Yep. Like I had a friend who made one of these companies. You might've used his product. His product generated about 30 to$50 ,000 a month and took about seven to 10 hours a month of maintenance. The entire time I was working on my startup, he was living life. Like I would watch his life on Facebook and be like this is amazing he traveled the world he got married he had kids I'm like he won like that's like like good for him like there's no like again this is the one-sided thing is that we're like great like we're like high-fiving that that's amazing versus that there's this um two-sided battle 97 % of the time I was watching that Facebook I was like am I the idiot?

7:24And like, the evidence was quite possibly, Michael. Quite possibly. Yes. And he's still doing great. Right. And so like, this is really clear. It's like building a great small business, software, some small software. Even the term small bothers people. It's just non-venture back. Yeah. It can be big. Yeah. Non-venture back. You're making millions and millions of dollars. Yes. Totally fine. I think the other thing that's kind of maybe a dirty dirty kind of underbelly here is who is spurting this argument like who is who's incentivized for this to be a big issue yeah i think that this has been just like a topic that gets a lot of engagement online yeah and so yeah you know if you want to get people agitated about something this is a pretty good topic and then you can use it to promote stuff and so yeah i'm not going to name and names, but I can think of folks over the years that are like kind of built a following around encouraging people to do this.

8:25And to the extent it is helpful and more people are improving their lives doing it, that's great. But there's a little bit of like creating a fake controversy. And then monetizing it. A little bit. And so maybe people may have this question watching this video. Michael, why should I apply to YC? Like why should I do it? You guys just did a great job of explaining why not to do it. Well, why should I do venture? So I think that there are some businesses where you actually need money up front. Yes. And if you need money up front and you're building a software business, the venture capital industry can help you get money up front.

9:05If you don't need it, don't take it. Yes. I think that what's so interesting about this is that there aren't many other good mechanisms. If you need millions of dollars or$10 million to get your company to break even, there aren't other mechanisms in our economy to give that to you. Let's use an example of Google. I don't know, just because famous, one of the most viable companies in the world. I don't know how you could have bootstrapped that. And so again, maybe the audience is saying, well, I don't want to build Google. Great. No one is saying you have to build Google. But if Google wants to build Google, it doesn't seem mathematically possible.

9:45There's no route they could have done it without the phrasing money. There's no loans they could have gotten to buy the servers and do the things they did. No, no. And so we should just be thinking about VC as enabling incremental entrepreneurship that wouldn't be around otherwise. Not as cannibalizing anything. It's just enabling that incremental founder. And the other thing is you You have to remember if you want to raise a lot of money, but you can't explain to the investor why you might IPO and give them a lot of money back, then you can't raise VC. We want to be explicit. Like it is a business transaction.

10:26It's not a faith transaction. Correct. It is I give you money now. You give me a lot more money later, or at least you try really hard to. And if you can try really hard, but the result can't be a lot of money, I shouldn't logically give you money now. Not because I don't like you or because you're not a great person or these users you're trying to serve aren't great. It's just because it's not a good business transaction. It's literally nothing personal. And I think sometimes founders kind of are very confused when VCs say no. Well, it's because, again, if we're trying to stoke outrage. Let's stoke some outrage.

11:05You point at something silly that raised a lot of money. Yes. The most extreme silly thing in the world. You always point to Juicero. That'd be one. Right? Or we were, whatever. You point to something that is like on face silly. Yes. And then you say, well, if they funded that, why won't they fund my social network for dogs? Yes. And so it causes a lot of emotions. Yeah. And I understand. I relate. But it's don't fall for the rage pill. Don't let yourself get enraged by obvious engagement bait. Yes. Which is to cherry pick the craziest, silliest thing. Yes. And use that to get all worked up and take that personally.

11:50Like that somehow hurt you. Like you were hurt by that thing over there happening. Well, and what's so funny is like you are actually included on the real truth. Real truth, which is that they screwed up. Someone messed up. Like, you're right. They shouldn't have gotten that money. Like, you nailed it. That person who funded that company is an idiot. And you're exactly right. But like, hey, that doesn't mean we should. All bets are off. Yeah. It's like, okay, this dumb thing happened. Therefore. Up is down. Like, forget everything we know. Yes. That doesn't follow. That logic doesn't make sense.

12:30That person should probably be spoken to. about their investment strategy. So yeah, so just understand that game. And I have to be honest, I like games like this. I don't like games where you have to convince people to like you or to align with your views. Those are games that are way harder to play. I like games where it's like, hey, if I want to serve this customer and you can be a good legal partner to me and I give you money and you give me legal services, you can be a good funding partner for me. I give you a check at my company, you give me cash, right? If you can be a good partner to me, a simple to understand partner to me so that I can spend my time working with my customer, that's what I want.

13:14Yeah. The customer's complicated enough.

13:22I like the idea that the money people are like, so if I give you this money, maybe give me a lot of money back. Yes. Yes. Okay. Okay. We're good. Okay. We're good. All right. End of conversation. I give you money, you don't give me any money back? No. No good. Come back when I, come back when this is hot, my way. Hopefully this helps clear up the debate, but I secretly hope this like, I don't know, like doesn't at all because this is like so silly. I hope we get somehow flame aboard for this. Anyways. Great. Good shot. Love it. Okay. Sounds good. Thanks.