Focus on creating a successful product or service rather than immediately making your way to the top.
“Buyers like us, we have a lot of options. It’s a buyer’s market.” My friend, a successful entrepreneur who, like me, buys software companies, went on about how venture capital is harder to come by lately. “And these guys,” he gestured at the Twitter and Uber offices, “have given people the wrong idea about what success looks like for a startup.”
We spent the rest of lunch discussing just how skewed the formula for “success” had become in hubs like San Francisco that influence the rest of the startup ecosystem worldwide.
The Airbnb and Uber stories have convinced smart founders who are capable of building sustainable businesses and creating jobs that they must pursue the unicorn dream.
I hope you can appreciate the irony: San Francisco is where seemingly everyone in our business wants to be. It’s the mecca for entrepreneurs who are supposed to be smarter and more successful than I am. And here I am, a small-town southerner, having meetings in the “it” city for tech startups and SaaS apps, looking around and thinking, “This doesn’t make sense. This is out of control.”
What’s With the Unicorn Obsession?
Stop and consider this scenario: two founders have an idea for something (mildly) disruptive or innovative—say, on-demand cutlery as a service. They envision an Uber model for people who will carve your turkey at Thanksgiving.
These cofounders are smart, and they have a good team. They raise a solid seed round, put $1 million in the bank, and manage to build up their monthly recurring revenue to $30,000 in six months. The Unicorn Formula says that if they hit a few more milestones, they will be poised for a really good Series A—like it’s some kind of given.
But despite bringing in $30,000 a month, the founders are spending more money than they’re making. As they consider more fundraising, they revisit their cap table. It gives them a reality check: they have given investors a big chunk of the company’s equity and another 10 percent to the developer who built the minimum viable product.
The MVP was supposed to be just the beginning, but the founders now lack the energy to execute on their bigger vision. Nobody (not the founders, the investors, nor the developer) has enough passion or upside to keep pushing, achieve the next milestone, or raise more money.
Each founder now has 20 percent equity, and if they did raise another round, they’d have to give up even more. Besides, they have a new idea now, and that’s where all the energy is. $360,000 a year in recurring revenue sits on a table that everyone wants to leave.
So What Happens When a Venture-Backed Startup Doesn’t Hit That Hockey Stick Curve?
Usually, it just goes away. But every once in awhile, somebody like me might acquire it.
Where founders see sunk costs, I see value in the products as well as monthly recurring revenue and SaaS metrics that my team can optimize. Optimizing a SaaS business requires significantly less effort and risk than starting one, especially with an existing team in place.
My acquisitions so far have been bootstrapped B2B SaaS apps because I look for four things in a deal:
- The app has low maintenance needs.
- I can get passionate about the app because it solves a real problem.
- The app’s monthly recurring revenue looks good on paper.
- The founder wants out for the right reasons.
In many ways, the last reason is the most important one. I am not interested in making a living off of someone’s misfortune. I want to buy from founders who have good reasons to move on to their next adventure.
I enjoy making good products better, and the recurring revenue is important to me because of how I define success. A successful company is one in which I can employ people and keep their jobs secure.
Start small, stay in control, and build as you grow. Bootstrapped companies may seem like the exceptions in the tech industry, but they’re the norm in just about every other industry in the world.
You don’t have to let the venture capital industry define success for you or prescribe the formula to achieve it. I have built my little empire one self-determined decision at a time. When you own more of something, you can do that.
I think that’s the root: a handful of software startups have warped people’s perspectives on what they should do with their design or software development skills and business ideas. They could build reliable products and tools for niche markets, improve people’s lives, and make a fantastic living in the process.
I’m not saying the venture capital route is wrong for everyone; what I am saying is that it’s wrong for me because it’s not designed around my personal values. If you’re considering a startup, go into it with your eyes open and know that your odds of succeeding and being there for your employees and customers long-term are better with a common-sense approach to business.
The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses.
Image credit: CC by Phillipe Lewicki