Joseph Flaherty, Director of Content & Community
In the startup world there are two dominant exit strategies:
- Build and sell your company for millions, or,
- Build your company and take it public for billions.
These are the liquidity events that give the impression that startups are a great way to “get rich quick,” even though building a saleable company often takes the better part of a decade. Less often discussed, or championed, is a third option — the “get rich slow” method of building a company and making millions of dollars in profits, for years or decades.
In the first option, a sale, the founders earn enough money to set their family up for generations, in an instant. But there is the possibility for regret, recently given voice by WhatsApp co-founder Brian Acton, who walked away from $850M in earnout potential because he didn’t agree with the way his creation was being monetized.
In the second scenario, an initial public offering, immense financial gains are paired with the ability to continue leading your company, subject only to the pressures of the stock market. There’s an added bonus of prestige for joining the elite ranks of public company CEOs. But as Elon Musk has recently learned, no amount of money or esteem will allow you to escape the eye of regulators.
The third choice, running a company at scale in perpetuity, is harder to pull off. Basecamp has been proselytizing for the approach to startups for over a decade, urging founders to create companies that are more like Italian restaurants than internet monopolists. This summer saw a mini-wave of smaller startups, like Buffer and Wistia, buying out their early investors, essentially purchasing the freedom to go their own way. Often this class of startup is dismissed as “lifestyle businesses.” That’s a mistake.
There are companies that serve as a proofs of concept that this approach to building a startup can scale and rival even public companies. Epic Systems, makers of the leading Electronic Health Record system, records approximately $2.5B a year in revenue and employs 9,000. Mathworks, creators of the science software standby MatLab earned $900M in revenue, and most recently, EclinicalWorks has a nine-figure run rate and no plans to go public. Atlassian operated this way for years before deciding to go public. MailChimp which announced $600M in revenue run rate, up from $400M in 2016.
To put this in perspective, Hubspot had $375M in 2017 revenue. MailChimp bootstrapped a company that is 50% larger than one of the hottest SaaS startups of the last decade. In Atlanta. With a founder who studied industrial design in college and taught himself web design.
The founders of these companies pay themselves well. They face no artificial timetables. And they’re free to run their companies the way they want, whether that’s dressing up as a wizard for company meetings, or engaging in unusual marketing approaches, a MailChimp specialty.
Before becoming a meme via their infamous Serial ad, they marketed like cereal manufacturers, rewarding fans with coloring books, animal-theme beanies, and pepperoni-scented vinyl toys. Their imagination was constrained more by physics than budget, as this anecdote from MailChimp Director of Brand Marketing Mark DiCristina illustrates:
“There was a time when a couple people were joking around and showed Ben an eBay listing for a tractor trailer, along with three Honda race cars, and suggested we turn them into a giant Transformers robot. Ben actually cleared the budget for it, and then he was crushed when he realized it was just a joke.”
It’s hard to imagine such a stunt being looked on favorably by a board or public company analysts.
While the freedom is fun, there are downsides to this approach:
- Venture capital can be a superpower. VC provides leverage that no other form of funding can match. Though it’s much derided by bootstrapping zealots, almost every startup of consequence has taken capital at some point in its journey.
- Recruiting and retaining talent can be tougher. Founders no longer have the carrot of a potential six or seven figure payday to tempt talent. This kind of company needs to be more thoughtful about things like profit-sharing.
- All successful startups are subject to reporting. Even if you don’t plan to list on public markets, there are points at which the government will require financial reporting on par with what’s expected in financial markets. This gives competitors an insight into your business without the benefit of being able to access public capital markets.
- The market might change rapidly. The benefit of a sale or IPO is the opportunity to take financial risk off the table. If you sell a company and the market shifts, the gains have been realized, whereas running the company long-term creates financial risk. This can be mitigated by taking a higher salary, or profits in the form of bonuses, but it exposes the team to more variability.
It seems like MailChimp’s founders have navigated or mitigated those risks and are choosing to act like mid-century captains of industry — staying loyal to their customers and employees, serving as stewards of their community, and putting off an immediate payday for a chance at building a legacy closer to home. It’s an admirable approach and worth studying.
The point of this blog post isn’t to convince you not to raise money. Founder Collective is a VC firm that wants to back companies that will sell or go public in a ten-year time period. But there is a lot to be gained by being thoughtful about the decision when to raise capital and how much. There’s no evidence that raising more money leads to better outcomes, but plenty of examples of startups dying due to toxic overexposure to capital. By limiting funds raised, $100M exits become pretty darn attractive. So before reflexively deciding to raise more money, or jumping at inbound interest from investors, think a bit about what made these companies work and decide how valuable optionality is to you.