Do you need to raise, or can you bootstrap? You may not have a choice in the future, so get ready to buckle up.
First the economics: the USA has announced that it will slowly but surely stop pumping fake money into the economy. This will likely reduce those amazing funding rounds and acquisitions announcements that were fuelled by Treasury. As everyone needs to raise prices to survive without ‘free’ funds, inflation takes hold. Result: we have to strap in. That’s it! End of analysis…just kidding, there’s more to back this up.
The graph above calculates when most of the companies, we have captured, will burn out of cash. When Ross Intelligence imploded, they gave us conformation on our algorithm. Moreover, since a greater number of companies raise funds on public markets, we get to feed the algorithm vetted financials. Note that there is a way to go public with less scrutiny. In case you missed it: Fiscalnote went public via a Special Acquisition Company aka SPAC merger valued at $1.3 Billion. With these dates and numbers, we are able to calculate the collapse of companies and rank the near-death by date. This way, we know when to reach out for support.
More on reading tea-leaves: remember our friend leaving (NL) the legal tech division of a big-name Dutch law firm in 2019. Well before COVID-19 struck in 2020, a also well-capitalized Dutch Legal Tech Studio quietly folded. Off the record, a well-funded non-profit told us they would no longer support legal tech companies. We watch™ these departures unfold around the globe and see the collateral damage to those who relied on them. To understand why this is happening, check The Right Valuation. Besides the time required for startups to mature, another reason is the time it takes for customers to trust them. In short, support is slowly pulling back, but there is a silver-lining in the lowlands, so keep reading.
Trust is a good reason to fundraise and not bootstrap. Yet, fundraising doesn’t say much about the long-term sustainability of any company. Actually, a fundraising event signals a lack of funds to compete. Remember, we had this difficult conversation before. Visualize fundraising as a snowball of debt rolling towards an inevitable outcome: payout. Here’s the cycle: founders invest sweat equity to build a company. During this journey, they accumulate debt. Debt will be paid off when the company gets acquired in whole or in part by another company or investors. All the while, founders can technically only live from profits or interest on assets like real estate.
It can get even weirder: according to 2019 court records, Elon Musk was financially illiquid, which means, he’s broke. He doesn’t have a salary or income and reportedly lives in a very modest prefab SpaceX property. Yet on paper, he’s the richest man alive. But only if he sells all of his shares. He’ll cash out, but the point is that plaintiff Musk was still bootstrapping when he really..really didn’t have to.
Are you saying to not raise funds? It depends on your unit economics. Your economics will be determined by your competitors, and your model. Contrary to what investors have you believe, your market size doesn’t matter if you don’t know your competitors. Let’s get back to Tesla, whose market cap hit $1 trillion. The car market has many competitors, and yet Tesla market cap is worth more than all of them combined.
Why? The current stock value tells us that none of the existing car-makers can compete with Tesla in the electric car (EV) market. According to those same public stock markets, EV carmaker Rivian is the only exception. If Rivian performs like Tesla, it could reach a $69 trillion market cap. Point: in a seemly crowded market, you can still be a monopoly. When you think you have a monopoly, you may actually have more challengers. You only notice these subtle differences using a CAT™ approach and an ROI algorithm.
To inspire, let us sample some bootstrap outcomes: Mailchimp, never took in venture funding and sold for $12 Billion. Both founders got $5 Billion each. Here’s a head-to-head: Arianna Huffington (HuffPost) vs Mike Arrington (Techcrunch). Huffpost sold for $315 million and Arianna walked away with about $18-$21 million. TechCrunch sold for just $30 million, but Mike pocketed $24 million. Let’s clarify, we aren’t saying that venture funding leaves you poor. Uber and WeWork founders walked away as billionaires, building a unique but unprofitable business. Both companies repeatedly broke venture funding records. How is this possible? Between 14:50 – 15:48 minute (video) in Adam Neumann’s first interview, we get an honest answer.
Back to legal: do you know how many players there are in the legal document space? Do you know how much capital they have? If you are in that space, you need to raise…a lot. If you are doing something completely different and perhaps unique, it’s better to rely on yourself and bootstrap. Back to lowlands: I met Lieke Beelen shortly after she won the ‘The Hague’ innovators price in 2015. Six years later, she won again (NL) and more importantly, she outlasted all those well-funded initiatives above.
Bootstrapping is an essential skill to master in light of oncoming traffic. It is honorable and humbling, and one should take great pride in being capital efficient, socially responsible and scrappy. While both paths are hard, and the payoffs can be pretty, the path of perseverance is a bit more predictable.
Some reading that inspired us: