Over the past 12 months, we’ve seen the fall from grace of many of the previously celebrated (yet grossly over-funded) unicorns like WeWork, Uber, and Peloton. These companies received far more than their fair share of media coverage over the past decade.
Perhaps it’s for this reason that the media is finally turning its focus towards the entrepreneurs that turned away from the venture capital fail fast/growth at any cost model.
Sean Silcoff, a technology reporter at the Globe and Mail, recently published an article (subscription required) about Mississauga-based financial technology firm, Prophix Software.
Silcoff doesn’t normally write about bootstrapped companies, so it was refreshing to read Prophix’ story of phenomenal growth without venture capital involvement.
The article begins with an anecdote about a Silicon Valley investor who tried to woo Prophix’ President and COO, Alok Ajmera, with tickets to the historic NBA championship series game between the Toronto Raptors and Golden State Warriors.
Silcoff included a quote from a venture capital firm that said that most bootstrapped founders eventually get converted and give up equity in their business. This is misleading, however, as there’s a huge difference between a bootstrapped founder that converts after many years of growth versus a founder that converts in the early stages of his or her business.
For Pro-Founder Venture Capital, Timing is Everything
There’s an element of the technology ecosystem that rewards founders for taking money. They are celebrated in the press, they get asked to speak at conferences, and they’re lauded among their peers.
As I’ve written about before, the phenomenon of celebrating funding rounds is baffling. And it sets a poor example for new founders. We need to take the focus off the funding and place it back on enterprise value creation, revenue growth, and capital efficiency.
I’m not saying that you should never take venture capital. It’s just that there’s a time and a place for it and, for the most part, early-stage founders are hugely disadvantaged by it.
For early-stage founders, it’s in the best interest of the venture capitalist if you rapidly fail. Compounding returns make time your enemy—when you fail to meet the unrealistic growth targets, the VC will cash out and move on to the next shiny object. In this scenario, the founder is left with nothing and all the enterprise value creation (or potential for value creation) is destroyed.
However, when it comes to compounding revenue growth through a deliberate, sustainable growth strategy, time is actually on your side. Founders of companies like Qualtrics, Atlassian, and Shopify have demonstrated that building your SaaS with customer cash means enterprise value is created long before equity is sold to third parties.
Create Enterprise Value Before Taking on Venture Capital
Qualtrics, Atlassian, and Shopify bootstrapped their companies, growing them into multi-million dollar players before taking any venture capital. In these cases, the founders created so much enterprise value for themselves that they were in much stronger positions when they accepted venture funding.
Qualtrics Waited 10 Years
According to Qualtrics co-founder, Ryan Smith, every founder should bootstrap as it changes the way you run your business and it helps shape you as a leader. In 2012, 10 years after Qualtrics started, the founders had the opportunity to sell for $500 million but decided to take on some venture capital instead.
In an interview with Fortune, Smith said, “Ultimately, choosing to take VC money was the right choice for us because we weren’t using it as a lifeline. We had already nailed our model. That money and the additional $150 million we later raised was used simply to scale a business we already knew how to run. We accepted the money on our terms and entered into a true partnership with our backers. Before term sheets were signed, there was already a mutual respect and implicit trust because my VC partners had seen that we had done very well on our own.”
Atlassian Waited 8 Years
Mike Cannon-Brookes and Scott Farquhar founded Australia-based Atlassian in 2002. They bootstrapped the company for several years, financing it with $10,000 credit card debt. Atlassian achieved 40 straight quarters of profitability and had a compound annual growth rate of 43 percent for the five years prior to taking on venture capital.
The company raised $462 million in its IPO in 2015 and co-founder, Cannon-Brookes was quick to downplay the IPO’s significance stating, “It’s not a victory line, it’s a financing event.”
Shopify Waited 6 Years
Shopify was founded in 2004 by Tobias Lütke, Daniel Weinand, and Scott Lake. The founders didn’t take any venture capital until 2010 when they raised $22 million. The company went public on May 21, 2015 trading at $28, more than 60% higher than its US$17 offering price.
Today, Shopify encourages the businesses that run on its platform to bootstrap with one blog post stating, “In exchange for complete control over your business, you also assume all of its financial needs, and that means being extra strategic about how, when, and where you invest your money.”
Lots of Other Success Stories
Qualtrics, Atlassian, and Shopify are just three examples of SaaS businesses that played the long game when it comes to venture capital.
There are many more examples of companies that are holding out and retaining equity and control of their businesses. Journalists just need to work a bit harder to find them and tell their stories. Prophix’ story is far more newsworthy than any funding round, as it tells a tale of true enterprise value creation and successful entrepreneurialism.
Greg Smith is the Chief Investment Officer of TIMIA Capital.