Reflections on bootstrapping
By Matthew Granade2014-09-299 min read
We recently hired a Head of Marketing, and one of the bigger challenges in doing so surprised me: many candidates expressed serious concern about our having bootstrapped the company rather than using the more traditional venture capital-backed approach. I thought our approach was better, faster, smarter – but that’s not what many candidates saw.
Having these debates with candidates caused me to reflect on the how, the why, the good and the bad of bootstrapping Domino, all of which I want to share for the perspective it might provide you and the advice you might have for us.
Bigger picture, bootstrapping Domino was a more radical decision than we realized because today many people cannot imagine starting a company without venture funding. So beware: you're swimming upstream.
How and why we bootstrapped
As background, Domino is a "data science platform:" it lets data scientists improve their analyses faster by making it easy to run, track, reproduce, share, and deploy analytical models. Nick, Chris, and I started it after working together for six years (plus or minus) at Bridgewater Associates, a deeply analytical and systematic hedge fund.
We saw lots of options for funding Domino but one thing was fairly clear: seed stage venture capital (VC) was the most expensive of the bunch. To raise $1 million in seed funding would probably have required us to give away 20% of the company. In some cases, you get more cash for the same percentage; in some cases, you don’t. It also requires meaningful distraction from building product and doing sales. It’s a high price to pay so we wanted to think about alternatives.
Instead we bootstrapped, specifically:
- Founders did not take salaries. Obviously not everyone can do that, but it’s a huge lever for keeping costs down. And it’s not all-or-nothing. Even reduced salaries make a huge difference in your burn rate.
- We kept other expenses low. For example, we have yet to hire a lawyer; we’ve relied instead on Rocket Lawyer and similar products to pull together the things we need. I’ve seen start-ups spend ten of thousands just on lawyers.
- We used overseas contractors when possible which both cost less per hour in salary and resulted in less overhead (e.g., office space).
- We did some side projects. A couple of Silicon Valley companies we knew needed some help in areas we had a lot of experience, so we picked up three or four consulting projects to get some cash. Depending on your skills and network this will be easier for some founders than for others; it might require some extreme creativity. You also have to balance the distraction with your core product.
- We charged for our product as soon as we could. As with not taking salaries, this doesn’t work for every business, but for ours we were fortunate that it did.
Just to be clear about it: we did not write big checks to the company from our personal savings. We each chipped in a few thousand dollars to get started, and then did the things I describe above.
Where have we ended up after 16 months? We have a product in the market, lots of supporters of that product, meaningful revenue (more than enough to cover our costs, though the founders are still not taking salaries), and a small team.
And the company is 100% employee owned — which is the best thing about our approach.
Aside from the increased ownership, another big advantage to bootstrapping is that it keeps you lean and hungry. Baked deeply into Domino's DNA is a profound appreciation of how hard each dollar is to get and how carefully each dollar should be spent. (Marc Andreessen had a great tweet storm related to this point recently as well.)
And bootstrapping is certainly an approach that has worked for lots of other successful companies. Github went five years without outside funding. Burt’s Bees grew to a billion-dollar company without outside funding. Craigslist, Patagonia, and Tableau Software bootstrapped for their first few critical years as well.
"I would think, this is how Galileo must have felt after a lecture to the Catholic Church."
One tradeoff with the bootstrap approach: Certain VC firms can be powerful allies in building your business (e.g., recruiting, marketing, press). And by not having a VC involved, we haven’t been able to benefit from that assistance (though to be clear not all firms offer that). We have compensated for this to some degree with advisors.
But the biggest challenge has been with recruiting. Here’s how our discussions with candidates typically went:
Candidate: “So which VCs are backing you?”
Me: “We’re boot-strapped.”
Candidate: “Umm ... why is that?”
Me: “Mainly because we could. VC funding, especially early stage, is very expensive. Bootstrapping meant less dilution for us. Means we have more equity to hire with. Also less distraction — could focus on product and sales. Plus it keeps us lean and focused.”
Candidate: “So are you about to run out of money?”
Me: “No, after hiring you, we’ll have about a year of runway in the bank. Pretty typical.”
Candidate: “But bootstrapped companies tend to not to be as well-resourced.”
Me: “Actually our contrainst is finding talent, not money — meaning we can afford hire more people than we can find good people to hire.”
Candidate: “Well, I also like to know that a VC has signed-off on the idea.”
Me: “What does that mean?”
Candidate: “Well you know – that a VC stands behind it. VCs see a lot of businesses, and it would be good to know that they think yours is a good idea. Of course you think it’s a good idea … it’s your company.”
Me: “Well … VCs are buying a portfolio of options, so I’m not sure their backing means what you think it means. VCs are trying to get one or two hit-the-moon investments, and the rest don’t matter – so it’s more like playing the lottery. I’m making only one bet, and I think it’s a good bet — which is why I invest in it every day. You should think about which situation most mirrors the one you're in.”
Candidate: “But it’s what VCs do – they validate start-up business models. So it would help tell me that your business is solid.”
Me: “Sure. But the absence of VC backing doesn’t mean the company is invalid. You could use customers and revenue growth as a more meaningful indicator and our growth is one key reason we’ve been able to bootstrap.”
Candidate: “I’m just not sure.”
To be honest, I found conversations like the above to be deeply frustrating. Afterwards I would think, "This is how Galileo must have felt after a lecture to the Catholic Church."
Of course, that is not fair. Taking VC is a perfectly reasonable and often sensible way to fund a business. But it’s not the only way. And in some cases it may not be the best way.
"Ultimately we turned the pushback we were getting into an interview question that we used to judge independence of thought."
So what creates this mindset among would-be start-up employees? Two things — which to some degree point to the meta challenge of bootstrapping:
First, in a manner and to a degree I can only admire given the goals of their business model, I think VCs have “captured” the start-up ecosystem. In other words, people cannot imagine starting a company without VC backing. Then because the talent (and the press and others) start to believe this, it becomes a self-reinforcing cycle.
On that point, the main thing I would emphasize is there are alternatives (which is the main reason I’m writing this post). Of course, we have hundreds of miles to go before we are a resounding success. So there’s only so much you can draw from our example. But for those considering the bootstrapping path, I hope this offers you some encouragement.
Second, too many people want to outsource their thinking to others. I won’t expound on this too much because I think Peter Thiel’s recent push covers the importance of contrarian thinking in start-ups (and in life) far better than I can.
Ultimately we turned the pushback we were getting into an interview question that we used to judge independence of thought. And that's how we finally got our Head of Marketing.
Matthew is an experienced executive and business builder at the intersection of advanced analytics, data, finance, and technology. As a co-founder and member of the board, he brings to Domino decades of experience in management and market positioning to help the company unleash data science at the world’s most sophisticated companies. Matthew previously built Point72 Ventures and was Co-Head of Research at Bridgewater Associates.
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