Pod Insights Y Combinator Podcast Should Your Startup Bootstrap or Raise Venture Capital? | Dalton & Michael Podcast About this episode Within the world of startups, you'll find lots of discourse online about the experiences of founders bootstrapping their startups versus the founders who have raised venture capital to fund their companies.
Is one better than the other? Truth is, it may not be so black and white. Dalton Caldwell and Michael Seibel discuss the virtues and struggles of both paths.
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Transcript 0:00 Speaker 00 I would watch his life on Facebook and be like, this is amazing. He traveled the world, he got married, he had kids. I'm like, am I the idiot? And like, the evidence was like...
0:10 Speaker 01 Quite possibly, Michael. Quite possibly.
0:15 Speaker 00 This is Dalton Plus Michael, and today we're gonna talk about should you bootstrap? Or should you start a VC-backed company? This is like a confusingly controversial topic.
0:26 Speaker 01 Yeah.
0:27 Speaker 00 I'm not really sure why it's controversial.
0:30 Speaker 01 Well, it's one of those sort of one-sided things where a lot of people don't care about the topic versus people that care a lot.
0:39 Speaker 00 Yeah.
0:40 Speaker 01 Does that make sense? And so I think there's a lot of people that strongly identify and are really excited about bootstrapping.
0:45 Speaker 00 Yeah.
0:45 Speaker 01 That are very like fired up about this.
0:47 Speaker 00 Yeah.
0:47 Speaker 01 And there's a lot of people that this just isn't a topic that comes up much.
0:50 Speaker 00 Yeah. The place we should start, I think, is that the vast majority of businesses should not raise venture capital. And I'll extend that point. Venture capital is not interested in investing.
1:03 Speaker 01 Yeah.
1:04 Speaker 00 In the vast majority of businesses. So like, one of the things I think founders get really screwed up on is that VCs have become a little bit more marketing-y. Right? Talking to people. And then I'd be confused, well, I want to start a restaurant. VCs don't want to fund your restaurant.
1:18 Speaker 01 Yes. Well, I think another thing that's confusing is a side note, is a lot of the stuff on Shark Tank.
1:25 Speaker 00 Oh, yeah.
1:25 Speaker 01 I would argue is not venture capital backable. You know, a lot of the stuff that I see on the television show.
1:31 Speaker 00 Yeah.
1:32 Speaker 01 You would never in a million years be able to raise VC from it. And so I think you watch Shark Tank and you think that that is.
1:37 Speaker 00 No.
1:38 Speaker 01 Reality.
1:38 Speaker 00 It's not this industry. So I think that that's the first thing, is that if you're starting a business that can appear on Shark Tank, for the most part, you probably shouldn't raise venture capital. But I think there's actually like a deeper thing here, which is that, let's say you want to start a startup business. You don't have to raise venture capital either.
1:58 Speaker 01 Correct.
1:59 Speaker 00 And I'll say the same thing. I don't believe venture capitalists want to invest in all software businesses. And I don't believe all software founders should raise venture capital.
2:11 Speaker 01 Yep.
2:12 Speaker 00 So.
2:12 Speaker 01 Yeah, let's talk about the.
2:13 Speaker 00 Yeah.
2:14 Speaker 01 I think what's really going on is I think if you looked at how many businesses are started every year.
2:21 Speaker 00 Yes.
2:22 Speaker 01 What percentage of those are venture funded?
2:24 Speaker 00 Cool.
2:25 Speaker 01 We could ask ChatGPT, but I would guess definitely single digits, if not less than 1%.
2:31 Speaker 00 Yes.
2:32 Speaker 01 And so if you just look at businesses that are started in the world.
2:34 Speaker 00 Yes.
2:34 Speaker 01 It is like a weird outlier freak occurrence.
2:38 Speaker 00 Yes.
2:38 Speaker 01 That is a VC funded business.
2:39 Speaker 00 Very outlier.
2:40 Speaker 01 But I think if you're just consuming content, you're watching media, watching YouTube.
2:44 Speaker 00 Twitter.
2:44 Speaker 01 You don't realize that.
2:46 Speaker 00 Yeah.
2:46 Speaker 01 Okay. And venture capital as a product is specifically for investing in something where their investment could be worth at least 100 times more, if not 1,000 times more.
2:59 Speaker 00 Yes.
2:59 Speaker 01 And so trying to put that jet fuel into something that isn't going to grow to be big. Everyone is going to be sad and lose.
3:09 Speaker 00 Yeah.
3:09 Speaker 01 And so you shouldn't do it.
3:10 Speaker 00 The founder and the investor.
3:11 Speaker 01 No one wants that.
3:12 Speaker 00 And the user.
3:13 Speaker 01 No one.
3:13 Speaker 00 No one wins.
3:14 Speaker 01 No one wins. And so again, like, I don't think that there's this push that I can see from investors to try to convince people to raise VC money.
3:24 Speaker 00 No.
3:25 Speaker 01 For something that is not, has like no chance of growing like that. It just doesn't make sense for anybody. Okay?
3:31 Speaker 00 I'll go a step further. I think the whole argument is fake news, right? I don't think this is a real argument, right? I don't think that anyone thinks it's more moral or good or right to start a VC backed company or a non VC backed company. I don't think this is an actual debate.
3:52 Speaker 01 Yeah.
3:53 Speaker 00 I think that like, starting a VC backed company, really hard. Not the best way to get rich.
3:59 Speaker 01 Not the best way.
4:00 Speaker 00 Relatively small number.
4:02 Speaker 01 Like the numbers are not huge.
4:04 Speaker 00 Not a good path. Like, I always like to equate it to like athletics. It's like getting into the NBA is really hard. Like, not like the best path to have a good career is to be like, oh, I'll just I'll just make the NBA.
4:16 Speaker 01 Yeah, that's simple, right?
4:17 Speaker 00 Yeah, it's like 450 guys, I'll just be one of those guys.
4:20 Speaker 01 And then game on, right?
4:21 Speaker 00 Right? They recruit from all around the world. I live in the world.
4:24 Speaker 01 Yeah, very straightforward. I like that.
4:25 Speaker 00 Yeah, no. So this is not the only way to get rich. Let's take a further step. Most people who are rich did not raise venture capital dollars.
4:33 Speaker 01 That's right.
4:33 Speaker 00 Did not start companies.
4:34 Speaker 01 Real estate investing, stock market investing.
4:36 Speaker 00 Yeah.
4:37 Speaker 01 Being lawyers, being doctors. Again, go look up the numbers.
4:40 Speaker 00 Investors. Yeah, there's so many people, right? So this is not the only way to get rich. I think the other thing that's funny is like, there is no one trying to force you or cajole you into starting a VC-backed company. Like, if you don't want to do it, don't do it.
4:55 Speaker 01 Correct.
4:55 Speaker 00 It's also a decision that you can revisit. If you don't want to start a VC-backed company now, but like your bootstrap product starts doing well and you want to do it in the future.
5:06 Speaker 01 Great.
5:06 Speaker 00 You can. There's no one who is going to say, no, you said you were bootstrapped on Twitter. I will not give you money. Like, no. I'll get another truth. Empirically, none of the trillion-dollar software companies are bootstrapped with no VC dollars ever.
5:22 Speaker 01 Yeah.
5:23 Speaker 00 So if you, if someone told you you can make a trillion-dollar company, maybe you can. Just no one's ever done it.
5:31 Speaker 01 Yeah.
5:32 Speaker 00 I'll say fact-based.
5:33 Speaker 01 And again, like, to look at the numbers, even if you look at software companies.
5:37 Speaker 00 Yeah.
5:38 Speaker 01 Even if you look at iPhone apps, if you actually did an audit of the App Store and you said, what percentage of the apps in the App Store are VC-backed? It is tiny. But if you said, what percentage of dollars that are spent in mobile apps? Going to VC-backed companies. I think that.
5:54 Speaker 00 That's fair.
5:55 Speaker 01 Right? Because dollars are going into Amazon and eBay and like all that kind of stuff, right?
6:01 Speaker 00 Yes. And by the way, I don't, I want to be clear. Neither of us are saying you should want to make one of those companies.
6:07 Speaker 01 Yes.
6:08 Speaker 00 Like, or you should want-
6:09 Speaker 01 That should come in from inside of you.
6:10 Speaker 00 Exactly.
6:10 Speaker 01 Not from YouTube.
6:12 Speaker 00 No, no. Like, I actually kind of try to convince people not to.
6:19 Speaker 01 It is because if you need to be talked into it, that's a-
6:21 Speaker 00 That sucks.
6:23 Speaker 01 So I like to talk about why it sucks.
6:24 Speaker 00 Yeah. So I think the other thing is that no one is trying to say in our industry that if you make a great software product that allows you to make enough money to live a good life and it's not PC-backed, that you haven't won. You won.
6:38 Speaker 01 Yep.
6:38 Speaker 00 Like, I had a friend who made one of these companies. He might have used this product. His product generated about thirty to fifty thousand dollars a month and took about seven to ten hours a month of maintenance. The entire time I was working on my startup, he was living life. Like, I would watch his life on Facebook and be like, this is amazing. He traveled the world, he got married, he had kids. I'm like, he won. Like, that's like, like, good for him. Like, there's no-
7:08 Speaker 01 No. Again, this is the one-sided thing, is that we're like, great! Like, we're like, high-fiving that dream versus that there's this two-sided battle.
7:19 Speaker 00 Ninety-seven percent of the time I was watching that Facebook, I was like, am I the idiot? And like, the evidence was like-
7:27 Speaker 01 Quite possibly, Michael. Quite possibly.
7:29 Speaker 00 Yes. And he's still doing great, right? And so, like, this is really clear. It's like, building a great small business, software, small software-
7:37 Speaker 01 Even the term "small" bothers people. It's just non-venture-backed.
7:40 Speaker 00 Yeah, non-venture-backed.
7:41 Speaker 01 It could be big, non-venture-backed.
7:42 Speaker 00 You're making millions and millions of dollars.
7:44 Speaker 01 Yes.
7:44 Speaker 00 Totally fine. I think the other thing that's kind of maybe a dirty, kind of, underbelly here is who is spurning this argument? Like, who is, who's incentivized for this to be a big issue?
7:58 Speaker 01 Yeah, I think that this has been just like a topic that gets a lot of engagement online.
8:04 Speaker 00 Yeah.
8:05 Speaker 01 And so, you know, if you want to get people agitated about something, this is a pretty good topic. And then you can use it to promote- Stuff and so yeah, I'm not gonna name any names, but I can think of folks over the years.
8:18 Speaker 00 Yeah.
8:19 Speaker 01 That are like kind of built a following around encouraging people to do this and to the extent it is helpful and more people are improving their lives doing it, that's great.
8:30 Speaker 00 Yes.
8:30 Speaker 01 But there's a little bit of like creating a fake controversy.
8:34 Speaker 00 And then monetizing it.
8:36 Speaker 01 Little bit. And so maybe, maybe people may have this question watching this video. Michael, why should I apply to YC? Like, why should I do a venture? You guys just did a great job of explaining why not to do it. Well, why, why should I do venture?
8:49 Speaker 00 So I think that there are some businesses where you actually need money upfront.
8:57 Speaker 01 Yes.
8:58 Speaker 00 And if you need money upfront and you're building a software business, the venture capital industry can help you get money upfront. If you don't need it, don't take it.
9:08 Speaker 01 Yes.
9:08 Speaker 00 I think that what's so interesting about this is that there aren't many other good mechanisms. If you need millions of dollars or $10 million to get your company to break even.
9:21 Speaker 01 Yeah.
9:21 Speaker 00 There aren't other mechanisms in our economy to give that to you.
9:26 Speaker 01 Let's use an example of Google. I don't know, just because famous, one of the most viable companies in the world.
9:30 Speaker 00 Yeah.
9:30 Speaker 01 You know, I don't know how you could have bootstrapped that. And so again, maybe the audience is saying, well, I don't want to build Google. Great. No one is saying you have to build Google.
9:38 Speaker 00 But if Google wants to build Google.
9:40 Speaker 01 But if the founders of Google wanted to build Google.
9:42 Speaker 00 Yeah.
9:43 Speaker 01 It doesn't seem mathematically possible. There's no route they could have done it.
9:47 Speaker 00 No bank.
9:47 Speaker 01 Raising money. There's no loans they could have gotten to buy the servers and do the things they did.
9:51 Speaker 00 No, no. And so we should just be thinking about VC as enabling incremental entrepreneurship that wouldn't be around otherwise.
10:00 Speaker 01 Yep.
10:01 Speaker 00 Not as cannibalizing anything. Like it's just enabling that incremental founder. I think the other thing is you have to remember if you want to raise a lot of money. But you can't explain to the investor why you might IPO and give them a lot of money back. Then you you can't raise VC. We want to be explicit, like it is a business transaction. It's not a faith transaction.
10:28 Speaker 01 Correct.
10:28 Speaker 00 It is it is I give you money now. You give me a lot more money later, or at least you try really hard to. And if you can try really hard, but the result can't be a lot of money. I shouldn't logically give you money now, not because I don't like you or because
10:46 Speaker 01 Yeah.
10:46 Speaker 00 you're not a great person or these users you're trying to serve aren't great. It's just because it's not a good business transaction. It's literally nothing personal. And I think sometimes founders kind of are very confused when VCs say no.
10:59 Speaker 01 Well, it's because, again, if we're trying to stoke outrage.
11:04 Speaker 00 Let's let's stoke some outrage.
11:05 Speaker 01 You point at something silly that raised a lot of money.
11:09 Speaker 00 Yes.
11:10 Speaker 01 The most extreme silly thing in the world.
11:13 Speaker 00 You always pointed you, Sero.
11:15 Speaker 01 I mean, one, right? Or we were whatever, like you point to something that is like on face silly.
11:21 Speaker 00 Yes.
11:22 Speaker 01 And then you say, well, if they funded that, why won't they fund my social network for dogs?
11:28 Speaker 00 Yes.
11:29 Speaker 01 And so it causes a lot of emotions.
11:31 Speaker 00 Yeah.
11:33 Speaker 01 And I understand, I relate, but it's don't fall for the rage pill. Don't let yourself get enraged by obvious engagement bait.
11:42 Speaker 00 Yes.
11:42 Speaker 01 Which is to cherry pick the craziest, silliest thing.
11:45 Speaker 00 Yes.
11:45 Speaker 01 And use that to get all worked up and take that personally, like that somehow hurt you. Like, like you were hurt by that thing over there happening.
11:55 Speaker 00 Well, and what's so funny is like you are actually included on the real truth, real truth, which is that they screwed up.
12:02 Speaker 01 Someone messed up.
12:04 Speaker 00 Like, you're right, they shouldn't have gotten that money. Like you, you, you nailed it. That person who funded that company is an idiot. And you're exactly right. But like, hey, that doesn't mean we should.
12:20 Speaker 01 All bets are off.
12:20 Speaker 00 Yeah.
12:21 Speaker 01 It's like, okay, this dumb thing happened.
12:23 Speaker 00 Therefore.
12:24 Speaker 01 Up is down, like, like, forget everything we know.
12:26 Speaker 00 Yes.
12:27 Speaker 01 Those are those, that doesn't follow. That logic doesn't make sense.
12:30 Speaker 00 That person should probably be spoken to about their investment strategy. So, yeah, so just understand that game. And I have to be honest, like. I like games like this. Like, I don't like games where you have to like convince people to like you or to align with your views. Those are games that are way harder to play. I like games where it's like, hey, if I want to serve this customer and you can be a good legal partner to me, and I give you money and you give me legal services, you can be a good funding partner for me. I give you a check at my company, you give me cash, right? If you can be a good partner to me, a simple to understand partner to me, so that I can spend my time working with my customer? That's what I want. Yeah.
13:15 Speaker 00 The customer's complicated enough.
13:19 Speaker 00 Jesus. Customer is complicated enough. I like the idea that the money people are like, so if I give you this money, maybe give me a lot of money back? Yes? Yes? Okay. Okay, we're good. Okay, we're good. All right. End of conversation. I give you money, you don't give me any money back? No. No good. Come back when I... Come back when this is out of my way. Hopefully, this helps clear up the debate, but I secretly hope this like, I don't know, like, doesn't at all, because this is like so silly. I hope we get somehow flame word for this. Anyways. Great. Good show. Love it. Okay, sounds good. Thanks.
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