💸 Fundraising

When to raise VC vs Bootstrap

Wade Foster

Module Description:
Zapier CEO/Co-founder and Ubiquity Extended Team member Wade Foster shares how he grew Zapier into a multi-billion dollar company having raised just $1.2 million of venture capital. He provides a simple framework for when to raise VC vs. bootstrap

Full Transcript:
Welcome everyone to our Ubiquity University session on When Does it Make Sense to Raise Venture Capital? Ubiquity Ventures is a seed stage venture capital firm investing in software beyond the screen, that means we back seed stage founders who are moving software beyond the screens of computers and phones into the real physical world, often using smart hardware and machine learning. In today's session, we're very lucky to have Zapier founder and CEO, Wade Foster. Wade's someone I've known for a little over 10 years when I was lucky enough to be part of his seed round many, many years ago. Today we'll dive into sort of the pros and cons and the conditions to consider when it does make sense to raise venture capital. Wade has interestingly raised a very small amount of venture capital along the way and been very thoughtful about this process. So Wade, welcome to our module, and if it's okay with you, let's just dive right in. You had an interesting framework as to think about when it makes sense to raise venture capital versus not raise.

Yeah, I think it's an important topic because a lot of the times, raising money or not raising money becomes like a religious war. And you're either on one side where it's like, you know, you must bootstrap all venture capital is evil, or you, only way to build a great business is through venture capital. And I find that the religious war doesn't really do founders all that much service, because it's really just not, neither side is really correct. And the framework I usually like to break this down is, I think there's sort of like two things to think about. One is just your own personal goals and ambitions and what do you want for the company? And it's okay for these to be, you know, specific to yourself. It's not right or wrong, it's just what do you want? Like, do you want to build a company that you know, goes through the, you know, funding's life cycles and is gunning for an IPO or gunning for a big exit and like, that's the path you want to go down. Do you wanna like do it bootstrap, have more control, have more of that. Like you can sort of decide just based on your own personal preferences. Then the other side is the stuff that is more specific to the business that you're in. So independent of whether you want to do it or not, you have to think through things like, do we have the right skill sets on the team? What does the customer acquisition cost look like? What does the unit economics of the business look like? Do I have fixed costs that are associated with these things? And so there's a more academic side of this as well too that dictates how useful is venture capital going to be for accelerating your business versus not.

So let's take those one at a time. So the first piece about your own personal motivations, I find it's often tainted a little bit, you know, if you wanna build a big business, do you wanna change the world, versus do you, I'm using all these wrong words on purpose, by the way. Versus do you wanna lifestyle business, where you want to like take it easy. And then that is such a false dichotomy, but I'm wondering how you dealt with that. Now, rewinding, I think it was 2012 you went, you did go through a Y Combinator, which is a very specific path, but how did you think about that, how did you approach that? How did you brush off the pressure to raise venture capital versus pursue your own personal outcomes?

Yeah, well you certainly hear those, that commentary from, you know, like, oh, this is a lifestyle business or a non-serious business. You know, if you go the bootstrap route from the other side, sort of trying to get you to like, you know, da da da a particular way. The way we always looked at it though was, more the, in the second camp, which is like, what does Zapier need to grow? And for us, there was a couple factors that it didn't eliminate our need for funding, we did take some funding, we felt that it was useful to have a little bit in the bank. But it did mean that we could run leaner than say the average company at that early stage. One was, we had three founders that were all fairly technical. And so any early job that you might need in a company, the founding team had the skillset to do, which means we didn't have to hire people. And hiring people is one of the biggest expenses that an early stage startup has. And so we were able to run a lot leaner because of the skillset embedded in that team. Second thing was we had already figured out how to drive almost zero customer acquisition costs. We had a really powerful organic search engine, which meant that as soon as we acquired a customer, they were almost profitable on day one, we were incurring these like really big fixed costs to try and go acquire customers. And then the third thing that a lot of folks do, if you're selling like hardware or you know, these days if you're doing certain AI related things, like you might have these big upfront capital costs that require you to spend that money before you actually have something in market. We were just selling pure software, and so we didn't have these like big upfront capital costs where we needed to go get some of that stuff in advance. And so you could sort of look at these things and say, you know, we actually have a trajectory to go really quick to do it with the existing team, and without incurring a lot of spin. And so it meant that our need for venture capital was maybe lower than a company who maybe did have to check some of those boxes to get there. And so that's sort of how we were like, how it sort of made sense to us. And then we would just tune out the, you know, sort of like the religious wars where it's like, oh, you, you know, if you're, you know, the bootstrappers are all like, this is the only, this is the pure way to build a business, and the other side is like, this is the only way you can build a business. You have to sort of realize like everyone's sort of talking up what's best for them based on their own points of view. And you sort of have to extract the bits that are relevant to yourself and then say like, okay, they don't actually understand this situation about my business. My business works in X, Y, Z ways, so that bit of advice applies, that bit of advice doesn't apply.

So I think if you're open to it, I think it'd be helpful for the audience here to hear just how striking your capital journey was. I think we met in summer of 2012, and when I was at Bessemer we led your seed round. And can you remind folks how much that was, and how far you got without raising any further capital?

Yeah, so we had started the company in September, 2011, and this is in Columbia, Missouri, very low cost of living place to be. We had kept our day jobs, so we're pulling in income. We're just outta college, so no lifestyle inflation, right? So you can start to see like the dynamics that allowed us to do this the way we were doing it. And the three of us put a couple thousand bucks in a piece. So got to about, we had $10,000 of just sort of like founder sort of like put into the business to just spend on hosting and some like, you know, software services that you need in the early days. Then we ran that for about six months. We went through YC. YC does, you know, at the time it was a 20K, I think an equity investment alongside another 120K in convertible notes. We moved to California, so that increases the lifestyle cost quite a bit, 'cause you have to afford to live in California. So that was the big sort of like increase in expense alongside just sort of like hosting and stuff like that is gradually stepping up just as like we're getting more users and things like that. And then we went through YC, and by the time we get to YC, we had launched the business, we are making about 6K in MRR. So you know, we're making a little bit of money, but enough to afford for three people to live in California. It's like, ooh, that's a little bit of a stretch. And we felt like we wanted a little bit more of a cushion than the sort of 120K we sort of had in the bank, and that's where we went to do the seed round. And the seed round ended up being about 1.2 million in total. And then on the other side of that, we just made a dedicated effort to say, we're just gonna treat this like it's the last money we ever get. And so we weren't afraid to like burn into it a little, but we didn't wanna get way out of our skis, and you know, we were able to do that, because again, we had all the skillsets on the founding team to not do that. So we didn't just run away and go hire a bunch of folks that we didn't necessarily need. We were very like specific about hiring, and so, you know, we hired someone in September, and then I think another person again in January, and then another person again in maybe like March or April. So by the end of that first year, we'd only added three people to the team. So we went from a team of three to six, so we doubled the team size, but the amount of spend was pretty small. And you know, as we're adding those folks, we're also growing the revenue along the way. And so it's not like those hires were eating into the balance sheet, you know, it was being funded a little bit by revenue, and we spent a little ahead of where we were going. But the biggest amount we ever lost in a given month, I think was around 20K was the highest burn month we'd ever had, which is, you know, quaint compared to most venture capital companies, but to bootstrap company probably sounds insane.

Yeah, it's funny, even, even now you're saying the most money we ever lost. Almost every other company at the seed stage talks about spending money every month. And you're talking about losing money with that negative connotation. But if I remember right, you were 10% monthly growth every month for like 50 months or something like that.

Yeah, for a really long time, yeah.

Which I think it's great that you look at venture capital as like an accelerant as opposed to sort of the base foundation of the business. When does venture capital fit? I mean, you eventually, and you went many, many years before even talking to other venture capitalists again, when do you think venture capital does fit in the second part of our conversation? You know, part of it's the personal ambitions, and the kind of business and tuning out the noise, but when, at what point in a company's life does it make sense to, what are the conditions you think?

Yeah, I think when you sort of have a, you know, a clear path for what you wanna spend it on, like that's probably the time to be thinking about it. You know, you'll usually hear it pop up in a few connotations. One is, you could go faster with the money. And so you sort of have to be honest with yourself about can I, or am I actually just gonna take the money and sit on it? Like, am I, like with the best thing I do if like buy T-bills? And it's like, well you probably shouldn't raise that much if all you're gonna do is go buy T-bills. But you know, the situations that do make sense is like, oh, I have a customer acquisition sort of thing that's working, but I need money to fuel it. So maybe you're like an enterprise SaaS company, and it costs money to hire sales reps ahead of when you get that stuff in. And so you can start to do the spreadsheet math and say, okay, I can afford to hire these three folks two, three, or four months earlier if I have this stuff on the balance sheet, and that's gonna help me grow. And maybe we're in a bit of a arms race against some like competitors, like there's not really any key network effects in the business, and so it is more of an arms race to get that done, and so you might go that route. Maybe you do have these big fixed infrastructure costs where it's like we can't actually get our product to market without these things. And so we need to go think about that. You know, you might be in a situation where your core business has grown really well, but you have something that's a little more speculative that you want to go chase after, and you sort of have the right setup to go tackle it, which this would be later in the lifecycle for many of the folks wishing this, but, you might say, I actually wanna fund this, not for my balance sheet, I wanna fund it from something that's a little more speculative. And so these can all be reasons to go talk to venture. And then even later in your journey, you might get in a situation where you don't necessarily wanna become a public company, but you know, you've got a reason to do secondary, which is, you know, you want to cash out maybe early investors or maybe the founders wanna "take a little money off the table" to sort of de-risk some things. And those can all be situations when it's useful to go talk to a venture capitalist and say, Hey, maybe there's a good partnership opportunity here.

Yeah, so I like what you're saying, 'cause it flies in the face of venture capital as validation or, we don't hear this much anymore in 2023, but in 2021 I raised money so I can become a unicorn. Like this notion that the capital anoints you in some way, or makes something happen is completely the opposite of, I'm freight train, I'm on a mission, and I can get there a bit faster, or I can try a second mission at the same time with venture capital, it's a bit more, the word accelerant comes to mind, you know, as opposed to making something possible versus accelerant. How does that fit with though, with, you know, where ubiquity focuses, preseed seed, you know, getting that first product going. I think you had those unique elements you mentioned, Missouri, and the SEO, and things like that, you know, do you have any thoughts on that, like when it makes sense to raise preseed seed capital if you don't have those kind of attributes to your business?

Yeah, you know, I think there can be a lot of situations, right? It could be, you know, we had to keep our day jobs for a while, like, and we're in central Missouri, it's like if we wanted to actually go full-time on this, and in hindsight maybe we should have, it could have been useful to get, you know, a 100K or 200K check like on day one to go full-time right away. That wasn't really an option to us in the middle of the country in 2011. So that could have been useful. You know, if you have, you know, we were college kids effectively, or just outta college kids, and so we didn't have that lifestyle creep. But if you've got a spouse and kids and other like responsibilities to care for, and you need somebody to sort of help you, that can be a reason to go after it. You know, if you don't have all the skill sets on the founding team, like maybe you have a specific specialized thing where it's like, we've got a lot of the pieces in the founding team, but we're missing a really key element, and so we actually do have to go hire somebody. And you know, they're maybe not a co-founder, but they're a first employee, and so they're gonna get a, better, bigger paycheck than what a founder would get. And you can offset that some with equity of course, but you're maybe making a justification of like, are they a founder versus a first employee? And they're sort of in that like gray area where it's like, you sort of have to make a judgment call on one or the other. But all these things can be reasons where you wanna take that first check and get someone as a seed partner that's gonna help you sort of get to the next level. Probably the last thing that's worth talking through is where are you getting the first check from? You know, a lot of seed folks, they don't, they do it for different reasons than late stage folks. Late stage folks are generally thinking about like, it's a financing event, and they're really there sort of calculating what the money earned looks like. But you know, folks like Ubiquity and, you know, you mentioned YC that we went through, but again, they're usually offering something that is something special that's maybe rare to get from other sort of venture capital sort of arms. And so maybe you want access to something that that group of people has that's is tough for you to get access to just on your own. And so all of those things can be reasons that you might wanna go pursue this path.

Perfect. Well I appreciate that Wade. This has been really, really helpful and we appreciate your help on the extended team. Some of the Ubiquity CEOs may continue to reach out to you for help. So this has been our module for Ubiquity University on When Does it Make Sense to Raise Venture Capital? We would love to hear from you, if you have ideas you wanna talk about, you can reach us, fill out a very short, 60-second form at pitch.ubiquity.vc.

15 minutes
Startup Stage:
Pre-seed, Seed, Series A
Upload Date: