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Founders! Do. Not. Raise. Venture. Capital

I love the book Rich Dad Poor Dad. It was my fav growing up. Since then, I've founded several startups, was employee #3 at a $65m VC firm in SF, and realized that there is a similar phenomenon to what Robert Kiyosaki is talking about in Rich Dad Poor Dad currently occurring in Silicon Valley.

Let's tastefully call this phenomenon: Rich Founder Poor Founder.

The point of entrepreneurship is freedom. Yes it’s to build cool shit and innovate and all that, but at the end of the day the sort of person who becomes an entrepreneur is usually doing it because they want freedom to control their day and work on the things they care about.

A lot of people go out and start their first business and try to make it a venture backed startup. That’s the wrong move. That’s like going to the gym and trying to bench 250 lbs on day one. It’s not that you can’t build up to that, it’s just not the right move today. I think the right move is to start a business that can make you $100k+ per year in profit. It doesn’t matter if it can’t scale past that, it’s about building that foundation to give you the freedom to try new things. Fail at those new things and it doesn’t matter as you have that financial foundation. It could be something as simple as a consulting or a services business, or a digital product like a course, newsletter or subscription podcast. Anything that is high margin, simple and enabled by the internet.

VC’s may shit on lifestyle businesses but at the end of the day they collect a 2% yearly management fee regardless of their success and typically have a great lifestyle (once their fund size is above $100m AUM at least).

Ask yourself what’s an easier path to wealth and freedom?

Path 1: Venture backed startup

90% chance of $0.

Small personal income until scale, IPO or liquidity event.

Massive dilution. Most founders end up owning 5%-20%. $500m market cap = $25m-$100m for founder(s).

OR

Path 2: Lifestyle business

50% - 75% chance of success.

Pay yourself whatever you want out of profits over time.

If you can bootstrap your way to $300k/yr in profit and invest half of that ($150k/yr) at 10%/yr for 20 years = $9.6m + $150k/yr salary to enjoy your life with your family and friends. After 20 years, you can choose to sell that business or automate it and let it ride but with $9.6m invested in a conservative portfolio paying out 5% annually = $480k/year in interest or $40k/mo for you to live off without ever touching the principal nor sacrificing quality of life.

The definition of rich is having passive income that’s greater than your burn. I’m pretty sure we can all comfortably live off $40k/mo without ever having to leave the house.

But wait this isn’t a fair analysis as venture backed startups typically reach scale or a liquidity event in 10 years and you did 20 years for the lifestyle business. Fair, I’m sure after 10 years most of us can comfortably live off $20k ish/mo without ever having to work or touch the principal investment.

Most entrepreneurs start with one goal in mind: freedom. If you value freedom, you should have one goal for your first company, and that’s to build a lifestyle business that can produce $100k+/yr of personal income. It can be boring and it doesn’t have to scale. It sets yourself up for the foreseeable future and then you can afford to take big swings. Forget startups. Forget venture capital. Build something that gets you in the game and makes you a living first.‍

I think VCs may underestimate the extent to which mainstream entrepreneurship is a key input to outliers and moonshots. So many successful billionaire founders had a “never worry about rent again” moment via an exit in a much more boring business before swinging for a home run.

Elon Musk — before sending rockets into space and revolutionizing the auto-industry, Elon Musk was broke building Zip2 (online city guides for newspapers) before he netted $22m on the sale. Source

Patrick & John Collison — built Auctimatic: auction management software for small Ebay sellers, and sold it for $5m before going on to found Stripe, valued at $36b. Source

Mark Cuban — Before building and selling Broadcast.com for $5.7b and buying the Dallas Mavericks, Mark Cuban built a services business called MicroSolutions and sold it for $6m. Source

Mike Bloomberg — now worth $60b, Mike Bloomberg had a nice “never think about rent again” exit at 39 when Salomon was acquired by Phibro in 1981; he received $10 million. Bloomberg said “The Salomon Brothers did me the two greatest favours in my life. They hired me and they fired me.” Source

Daniel Ek — Spotify isn’t Ek’s first success. Daniel Ek became a self-made millionaire at age 23, before even putting a single thought into Spotify. At 23, Daniel Ek “retired” after he sold his online marketing company Advertigo to Swedish digital marketing firm TradeDoubler in a deal worth $1.25 million.

Alex Tew — started the Million Dollar Homepage to raise money for his university education. He sold 1 million pixels on a 1000 x 1000 pixel grid on his website for $1 per pixel. He ended up making $1,037,100 USD before founding the billion dollar meditation app, Calm.

Austin Allred — co-authored the growth hacking textbook Secret Sauce, which became a best-seller and provided him the personal seed money to build Lambda School, valued over $150m.

And countless others: Ev Williams (Blogger), Pincus (freeloader, support .com, tribe), Travis Kalanick (Red Swoosh), Stewart Butterfield (Flickr), Jason Fried & DHH (37 Signals services business) etc.

All of these entrepreneurs built more of a lifestyle business or had a smaller liquidity event before they built a rocket (figuratively and literally for Elon). There is no greater security than knowing that no matter what risks you take, you have a business or enough cash in the bank to pay for your livelihood.

If you start by building a lifestyle business it will force you to build a product or offer a service that customers actually want. It forces you to create a monetization plan and it forces you to build a real business. By starting a lifestyle business it forces you to create something you’re passionate about and build an actual business that will actually help attract VC if that’s the path you choose to go down.

Renowned value investor and Warren Buffett mentor, Ben Graham, once said: “In the short-run, the stock market is a voting machine. But in the long-run, it is a weighing machine.”

AKA in the short term the market may value hype and narrative, but in the long term it always values real traction, revenue, earnings and margins.

We’re seeing this play out in the venture market today. In the last few years you may have heard startups raising at eyebrow lifting valuations and hiring large masses of employees. But behind the curtain their P&L is fucked! They have little to fuck all for revenue and huge expenses.

Founders often get attached to valuations and forget that when they sell the business, the weighing machine is the only thing that matters. The buyer has to have a way to pay themselves back, either via earnings, a future sale or strategic synergies.

Your venture valuation is irrelevant. Venture valuations aren’t backed by fundamentals and their funds have been compared to a ponzi scheme. Build a lifestyle business where results, traction, revenue, margins and earnings are the things that matter because at the end of the day, the numbers have to work with the weighing machine.

Pro tip: If you’re bootstrapping, you can still take advantage of venture capital by using all the VC subsidized software available on the market.

The internet is the greatest leveler of access to entrepreneurship society has ever seen. There is far too much focus on raising venture capital and creating 100–1000x outcomes and not nearly enough on leveraging the internet to empower entrepreneurs to build profitable and sustainable software-enabled lifestyle businesses.

TL;DR 'Rich Founder' is someone who creates a sustainable 'lifestyle business' with a high probability of success. 'Poor Founder' is someone who thinks they need to raise venture capital, a fancy office, big staff and a bunch of resources to succeed. Rich Founder has a probability of success and enjoys his/her life. Poor Founder is miserable and might as well go to a Casino and put it all down on Red 5.

I started a free community and resource hub to help more people become 'Rich Founders'.

  1. 5

    Great post!

    This makes me wonder what innovations the society could see if everyone was already "set for life" and they didn't have to care about failures or paying the rent. Yes, many people will just slack, but it will also enable a lot more creative people to work on things they enjoy and find valuable.

    1. 2

      Exactly!! The 3 phases of serial entrepreneurship seem to be:

      1. Explorers.
      2. Builders.
      3. Those working in the world of atoms.

      If we can help people progress through this ladder and have more people working in the world of atoms I can't even imagine the good that would come to society

    2. 1

      Yes, I'm a huge proponent of universal basic income just because of this fact, that we'll get more innovations in society. Think of how many Einsteins there are on the streets who can't reach their full potential due to being poor.

  2. 5

    Great stuff. I think the focus on VC has come about because there are people, who may have a good idea, that cannot build it out without hiring other people.

    A dev who cannot do legal or marketing. A marketing guy who cannot do dev, etc.

    From media and TV many people have learned a false representation of the process: have a good idea -> then get funded -> then finally build company. Most IH know the falsity behind this :)

    In reality the process is: have idea-> build product -> share it -> have growth -> decide to get funded or not.

    My favorite question "Why do you think your company even needs VC funding?" 99% of all companies will never need it. They just do not have the growth dynamics that makes sense with VC, or they grow out of the VC phase in terms of revenue before the risk reward ratio (they become normal profitable companies).

    What does this mean? VCs will need to look outside the 1% of VC appropriate companies for "good deals". They need to invest the money in their funds in a certain amount of time!

    1. 3

      I understand that when you were Google you needed a lot of cash to build an infrastructure, and speed of execution was key if you saw you needed to be in the winner-takes-all position. Most of the time, building a SaaS costs nothing now :

      1. Building it costs nothing. Anyone can easily learn to code nowadays (or even do it with no-code tools)
      2. Distributing it costs nothing. You don't have to burn CDs or have your own infrastructure. You can host it on Netlify or use a free-tier on AWS for 0$
      3. Marketing ans sales costs almost nothing. You can create content and be found, you don't need sales up to a certain price. You can have tremendous growth with 0$ spent on sales and marketing.

      In the "decide to get funded" phase, I think the only reason for me should be "This thing I built is growing so fast I can't support the costs by myself anymore" :D

    2. 2

      Thanks for the kind words! :)

      100% the ideal process should be idea -> build -> share -> feedback -> iterate -> grow and then when VCs are reaching out you'll have a decision to make.

      I'm not sure where your referencing that question from as it's not in the post I wrote? Venture capital investing faces power laws and somewhat challenging venture economics unless you're tapped into the top of the ecosystem. It's never been easier to raise a pre-seed/seed round but I think it's never been harder to raise an A. Or at least that's the definitive trend

      1. 1

        Excellent post, thank you so much for sharing this.

        I humbly submit that "idea -> build -> share" is not a great way to start product development. Finding the customer you want to serve, and researching their needs should really come before "idea".

        Maybe that's obvious so you didn't mention it, but to a lot of people on here it is not obvious at all. I myself have started countless projects with "idea -> build" and no idea of what the customer wants. Trying to stop making this mistake.

  3. 2

    Amazing post!

    I’ve always grappled with seeing my peers joining incubators and the likes competing for VC money when the idea was valid and could very easily have been bootstrapped.

    I feel like a lot of people in the communities i was involved with were enthralled with this false Silicon Valley mentality of investment = value... the more firms you had behind you and the more board members and partners on your website the more credible and likely to succeed you were.
    Of course that’s so very misguided and I’ve found that those same people are now off the map or are recovering from all the (extra) fatigue from a failed project. All the time wasted on meetings and “work” with VCs etc. It was a crash and burn situation waiting to happen.

    Meanwhile, everyone else who was quietly bootstrapped and building on years of skills and real customer acquisition are now running profitable businesses and it’s nice to see. It’s nice to see because they were once scoffed at or seen as “just working on some side project” as if it was a childish hobby!

    Lifestyle brands are what get you closer to your goal you start off crawling not running, otherwise you fall and it’s harder to jump into a run if you can’t crawl back up.

    Nothing trumps hard work, leveraging your own funds and of course, control!

    1. 1

      100% agree! Accelerators absolutely help I just don't like how the essentially force you to go down the VC path. Some of chose to only raise a single round to help get things off the ground and then keep their cap table tidy (Zapier). I'm hard at work building something akin to an accelerator, although it's more of an amplifier, where you pitch investors AND customers. You'll get eyeballs on your product and early customers + get the attention of investors from across the financing spectrum, not just venture capital (i.e. venture debt, structured credit etc) and have the choice of raising dilutive or non-dilutive capital, or none at all. If you're interested in being in the first cohort, likely beginning of Oct, shoot me an email: [email protected]

      1. 1

        That sounds really good! I’ll definitely shoot you an email when I have something together 👌

  4. 2

    We see that success stories are all the same model, and the stories of failure are all different but no one cares.

    People always exaggerated the influence of venture capital in the success story, and weakened the influence of the process of "the founders go from idea to market verification".

  5. 2

    Excellent post, thank you for sharing and taking the time to write it. I think the problem is that the media creates the image that the only way to be a rich founder is to raise lots of money from VC's. Your piece validates what I have been thinking for the last couple of months.

    1. 1

      Thank you! Best of luck growing papertrail!

  6. 2

    Great post, thanks for sharing.

  7. 2

    Great read which exactly represents what I think about the VC world.

  8. 2

    Superb post👌👌🤘🤘

  9. 2

    Love this, thanks for sharing James. I'm actually reading Rich Dad, Poor Dad right now.
    I'm a first-time founder here so everything you mentioned in this post is extremely relatable. I've been bootstrapping my first startup since Feb of last year and finally launched my MVP this year during COVID. Never been a better time to launch, right?

    One of the biggest reasons why I started my company is so that I could be my own boss. Who knew that being a boss meant being a CEO (Chief Everything Officer). I've been learning so much about the startup industry and juggling so many tasks since then from legal, marketing, UI designing, web designing, content creation, learning the tech, researching the competition, engaging with my target market, pitching to investors, and so much more. And yet -- I feel like I've barely scratched the surface.

    At the end of the day, as you said, entrepreneurs should really focus on building a sustainable business that speaks for itself. Even if VC funding is in your sights, no VC will ever fund you if you can't generate traction and revenue on your own first. The internet has been such a blessing because I'm a non-technical founder with a background in aviation and yet I'm building a software company in the fintech space! I can't lie, I've been beating myself up for a while from all the rejections I've gotten since last year regarding my app. It's funny though, because every time I speak to anyone from my target audience, they all validate the idea almost immediately. I realized over time that every rejection should just be fuel for motivation for me to continue growing.

    To add to your post, I think it's also important to push yourself while you're building your business but never compare yourself to others. Do things at your own pace. As long as you're putting time into your business, the results will come. For some, it comes fast, for others it comes slower. The important thing is to not give up on it.

    PS. Joined GradSchool :)

    1. 1

      Wow this is so awesome to hear Tony! 100% agree on doing things at your own pace. Sounds like you have a really diverse background which should help out being the Chief Everything Officer haha. I was at a fintech focused VC in SF so I should be able to help you out with your fintech product. Excited to meet you on our call Thursday!! DM me anytime if you ever have any questions or if there is ever anything I can do to help you out! Thanks so much for joining :)

  10. 1

    I very much agree with this.
    There are loads of businesses that are bootstrapped, and generate a shitload of cash for their owner. We know it is possible to have a huge business without raising VC.

    I choose to raise money with my first startup, but will not do it again.

    I recently wrote an article about it with some other arguments in favor of bootstrapping: https://www.romainsimon.net/bootstrapping-vs-venture-capital

    1. Building a successful SaaS does not required money anymore (you can build it, distribute it, market it, and sell it for almost 0$)
    2. You loose some control, and thus your freedom
    3. Raising money is for spending it. This means you will have cashburn. And cashburn is not sustainable in the long run. It's better to use the money you have.
    1. 2

      Awesome read Romain! Sounds like you learned a lot of the same lessons with Datananas

  11. 1

    Hey James - just curious as to how the Community website differs from IH. Thank you!

    1. 1

      You can see how here: https://www.gradschool.co/

      We're a bit more hands on inside our community than IH although we can only dream of building a community as authentic and engaged as IH. Think of it like a global EIR community or like a version of ODF for those outside Silicon Valley or those who don't want to be pigeonholed into raising VC.
      We do office hours, expert-led workshops, offer access to our full course catalog, offer regular 1:1 introductions to other GradSchool members and the broader community, provide members with some awesome deals and discounts etc.

        1. 1

          EIR is entrepreneur in residence
          ODF is the On Deck Fellowship (a paid, equity free version of Y Combinator)

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