Y Combinator Startup Podcast - Should Your Startup Bootstrap or Raise Venture Capital? | Dalton & Michael Podcast

Episode Date: February 13, 2024

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. Apply to Y Combinator: https://yc.link/DandM-apply Work at a Startup: https://yc.link/DandM-jobs

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 quite possibly, Michael. Quite possibly. This is Dalton Plus Michael.

And today we're talking about should you bootstrap or should you start a VC-backed company? This is like a confusingly controversial topic. Yeah. I'm not really sure why it's controversial. Well, it's one of those sorts. of one-sided things where a lot of people don't care about the topic versus people that care a lot. Yeah. Does that make sense?

And so I think there's a lot of people that strongly identify and are really excited about bootstrapping. Yeah. That are very, like, fired up about this. Yeah. And there's a lot of people that, this just isn't a topic that comes up much. 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. Yeah, 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. Yes. Well, I think the only thing is confusing is a side note is a lot of the stuff on Shark Tank. Oh, yeah.

I would argue is not venture capital backable. You know, a lot of the stuff that I see on the television show, 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 reality. 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. Correct.

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. Yep. So. Yeah, let's talk about them. Yeah. I think what's really going on is I think if you looked at how many businesses are started every year.

Yes. What percentage of those are venture funded? Cool. We could ask chat, GPT. But I would guess definitely. definitely single digits, if not less than 1%. And so if you just look at businesses that are started in the world, it is like a weird outlier, freak occurrence that is a VC-funded business.

But I think if you're just consuming content, you're watching media, you're watching YouTube, Twitter, you don't realize that. Yeah. 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. Yes. 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. Yeah. And so you shouldn't do it. The founder and the investor. No one's going to win. And the user. No one wins. No one wins.

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 for something that has like no chance of growing like that. It just doesn't make sense for anybody, okay? 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 VCAC company

or a non-VC PAC company. I don't think this is an actual debate. Yeah, I think that like starting a VC back company really hard, not the best. way to get rich. Not the best way. Relatively small number. Like the numbers are not huge. 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 make the NBA. Yeah, that's simple, right? Yeah. It's like 450 guys. I'll just be one of those guys and then game on, right? Right? They recruit from all around the world. I live in the world. Yeah, very straightforward. I like that. Yeah. No. So this is not. 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. That's right. Real estate investing, stock market investing, being lawyers, being

doctors. Again, go look up the numbers. Bankers, investors. Yeah, there's so many people, right? So this is not the only one we 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 VCU backed company. Like if you don't want to do it, don't do it. Correct. It's also a decision that you can revisit. if you don't want to start a VC back company now, but like your bootstrap product starts doing well and you want to do it in the future, great, you can. There's no one who is going to say no.

You said you were bootstrapped on Twitter. I will not give me money. Like, no, I'll get another truth. Empirically, none of the trillion dollar software companies are bootstrapped with no VC dollars ever. Yeah. So if someone's telling you, you can make a trillion dollar company, maybe you can.

Just no one's ever done it. I'll say fact-based. And again, like to look at the numbers, even if you look at software companies, 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 go into VC-backed companies? I think that, right? Because dollars are going into. to Amazon and eBay and like all that kind of stuff. Right? Yes.

And by the way, I want to be clear, neither of us are saying you should want to make one of those companies. Yes. Like, or you should want... That should come up from inside of you. Exactly. Not from YouTube. No.

No. Right? Like, I actually kind of try to convince people not doing it. It is because if you need to be talked into it, that's a bad side. So I like to talk about white size. Yeah. So I think the other thing is that. But 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 VC back that you haven't won. You won.

Yep. Like I had a friend who made one of these companies. You might have used his product. His product generated about $30,000 to $50,000 a month and took about seven to 10 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. 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. Ninety-seven percent of the time I was watching that Facebook, I was like, am I the idiot? And like, the evidence was like, Quite possibly, Michael. Quite possibly. 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 business.

Even the term small bothers people. It's just non-ventureback. Yeah, non-ventureback. It could be big and non-ringer-back. You're making millions and millions of dollars. Yes, totally fun. I think the other thing that's kind of maybe a dirty kind of underbelly here is who is spurting this argument?

Like, who is? Who's incentivized for this to be a big issue? Yeah, I think that this has been just like a topic that gets a lot of engagement online. Yeah. 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 going to name any names, but I can think of folks over the years 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.

Yes. But there's a little bit of like creating a fake controversy and then monetizing it. A little bit. And so 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 should I do venture?

So I think that there are some businesses where you actually need. money up front. Yes. And if you need money up front and you're building a software business, the venture capital industry can help you get money up front. If you don't need it, don't take it. Yes. 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, there aren't other mechanisms in our economy to give that to you. Let's use the example of Google. I don't know, just because famous, one of the most Bible companies in the world, 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. No one is saying you have to build Google. But if Google wants to build Google. But if the founders of Google wanted to build Google, it doesn't seem mathematically possible. There's no route they could have done it without praising money. There's no loans they could have gotten to buy the servers and do the things they did. No, no.

And so we should just be thinking about VC as enabling incremental entrepreneurship that wouldn't be around otherwise. Yep. 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 can't raise VC. We want to be explicit.

Like, it is a business transaction. It's not a faith transaction. Correct. 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 you're not a great person or these users you're trying to serve are 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. Well, it's because, again, if we're trying to stoke outrage, let's stoke some outrage. You point at something silly that raised a lot of money. Yes. The most extreme silly thing in the world. No, no, no, no.

You always pointed you Serro. Not me one. Right? Or we were, whatever. You pointed it. something that is like on face silly. And then you say, well, if they funded that, why won't they fund my social network for dogs? Yes. And so it causes a lot of emotions. Yeah. 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. Yes. Which is to cherry pick the craziest silliest thing. Yes. And use that to get all worked up. And take that personally, like that somehow hurt you. Like, you were hurt by that thing over there happening. Well, and what's so funny is, like, you are actually included on the real truth,

real truth, which is that they screwed up. Someone best out. Like, you're right. They shouldn't have gotten there. That money. Like, you nailed it. That person who funded that company is an idiot. And you're exactly right.

But, like, hey, that doesn't know. mean we should all bets are off yeah it's like okay this dumb thing happened therefore up is down black like like forget everything we know yes those those those that doesn't follow that logic doesn't make sense that person should probably be spoken to about their investment strategy so yes 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 of 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. The customer's complicated enough. I thought you. Jesus. A 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. 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. I don't know, like, doesn't at all. Because this is like so silly. I hope we get somehow a flaming word for this.

Anyways, great. Good shot. Love it. Okay, sounds good. Thanks.