Here’s what’s covered on this week’s episode:

• Phuong Ireland joins us to talk about bootstrapping startups. Bootstrapping means building and growing your business without external funding, relying on personal savings, revenue, or loans. It offers benefits like maintaining full ownership, having control over the company's direction, and focusing on profitability. It also makes you more attractive for future funding. However, bootstrapping comes with risks like limited funds and lack of access to mentorship and connections.
• Mike Rogers shares his insights on the current state of Series C funding. Series C funding peaked in 2021, but 2022 showed a decline and 2023 is showing signs of following suit. This is due to a flight to quality, with investors being highly selective in their investments and demanding best in class metrics and profitability. On the flip side, many companies meeting these criteria choose not to raise funds in the current market. This confluence of factors has led to a smaller pool of eligible companies and a decrease in Series C funding.

Links:

• Links: The Fundraising Rules
• Follow us on Twitter: @mpd, @Mikeyjrog, @interplay
• Podcast Links: Website, YouTube, Twitter, LinkedIn

Transcript (this is an automated transcript):

MPD: Welcome everybody. I'm Mark Peter Davis, managing partner of Interplay. I'm on a mission to help entrepreneurs advance society, and this podcast is part of that effort. We're struck changing up the structure a tiny little bit. We're changing the partner meeting to focus on Fong and Mike's content. We'll be covering startup business insights and tech trends and kind of macro trends around what's happening in the venture space.

And we're peeling Chris off to do his own segment where we're doing deeper dives less frequently on Mac on markets. And Global Macro recently did his coverage of his experience in China. I thought that was a really good episode in peace. If you haven't listened to that, highly recommend you dial back and listen to it.

So today we've got Mike and Fong. I think it's a great conversation. We touched on a little bit of Latin America. We touch on bootstrapping versus raising capital and how to do it. Hope you enjoy.

We've got Iron Fong Ireland here today. She's the toughest on the team. She has a cold and she didn't let it stop her. She's here to give us some insights. What do you got, Fong? 

Phuong Ireland: Thanks so much, mark. I know I, I normally can troop through a lot of illnesses, but I got taken down this time hopefully I'll make sense today.

But today I wanted to talk about a topic that. Not a lot of investors talk about for obvious reasons. I wanted to talk about how to bootstrap your startup and things to consider to before doing so, and if you decide to do how to go about doing it. So first off, just a reminder that bootstrapping means building your building and growing your business without external funding.

So this means you're relying on your own resources to fund your startup. So your personal savings, revenue from the business or loans. That sounds hard. Why would anyone wanna do that? I think obvious reason is you get to maintain full ownership of your company, so you have no one to answer to, and there's more for you in case of an exit.

But there's some other really compelling reasons too, why you might wanna bootstrap. One is that it forces you to get good fast. So you're scrappy, you're resourceful, you're figuring out stuff on your own. So this might help you discover skills that you didn't know that you had. Two is without investors to appease.

You'll have more control over the direction of your company if you wanna try a different product design to shift your business model completely change where your company is headed. You don't have to worry about getting approval from anyone else. Thirdly, it forces you to focus on profitability.

So when you don't have outside money, you're forced to ge generate revenue as early, as possible, and become profitable as soon as possible. This will make you focus on building a strong foundation that can help you develop more sustainable growth. And then lastly, it makes you more attractive for future rounds of funding.

If you're able to bootstrap your startup to a few million, million dollars in revenue, it's gonna attract a lot of investors with more favorable terms for you. Obviously there's some drawbacks. It's riskier personally. You have limited funds, which means you're growing more slowly. This could be more, particularly, this could be more risky if you are in an in industry where your competitors are well funded.

And then you don't get access to the mentorship and the connections that investors could bring. But if you decide this is the path for you, here are some tips on how to do it. First, figure out how much money you need to get started. Think about how much money you need to live, how long you need. You can be without an income.

Maybe don't quit your day job yet. And then think about the costs of building the business. Is it just your time? Do you need software? Do you need services, equipment? How much money will you need monthly to keep things going? And then figure out how you'll cover those costs. Are you dipping into your savings?

Are you taking out loans? Tip number two is get a co-founder. I know I've talked about this in the show before and it's always an important decision to make regardless of how you're financing your company. When you're bootstrapping, it might make even more sense to seriously consider getting a co-founder, cuz you're spreading up the work in the financial risk.

Choose a co-founder with complimentary skills. That's that way you're covering off a lot of the work. And then together, learn as many skills as possible so you have less work to outsource. Next tip is that all the traditional principles of a lean startup are more important now than ever. So validating your business idea, building a streamlined mvp, testing and integrating your product to reach product, market fit, all these things need to be done, diligent here, diligently here, so you're not wasting your resources.

Tip number four is to identify your ideal customers and start with a focused niche that you can talk to and market to efficiently. The key here is fewer but more loyal customers that bring in cash consistently and don't cost too much to service or acquire. It's gonna be more valuable than taking, talking to a larger set of disparate customers.

Build this audience before you even launch, and then identify the right marketing mix to reach them. If you have a small concentrated set of customers, it's gonna be more obvious how you get to them. So number five, invest where it's important. So it's great to do a lot of stuff on your own, but when something is really important and you don't have the skills to do it, outsource it.

A good example of this is branding. So this is where you can really differentiate yourself in the marketplace. It's a key buying factor in both B2B and B2C businesses, and it's not a skill that many people have. So this would be one place where it'd be actually good to spend the money.

And then lastly, track the right KPIs and avoid vanity metrics. You really wanna understand how your business is performing, and so you should focus on the numbers that really matter. Sales conversions, lifetime value. These are essential to look at. It's great that you're growing your social media following, but how many sales leads are sales dollars are coming from there.

That's what's really important. And then there's all the other obvious stuff, right? Minimize your expenses, track your burden rate, don't hire too quickly. All that comes, becomes even more important here. And that's it. That's, those are my tips. 

MPD: That is a great topic. This is near and dear to my heart.

At Interplay we have started and invested in lots of high growth venture backed tech companies, but I don't know if everyone knows, but we've also bootstrapped about a dozen companies, a lot of which worked out. And the way we typically bootstrapped was a little bit of partner capital, but also mainly through revenue.

Just getting to revenue really quickly, even before we set up a lot of expense infrastructure. The pros and cons of bootstrapping are. Not valued. The pros are not valued enough by most people. I think it's really a terrific way to go. The maintaining ownership really is a game changer cuz even smaller exits can be really mo needle movers for folks.

And it's not to be undervalued how much it forces discipline, right? And how you spend money, how you spend your time. Resource constraints bring the best out of us. The one downside we've always had a rule of thumb that. When you bootstrap a business, you basically add one to two years to the growth curve.

So that's not based on any science, it's just intuition and what we experienced. So you might be in year five where you would've been in year three with capital, so it slows you down. But there's some math and there's somewhere for owning more and the relative trade off for those who are really thinking about this.

I never promote my book. I'm the worst of that. I don't care. But there's a section in the front of my book that everyone on this topic should read. I feel like this is my one intellectual contribution to this slide of thinking where I developed a two by two, which helps people evaluate whether or not they should bootstrap or raise venture capital.

And the argument is that about 99% of the people should be out there bootstrapping or finding alternative sources of capital. And about 99% are chasing venture. So there's a complete misalignment. Oh, interesting. And my hope is we will look at that two by two. They find a way see where they really belong, and play the cards a little bit differently.

Great topic. Thank you for musing through that fog. 

Phuong Ireland: Yeah, thank you. It was a fun topic to think about. 

MPD: All right, Mike. What's up buddy? 

Mike Rogers: What's up, man? That's what deep, that's what deepen 

MPD: used to say he did. Used to say that. Probably still does Throwback. 

Mike Rogers: Probably still does. Yeah. I hope he still does.

What's up? I'm a fresh trip to Bogota. Caught up with a portfolio company of ours called Chipper. It was great. Bogota's a really cool city. There's a lot of startup activity there. Obviously. That's where Rocky came from and the entrepreneurial bug that was seated there through the Rocky team.

Has emanated out into a bunch of really cool companies and what's a very vibrant, fun, cool Latin American city. So great trip. Good to get back down to the region and see the team and we had a good 

MPD: time. Yeah. Latam is awake, right? You've got the Columbia, Mexico, Brazil triumph it going now.

Where 

Mike Rogers: people are. Yeah. Columbia's awake in company building. It's a sleep in fundraising. If you think the drawdowns here in the US have been large, it's multiplied down there in terms of available capital to the region. So it seems like the flight to quality has continued. And I think when people think quality, it's not just business metrics, it's also region that the business operates in.

For 

MPD: sure. It's a challenge for investors. We talk, we see a lot of companies coming up from other geographies and. Governance laws, exit environment, acquirers, follow on capital are all forms of risk that are outside of the company and the business concept and the team that are real. Yeah. 

Mike Rogers: And, we've seen LA kind of cycle through, exacerbated versions of the US market for a number of, probably decades now in terms of venture growth.

I think this time will be different because you've got so many good established businesses in the space and, looking at chipper they're best in class. So if you look at the global landscape of B2B marketplaces focused on, servicing corner stores that, that business model exists in most regions of the world now.

There's one in India, there's one in Latin America, which is chipper. There's one in Africa. You see this model getting replicated all over the world right now because it's a real problem in these countries, and I think chipper is best in class in that. I think in terms of flights of quality, you, I think we've got the winter there, it's still it's a tough market for these emerging markets to raise capital.

MPD: Yeah. It's a long game building a venture ecosystem, but I imagine a couple decades out there'll be more capital. More depth, more institutional money, more understanding. For the rest of the, ecosystem to get behind it. Hey, I'm glad it was a good trip. What do you wanna hit today?

Yeah. 

Mike Rogers: I think we can expand on that topic. It's something that I, I saw firsthand, in the board meeting this week. And I think is broadly applicable across the ecosystem now and. I think a good place to start is there was a Crunch base article from Crunch Base News about two weeks ago now, saying Series C funding to US companies by year.

The title of the article was Series C isn't what it used to be which I thought was fairly clever. The high level is, 2021 obviously peaked for SIR C funding and I'm using sir C as just like a guideline for like growth. It's like the, for some companies, like the true like growth round pre I P O or growth round 2021, we saw 50 billion of funding.

2020 for context was 23 billion. 2022 reset to about 2020s numbers. So we got to 28 billion or so, 2023 now is two and a half billion year to date. So it's on track to do, I don't know, 60% less than 20, 22 number which is a significant recalibration in the market. The way I think about this is if you think that 20 20 20 20 22 was the correction back to 2020 levels 2023, a lot of people were like, will we bounce back?

The answer is not only have we not bounced back, but funding looks like it'll be down at this growth stage mark by about 60%. What do you think thinks driving 2019 levels? 

MPD: Why do you, obviously the market got it haywire. Why is Series C down 60 specifically? What's your sense of it? 

Mike Rogers: Yeah I think what we're seeing in the market now is in.

Incredible flight to quality. So a lot of people have said, oh, there's so much dry power, there's so much this and that. Like growth stage investors are not doing a deal unless it fits the exact wheelhouse that they're looking for and that the metrics are perfect. The growth is perfect. They're probably profitable at this point or very close to be profitable.

And the available universe of those companies is small and the really good ones don't wanna raise right now if they don't need to because they think that Marks will be poor. So a confluence of not that many companies in the space actually meet the criteria. Plus companies in the space that do meet the criteria are like, why would we go to market right now?

They could go raise venture debt. Maybe insiders are padding with some capital we didn't care about. Or they're just like, we'll ride it out. And then I know we've got a bunch of companies in our portfolio that fit that criteria where in any other market they would've raised. Another round to either continue growing faster or Sure up a balance sheet.

Instead, they've chosen to grow slower and just not test the market right now because they know marks are not gonna be good. 

MPD: I just came back from giving a talk to a bunch of series B ish Canadian entrepreneurs, and they're doing a tour through New York and Palo Alto to meet other folks and learn and swap notes.

And the question came up like, how would you characterize early stage versus growth? And I said, one of the big differences is an early stage. You're chasing the VCs. It's not quite right, but in growth, the VCs are chasing you a little bit. And it's because companies have more options. They're default alive, they're easy to raise money from internal investors.

They've got real businesses. Now, if they're garbage businesses, that's a different issue, but they're not getting funded anyway in this market. But the real businesses have a greater degree of optionality on not taking down capital. So not a totally surprising stat. And we've seen that too internally.

You and I, like we have seen a real contraction of valuations deal terms in the growth stage. I think it is a great time to be investing in that market. You have to be a bit of contrary and if you wanna make money so this is a buyer's market moment. Yeah. 

Mike Rogers: Agreed. And I think the great founders know that like a mark to market is not the end of the line.

So if you raise your last round at 200 or two 50, it was a crazy round led by, we won't name names firms, I. But firms that you know are marking up companies out outta whack if you need more capital and you have to just recognize, hey, you know what, we'll raise 20 on a hundred right now, might be half the price per share of the previous round, but as long as you manage dilution appropriately, it really shouldn't matter for your long-term outcome in the business.

It's just a mark to market on your stock price. It's not an exit. So get the capital, keep building and realize that markets go up. Markets go down your job as founders to make sure the business survives. And surviving might mean just recognizing, hey, we're not worth what we were two years ago in the market.

But going out to VC saying, Hey, we want a flat round. That's a bad signal. And it shows that it shows investors that you're not aware of market dynamics. Which shows investors, especially myself and I know you as well, that you're just, you're not as competent at running a show as you, as we would like to see for someone that we want to invest in.

So for founders out there, understand the market dynamic, go out, raise the money that you need. You don't have to over capitalize businesses, but G, but also be realistic that the price of yesterday is not the price of stay, and that's okay. 

MPD: Welcome back to New York. Mikey. Glad to have you here. Yeah, later.

I'm probably the only vc, I'm sure that's an overstatement that thinks a lot of people should be bootstrapping their companies. Meaning I shouldn't be part of the deal and we shouldn't be cut in to fund in your, fund your business. Bootstrapping is a terrific way to build the business. It requires a little more patience, but it real builds really strong companies.

I think the key to know is that if you have a really large market that you can go after and you have an incentive to grab land in that market quickly, that's when you for sure want to be raising venture capital. There are a lot of businesses that build barriers with scale, particularly businesses with network effects.

There. There's a time when raising venture capital is a disadvantage because you end up just owning less of a small pie cuz you got it wrong and there's a time when not raising capital is gonna set you off to the point where someone else is gonna run by you. The key is to find alignment between the business strategy and your capital strategy.

And if you're bored and or interested in that, check out the first 30 pages of my book. The fundraising roles, which you can find on Amazon, peace out.

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