Bootstrapping vs. Raising VC
A conversation with Max Fleitmann about his journey as an entrepreneur, plus the usual short collection of stuff I’ve read on the internet
Hi folks, Patrick Ryan here from Odin. We make it easy for people to invest together in startups and funds, with Special Purpose Vehicles (SPVs)
Over the summer I caught up with serial entrepreneur and angel investor Max Fleitmann. We recorded a podcast in London.
At the heart of our conversation is the question of raising venture funding vs. bootstrapping.
Max, who has done both, believes that most founders don’t really understand the implications of being venture backed. He said to me that taking venture funding was one of the worst decisions of his life (!), and that many would be better off building more slowly and more profitably.
He also points out that there are more and more alternatives to VC, from revenue-based financing to simply raising funding from angels (ahem, perhaps with the help of a product like Odin’s Founder Vehicle, which lets you put all the small cheques in a single vehicle and simplify company governance).
I really enjoyed the conversation - it’s always great to hear from people with different views on how to build.
Let’s look at what raising venture funding vs raising exclusively from angels actually means:
VC’s are trying to return at least 3x their fund.
This means a small fund ($100m), accounting for management fees needs to return about $320m gross.
Assuming a 10% ownership stake in every company in their portfolio, the total portfolio value needs to be $3.2 Billion (you can see why they care about ownership stake - this gets harder if the stake is lower).
Since 95% of the companies will never get close (one or two will make it past $1B in a 25 company portfolio, if you’re doing very well), every company you back needs the potential to at least be a $1B plus company (i.e. return the fund), and really to be worth at least $3.2 Billion (i.e. 3x the fund).
As your fund size increases, this maths gets even harder to make work. If you have a $1B fund, you need to return $3.2B gross, meaning a $32B exit should ideally be on the cards.
Angels are playing a completely different ball game:
Let’s say you’re very wealthy and cutting $100k cheques.
Your total “fund” size might only be ~ $5 million, assuming 50 investments.
So your target portfolio value to 3x your money across all your investments, assuming a slightly lower 5% ownership, is only $400m. Even assuming the same outcome distribution as VCs (5% of companies driving the vast majority of the returns), the outcome you are expected to achieve as a founder is very different.
You’ll notice in conversations with some angels, that they are more risk-averse. They are probably more likely to be interested in backing businesses that have a lower failure risk, even if the companies are unlikely to be worth billions of dollars. This is compounded by things like tax relief, which give them a force multiplier on their gains and also downside protection if the business fails.
This also means angels and VC’s are not always great together - they may have very different expectations on valuation, growth rates, burn / capital efficiency, and other matters.
Not all angels fit this mould. Some want to back companies with venture scale ambitions. Some do both. Whatever your goals as a founder, choose your investors wisely, and don’t waste time on the wrong type of people.
Other topics we cover in the podcast include: building and selling a company online at 16 without telling your parents (pretty hilarious); the problem with risk aversion and pessimism in Europe; bootstrapping an edtech to €1m turnover and declining an acquisition offer; and the challenges of angel investing as a founder.
Max now runs Wizard Ventures, a portfolio of bootstrapped businesses in the startup and VC space (investor databases, templates for founders, VC job boards, and much more). He also angel invests, focusing on edtech, investment infrastructure and anything built by close friends who are second time founders.
If you’d like to connect with Max, drop me a line and I can link you up if relevant :-)
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Concept Ventures presents a fundraising 5K Race for CodeYourFuture. CodeYourFuture is a UK based non-profit organisation. It is the first, and only, coding school exclusively set up to teach refugees to code. They also train students to become web developers and find them work in the tech industry.
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I’ll be at Web Summit in Lisbon this week. If you’re going to be there, drop me a note 😘