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We need a new default funding model for tech companies

There is definitively a small but growing trend of new forms of financing for early/mid-stage tech companies. As a founder and bootstrapper, I feel like I saw the opportunity before I understood why it was there. I wanted to lay out the simple macro framework for why I believe this is just the beginning of a huge shift in how we fund startups.

Premise 1: Almost all new companies are technology companies now

Anil Dash and many others argue that there is no “technology industry” and that the label is too big to be useful.

Almost all companies use tech in some way, just like almost all companies use electricity.

Premise 2: Most companies (tech or not) are not a fit for VC and don’t have alternative options.

And yet there is this totally out-sized relationship between tech companies, which most new companies are, and venture capital, which is definitionally not a fit for the vast majority of companies. So every founder building in software/web/tech thinks they should raise VC when in reality almost none of them should.

But what should they raise? What about debt.

My father took out a loan in the 70s to start his business. That’s how most of the small business entrepreneurs from that era got started. You took out a loan, bought property and equipment, started your business and if you failed the bank foreclosed on your building and equipment, and depending on the loan, maybe your house and personal assets. Seems pretty risky to me but at least it was a well-known pathway to capital for entrepreneurs starting new ventures.

The problem is most tech companies don’t have collateral and you simply can’t get a loan at the earliest stages.

We’ve seen a precipitous drop in new firm startup rates since the early 2000’s. I don’t think my theory here is fully explanatory, but I think part of the problem is the fact that there is no good default financing option for entrepreneurs.

Why it’s all happening now

How did we end up in this position? Jerry Neumann, argues persuasively in this post that we are now in the Deployment Age of the internet/web/mobile technology cycle. This is an application of Carlota Perez’s theories in Technological Revolutions and Financial Capital. This podcast is excellent and compelling that we are past the age of bubbles, crashes, and winner-take-all opportunities specifically in the internet/web/mobile sector. We now get to deploy all the new productivity gains of the web to a ton of new sectors in a much lower risk way.

 

During this phase, new kinds of capital are needed with a different risk-return profile. The easiest comparison for me to wrap my head around is this quote from the post describing the creation of tons of new forms of consumer credit starting in the 20s.

Venture capital, as we think of it, is primarily a feature of the current cycle. Other cycles had other funding mechanisms. E.g.:
The consumer boom of the 1920s was financed through a vast expansion of credit, with personal debt nearly doubling as a proportion of income. And since banks did not make consumer loans, new lending channels had to be created. These included installment sales finance companies (such as the General Motors Finance Company founded in 1919), retail installment lenders (particularly department stores), licensed consumer finance companies (such as the Beneficial Loan Company) and Morris Plan industrial banks4.

 

This is just the beginning

Thus we find ourselves in a moment when there is vast demand to fundamentally re-define the default form of capital for entrepreneurs. It’s an exciting opportunity and a great time to be both an investor and a founder in this space.

How I email

In 2019 I’m transitioning into the role of an investor at Earnest Capital. Since we soft-launched in October with a call to collaboratively build investment terms for “funding for bootstrappers” I have received 100x the normal volume of emails that I’m used to processing. Looking forward it seems clear that being an investor in early-stage startups means becoming a professional emailer. As I’ll be spending most of my day in email1, I thought it would be a good idea to explicitly state my email preferences somewhere I can link to.

This should simply be viewed as a list of my preferences, not some list of demands that must be complied with in order to email me2.

Things I think about email

  1. Many VCs seem to view responsiveness as a competitive advantage, replying near-instantly at all hours. I’m not sure that’s a factor I want to optimize for but even if it were, I know I would never be an exceptionally fast responder. So I’m not going to compete on responsiveness. If you’re used to dealing with VCs and getting instant responses, emailing Earnest might seem jarringly slow but I’m okay with that.
  2. I optimize for completeness in a response. I prefer not to trade 25 half-baked emails back and forth when I could wait for all the facts I need and write a detailed, clear, complete response.
  3. I am remote-first and I prefer emails as the default mode of communication. Switching to scheduling a call the moment an issue becomes complex is a habit I don’t share. Let’s be thoughtful, clarify our thoughts in writing, and use a call as a last resort (or just something that’s fun but not necessary).
  4. I don’t do Inbox Zero. I used to, but feel that I frequently need more time for responses to marinate than an instant ‘respond, delay, delegate’ protocol allows.
  5. I do view my inbox as “other peoples’ todo list” and try to allocate my day first toward larger projects that will improve Earnest for everybody, then dive into my inbox.

My email preferences

  • I like long emails. I’m not one of those people who needs to get all the information in the first 3 sentences or I stop reading.
  • Follow-up as much as necessary. If I haven’t responded to your email, it doesn’t mean I won’t. I am most likely working on something else integral to a reply. Feel free to send additional follow-ups if there is new information. I prefer not to get a daily stream of “just bumping this to the top of your inbox”—though one or two is fine.
  • Please let me know explicitly if my default mode is not going to be appropriate. “I really need an answer on this by {datetime} because {reason}” is really helpful for me.
  • Don’t apologize. If we agree that sending me an email does not obligate me to send back an immediate response, there’s no need to apologize ✌️

Myers Briggs for Email?

We all spend so much of our lives writing and reading emails. Many people have radically different styles and preferences. I wish more people would explicitly write out their email preferences. Eventually, we’ll categorize and group them into themes like a Myers Briggs for email. So just as you can short-hand with “I’m an INTJ” and confer a lot of information on how you prefer to interact, you can say “I prefer my email as Correspondence” or “I’m an aggressive Inbox Zero-er” and confer a lot of the preferences above. I view my email preferences as Correspondence in reference to how people used to communicate when hand-delivered letters might take months to be delivered by ship. You had to be thoughtful and clear and close as many open loops as possible.

  1. I’m using Superhuman these days as I write this.↩

  2.  hat tip to @devonzuegel for the inspiration for this↩

Selling My Bootstrapped SaaS Business

Five years ago I built and launched the first version of a SaaS app on a single flight from San Francisco to Buenos Aires. Slowly and steadily, Storemapper grew into a healthy location-independent business for one person and then later a small dedicated remote team. At parties, I would describe it as, “not a startup; a healthy growing internet small business.” This year, almost exactly five years after launching, I sold the business for what, to someone growing up middle class in Florida, is a life-changing amount of money that will enable all kinds of exciting new projects and adventures. From start to finish, it has been an exciting ride, much of which I have documented here on the blog. With the sale concluded, I wanted to share as much as I could about the process of building a business that can be sold and how I sold it.

There’s always a risk that these posts turn into a 5,000-word humblebrag. But I really do think it’s worth a read because, unlike most business acquisition stories, which often feel like an out of the blue stroke of good luck, the way that I sold Storemapper feels very replicable for other entrepreneurs. When I spoke to someone two years ago about what it would look like if I ever sold the business I would say, “I’m not trying to sell it now, but if I ever did it would probably look this…” And six months ago I would tell a few folks privately, “I think that one of the people I met recently might be the one to buy Storemapper and if they do it will probably go like this…” And, then basically when it all went down it looked more or less like… that. There wasn’t some single huge stroke of good luck, though of course, I got lucky in the little ways that every successful business has to. An excellent outcome, but also a perfectly reasonable and achievable one that I think can serve as something of a template for other bootstrapped entrepreneurs.

This is a long and detailed post. I had so many questions going into this process and I didn’t find a ton of good posts from the founders perspective on selling bootstrapped businesses. So I thought I would just throw everything I could think of into a post and let you skip around or save it for reference when you’re considering selling your own business. Grab a pot of coffee and let’s get started.

First the obvious: why sell your software business?

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How to Get Startup Ideas: The Meat Grinder Approach

There are a million books and blog posts on how to get startup and business ideas. Many people think the biggest road block to successful entrepreneurial life is having that one great idea. Once you get even a modicum of success, lots of people will start asking you about how you got an idea like that, and for any tips and tricks on how to “come up” with a similar idea.

The concept is extremely tantalizing and sounds so imminently teachable that it’s a favorite tool of lifestyle business spammers everywhere. 7 Step Guide to Profitable Business Ideas. Join My Webinar on Finding Your Dream Business Plan.

But this is entirely the wrong way to think about it.

First of all you should be coming up with at least five possible business ideas every day. This part should be basically effortless. People trying to sell this part are scamming you.

If you are going to be a successful entrepreneur at all you should innately be looking around you at your life and the lives of others, thinking what are their problems. What are their desires. What do they spend money on. Which of those things are broken or could be done massively better or cheaper or faster. You should be constantly thinking this way. It should annoy people who spend a lot of time around you.

If you’re not doing that, you’re probably not going to be an entrepreneur… sorry. It’s okay. There are lots of other great life paths but this one isn’t for you.

There is one common exception to the rule. You might be hung up on one idea, and that stops the process of thinking of new ideas. It’s cool, you just need to build yourself a better meat grinder.

The secret to coming up with a successful business idea is putting hundreds of ideas through the meat grinder.

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