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Ferruccio BalestreriCTO and Co-Founder at June

17 Mar 24

Bootstrapping is Dead. Use OPM.

One of the most tired conversations is whether you should bootstrap or use other people's money (OPM) to build your company.

Having experienced both the bootstrapping way and the VC backed path, I think if you're ambitious, building a bootstrapped business is historically backwards.

Let me explain.

Bourgeois Capitalism - 1850 to 1930s

Run your own business, with your own money

Between the middle of the 1800s to the early 1900s was a golden age of entrepreneurship. Two generations of founders named their companies after themselves. Their personal identity, reputation, and innovative spirit were tied to their own institutions.

Companies like Nestlé (founded by Henri Nestlé), Ford Motor Company (founded by Henry Ford), Siemens AG (founded by Werner von Siemens), and Bayer AG (founded by Friedrich Bayer) are classic examples of bourgeois capitalism.

The bourgeois capitalists funded their own companies by reinvesting their profits back into their business. They were the original bootstrappers.

The professional managerial class - 1930s to 2010s

Let others run your business, with your own money

By the end of the 1930s, firms transitioned from being family-owned and operated to adopting a more managerial structure, with a separation between ownership and day-to-day management.

This was the beginning of modern capitalism, and the rise of the professional managerial class.

In this period the biggest winners in the economy were large conglomerates, MBAs and consulting companies.

The strengths of professionally managed companies

This separation between the owners and shareholders brought a series of advantages:

  1. Scale - Professional management offers global monotony, that can scale globally and offer "sameness". They can turn the labyrinth of international operations, global supply chains, and global market into soulless process. This cult of scale ensures that every McDonald's, in its imperial spread, becomes a temple of predictability, offering a consistent mediocrity at the lowest cost imaginable.
  2. Routine - Professionally managed companies are driven by process over vision. They're better at flawlessly executing established routines and behaviours. Formal governance and strategic planning processes, make it routine to identify, assess, and mitigate risks.
  3. Delivery - Professional managers are highly specialised in the existing business. Customers benefit from their ability to deliver existing business ideas on time and in full. Operations get more efficient.

The weaknesses of professionally managed companies

These qualities come with the cost of some weaknesses:

  1. Intimacy - To truly pursue excellence, you need intimacy with customers. One needs a deep understanding of each customer's unique needs to craft offerings that can beat the impersonal touch of corporate giants.
  2. Disruption - Only a founder can have enough power within an organisation to bring radical innovation. You can't think in decades, if you're hired to deliver in quarters. One needs absolute control, to chase a long term vision over short term results. There's no other way to bring new previously unimaginable ideas to life.
  3. Development - Relentless development of new businesses suffers from the short sighted-ness of shareholder demands. Only someone that is in it for the long run has the incentive to focus on long term R&D projects.
Founder-led businesses - 2010 to now

Run your own business, with other people's money

The professionally managed companies made up most of the S&P 500 list in the 1990s.

Since then a new generation of companies has taken over.

Today, 8 of the 10 most valuable companies in the world have been funded by venture capital.

Source: June.so

We're at a unique moment where almost half of top 10 companies by market cap are still run by their founders.

Source: June.so

What happened to the rest of the founders? They retired.

From my sample data only two companies where founders were fired by their board. Cisco and Apple (Steve Jobs RIP 😢).

Source: June.so

The idea that the VC interest is to fire the founders is nonsense. The founders and the vision of the business are the financial product that the VCs sell to the public markets.

The professionally managed incumbents already exist.

When the founder leaves, after an initial phase of optimisation, these VC backed companies face the same challenges of any other professionally managed business.

Why you should build a business with other people's money

Do you have a personal connection with a specific problem you really want to work on?

Do you want to try and innovate radically?

Do you want to dedicate decades to your company?

If your answer is yes, the world is hungry to fund someone like you. Someone that dares to dream and executes on a grand scale.

What's even better for you, is that the VCs and LPs don't even make a lot of money in return - this is well known in the industry. The majority of funds deliver less returns than the public markets after paying their fees.

So as founder, you'll negotiate terms that are more favourable to you than to the funds investing in you. This is true even in today's climate.

The paradox gets to the extreme when you look at employee compensation. Everyone working at a startup is living a curious inversion of Marxist principles. In aggregate, the proletarians - employees selling their labour - are getting paid more than the value they generate.

The reality of bootstrapping

Bootstrapped businesses grow slower. So they get valued at a 2-4x multiple, while VC-backed multiples are anywhere between 8-20x (depending on how fast they're growing).

Say you want to build a company that eventually makes $100 million ARR. If you do it bootstrapping, it might take you over 20 years and your company will be worth around $200-400M.

But if you raise VC money, you can spend $100M to reach the revenue milestone at the cost of half your equity. By then your company will be worth anywhere around $0.8-2B, so you as a founder will end up getting more than a bootstrapper. The challenge though, is that you have to do it within half the of the time.

So the question is - can you achieve the same goal in half of the time, by spending other people's money?

Rejecting the System, Embracing the Fruits

Peter Levels frequently tweets saying that building a VC backed business is signing a deal with the devil.

He makes millions a year with no external funding and invests it all into ETFs:

And guess were this money ends up going?

Holdings of the VUAA S&P500 ETF

Into VC backed companies. A huge of which are still founder-led.

His own investing fuels the 8-20x multiples of fast growth VC backed companies.

And he's not the only one. Most of the stock market is now passively indexing, providing cheap capital for the next generation 0f visionaries:

Conclusion

I spend my days building June. In the past 4 years, we've helped many of our customers grow from zero to their first millions of revenue.

Over the next 10 years, some of them will become public companies and fuel the growth of your ETF portfolio.

The world needs more high agency founders with a vision, they're the next-generation bourgeois capitalists and the future of the S&P 500.

So what are you waiting for? Go build the future you want, with other people's money!

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