Bootstrapping vs. Venture Capital

What's up everyone? Welcome back to another episode of Founder's Journal, my personal diary made public for the world. I'm Alex Lieberman, co-founder and executive chairman of Morning Brew. Today's episode is about bootstrapping your business versus raising venture capital and how to think about the trade-offs. And to help me cover this topic, I invited on Jason Fried, the co-founder and CEO of 37signals, which is a software development company that has created popular products like Basecamp, Hey, and others. 37signals is completely bootstrapped. It's been in business since 1999. It has more than 100,000 customers, and it does tens of millions of dollars in profit per year. In addition to listening to this podcast, I highly recommend you follow Jason on Twitter, check out his blog posts, which I'll link to in the show notes, and read his books, Getting Real, Rework, and Remote. Now it's time to answer the simple but vital question that most entrepreneurs ponder: to bootstrap or to raise VC money? Let's hop into it. Jason Fried, thank you for joining Founders Journal.

It's good to be here.

So I want to set the foundation before we talk about this first topic, which is bootstrapping versus raising venture capital. For those who haven't heard of 37signals or with what you've done with Basecamp over the last 25 years. Can you just quickly give an introduction to yourself and what you've built?

Sure. So, yeah, we launched this business in '99 and we started out as a web design company, actually. And about 2003 or so, we decided we needed to make some software to help us run our web design business. So we built this thing called Basecamp, which is a project management tool. And that's sort of— we launched that in 2004 and that sort of kicked off kind of the early days of SaaS. We were one of the first SaaS tools and also first freemium tools, actually, in fact. So we did that in 2004, and about a year later, it was generating more revenue for us than everything else that we were doing. So we stopped doing web design and have been focused on software ever since. And we've made a bunch of tools over the years, written a bunch of books, but we've always done things quite a bit differently. We are a bootstrapped company, so always 100% funded by customers. We share everything that we do and know, so we don't keep any secrets. There's no, you know, proprietary this or that. In fact, we've open-sourced tons of software, including Ruby on Rails. And we've just been making things our own way for 25 years, almost 25 years. And I've also worked remotely for all these years. We don't offer equity to employees. We do a lot of things quite a bit differently than most in Silicon Valley, or we're not in Silicon Valley, but in the tech world. So you could call us perhaps unconventional, I think would be a good description.

Yeah, it's funny. I feel like it— and you mentioned this on a recent podcast, but I feel like in some ways you're more similar to like the, the third-generation family business that owns like a road repair company, if that existed on the internet, than a venture-backed business.

Yeah. Basic Economics 101. Like, make more money than you spend. Don't give things away and think that volume is going to help you. Like, you know, the pizza shop on the corner is not giving away pizzas for free. You know, they're just not doing that. So You know, they might give you a little sample, maybe they've got a little sample on, on the weekends or something, whatever. But like, they're here to sell you something and that's what we're doing. Yeah.

And just a few other quick points I'll make just to give people a sense of the scale of the business. Last I heard, you have around 100,000 paying customers. Business, uh, does tens of millions in profit per year, right?

Yes. Annual profits. Yeah. So we have about 100,000 or so paying customers across Basecamp and HEY. And also high-rise. We have a couple of older products that we don't sell anymore, but we still have customers on those. So altogether, that's where that number comes from.

Love it. So let's, let's talk about bootstrapping versus raising venture, as if you haven't talked about this topic enough, but I think it's really important for people to understand. Talk through when you think it makes sense to raise venture capital and when it doesn't make sense.

Yeah, I mean, I'm guessing here because I've never raised venture capital. But it seems like it makes sense when you actually have real expenses, like real legitimate expenses, like you're opening a factory or you're making cars or you're, you know, making rockets or you're in biotech and you need to, you know, fund 10 years of research, like things like that where you really have legitimate things. Or, you know, it could be a commercial kitchen where you need to spend, you know, $6 million on a bunch of hardware and kitchen stuff and all that stuff, right?

And equipment.

Okay, but software businesses that have, you know, basically humans and some tech, which is cheap, either in the cloud or, you know, people just need a few laptops here and there, and there's not much that you need to get going and building a software business.

Yeah.

Or tech business in most cases. So I think in those cases, bootstrapping is the better route, or raising a little bit of money from friends and family or whatever, just to get going. Like when we started our business, there was 3 founders initially, and we each put in $10,000. So we had $30,000, you know, just to kind of make us make our way for a few months before we picked up some clients to pay our way after that. You need something, you know, you need something. But, you know, I think a lot of tech companies act as if they are companies with huge capital expenditures, and they're not, and they put themselves in a hole Because now they're beholden to someone else on someone else's timeframe. They have to become a certain kind of company. There's really like only one option. It's like you have to become a big— well, you have to be saleable. You got to either sell a business, merge, IP, whatever. There's like kind of maybe you have a few businesses you can become, but basically not really. You're kind of locked into this one path. And my sense is that optionality is really valuable. And, you know, when you're bootstrapped or when you're a small business kind of making it, making your way, your own way, You can land in, you know, hundreds of different places. You can become a business that generates $2 million a year in revenue. If you have 5 employees, that's pretty damn good. If you have 50 employees, probably not. So maybe that business needs to be a $12 million a year company. But you have options. I think that's valuable, and I think it's overlooked, unfortunately, in our industry. They just— people just want to go big. And that is one way, but it's very rare that that works. And it's, I think, unfortunately, the wrong path for many.

And what would you say to founders who say they've— they're thinking about going the venture route because one of the stories they have in their head is that we're building in a hypercompetitive space. It's a hypercompetitive space because it's a really exciting and fast-growing space. We're gonna have a lot of competition and we need to beat our competition.

Yeah, money doesn't beat competition. I mean, like, look, I would say focus on your costs and focus on your product, not focus on how much money you have in the bank to spend on trying to win market share. 'Cause that's really what that money's for. It's primarily for marketing trying to get out ahead. And that usually means taking huge losses initially to try to establish yourself in the market. And yeah, that does work. It can work. Obviously it can work, but it's a really hard road. I think you're better off finding a way to sustainability. So making more money than you spend, keeping your costs in check, not hiring too many people, being scrappy, and just building a really damn good product. If you're just trying to compete by outspending the competition, you're going to lose. Someone will always outspend you. But if you can make something better or have a unique point of view or have a perspective that is your own, I think you have a much better shot at standing out. So, you know, if you were to ask people like, what do you need to do? I would say you need to stand out. And that doesn't mean— I mean, it can mean having an exceptionally clever and creative marketing campaign that helps you stand out, but that's incredibly hard to do.

Yeah.

And also it's sort of gone in 5 minutes.

Totally.

And it's expensive. So invest in the product is what I would say and keep your costs low.

Yeah. And I think just as I think about it, like spending a shit ton on marketing, it can create a false sense of confidence that that is the differentiator where actually what the long-term differentiator needs to be is the product to actually retain all of those people you're spending on acquiring.

Yeah, exactly. It's incredibly expensive to acquire customers that way. And, you know, you can maybe sell them on the dream for a minute, But reality's gonna hit, especially in tough times like right now. Like, the economy's tough and companies are gonna look at their expenses and go, is this worth paying for? You know, why am I paying for this? I was suckered in. Or maybe I was allured. There was this allure, there's this beauty of this ad campaign. Like, this sounded great, but actually we're not using the thing. I'm outta here. You know, that's the biggest concern you're gonna have, I think.

Yeah. And I guess, you know, I know you've spoken about this and I guess like the other place I could potentially see this making sense or raising venture making sense other than just like hard tech or deep tech, uh, R&D heavy businesses is a business like Uber or Airbnb, uh, right? Where like it truly is a land grab for a market across the world. And like you, like, I think you talked about the example of like, in order for Uber to be Uber, a customer needs to be like, hey, I can call up an Uber and you need to have a certain level of penetration in order to achieve that. But like, that is the large exception, not the rule.

Yeah. Airbnb and Uber are 2 great examples of that. And there probably are a few others, like some of these delivery services and whatever. But, but when you go somewhere like Airbnb is probably the best example, like you're probably not Airbnb-ing just in one city, you know, you're like, I'm going on a vacation, so I'm expecting there to be this thing available there. You know, of course, it started much smaller than it is today, so it didn't start globally, but pretty quickly they needed to get to a lot of places to become an alternative to hotels, let's say.

Yeah.

A reliable alternative to hotels. You know, you can find a, I don't know, a Hilton, whatever, in every city or in every major city. Airbnb had to be that way in your head. So yeah, that's an exception. But like your, your B2B accounting software, you know, whatever, like, no, not that that can't be a great business. It can be, but it doesn't need the same kind of approach as Airbnb or Uber took. Yeah.

Well, I think you just, even the way you said it there, uh, creates a really important distinction, which is I think Founders, for whatever reason, have been kind of told this story that raising venture means ambition. Raise— not raising venture does not equate to ambition. And I think that's just like a false story.

It is. But also, I don't know, this ambition is sort of this— just build a great business that sticks around, you know? Like, look, I'm ambitious to some degree, but I'm also like, I'm not out for grabbing everything. I'm not out for maximizing everything. There's plenty of room for plenty of companies. All I have to worry about is my own company, my own cost structure, my own customers.

Yep.

Everyone else can do whatever they're gonna do. As long as I can make my economics work, that's the ambition I'm after so I can stay in business. And if I stay in business, I get to live another year and I get to do what I want again and get to build new things and work with great people. Like, that's what my ambition is. It's not the ambition typically, or ambition is typically a word used to talk about like amassing and collecting.

Yep.

And growing. You know, it can also mean, in my opinion, like it should mean existing, sustaining. I'm ambitious at that level, but I don't need to go destroy the competition. That doesn't interest me.

Well, I think there's a really important nuance in kind of how you're saying that there, which feels very on brand for, you know, if anyone reads your employee handbook, which is also public, right? Like one of the things you refer to in the handbook, I can't remember the exact kind of language, but it basically talks about the importance of being kind of like Intrinsically motivated by the joy for the work versus like getting the gold star when you do something well is like I think a lot of how you're talking about things is not to say ambition is always extrinsically driven, but there can be a lot of hints of that. Whereas like building a great product for customers and enjoying the people you're working with and building something good for those customers feels like a healthy, long-lasting way to just. I guess enjoy the way you spend your time.

Yeah. And part of that is because I like this company. I like what we do. I like what we make. I like how we make what we make. If I was out to build something and in my head I'm already ready to build the next thing, and after that I'm ready to build the next thing, I can see how someone's mentality would be different. They'd be like, I'm— I just need to get this as big as I can in 5 years. I'm going to sell it and move on to the next thing. Like, I'm a non-serial entrepreneur is how I like to think about it. Others who are serial entrepreneurs have a different point of view. And I'm not saying that their point of view is wrong. I'm just saying that there's an alternative to that point of view. And it's, I think the serial entrepreneur point of view is sort of the common one these days in our industry, at least, because it's sort of sexy. There's a big exit and you start another thing and maybe there's another big exit and you raise a bunch of money because you did well last time. That's one way to do it. But I think there's a real glory in just sticking around and sustaining. Yeah.

2 quick points on this. One is I do think this kind of like agency to software motion is something that is not explored and done nearly enough. Like kind of your story of how Basecamp came about with the original agency business feels reminiscent of even like what happened with Mailchimp. And I think like as you think about building a business that you can bootstrap, right? Obviously an agency business is a great way to do it. And obviously agencies, they're challenges with that business, just like any business. But I feel like people have kind of poo-pooed on agencies for a long time, and it's a really interesting way to effectively fundraise for your own business internally.

Yeah. And you get to do— you get to practice, actually. I think we got good at making things because we made things for others for 5, 6 years. Then it's like, you know what? We're ready to make something for ourselves now. Like, let's, let's see if we're any good at this. You know, you get paid to tell other people what to do and give them advice and make stuff for them. And you're like, are we any good?

I don't know.

Let's make something for ourselves. So, I do think it's a good model. And we ran them in parallel for about a year. And the idea wasn't that Basecamp was going to replace that. It just happened to do that. It happened to become so popular so quickly that we're like, you know, what do we rather do? We have limited time. We'd rather do Basecamp. So, you know, sometimes it might be you can't replace the agency business, but maybe it's a half and half, 50/50, which is nice. It's good, you know, more diversity of revenue streams and—

Yep.

You know, if one business goes down, the other can hopefully sustain. So I think it's a good path to have multiple revenue streams, especially in the early days, and figure out, you know, sometimes you don't know what's gonna work. So if you have a few irons in the fire that are actually hot, you're in a much better spot.

Yeah, the one other thing I wanna call out is what you mentioned before about optionality and how bootstrapping can offer you a lot of optionality. And you were recently on Lenny's podcast, and I thought it was a great interview. And I can't remember exactly how you refer to your business, but you kind of talk about it in this way where your business is this evolving organism that right now Basecamp sits within it or HEY sits within it or Once is going to sit within it. But you kind of have this freedom for it to be molded in different ways over time.

It's a vehicle, basically. Yeah. I feel like my career is sort of just a bit long continuation since I was in my teens or something, just kind of making stuff and selling stuff and whatever stuff. So yeah, this business could go in a bunch of different directions, and it has. We've been a website design company. We were also— we kind of productized website design for a while doing this other thing called 37 Express, which we can go into, but it's not that interesting right now. We wrote— we self-published our first book called Getting Real as a PDF. Made like hundreds of thousands of dollars selling a PDF, like way back in the day. And then we wrote a bunch of books and we gave a bunch of stuff away and then we open sourced a bunch of software. And like, there's no plan. There's never been a plan. There's not a, like, we're gonna do this to get to that. It's just like, let's do what feels right. Let's do what makes sense for us at, in the given moment or at any given moment. And whatever happens happens. I think businesses really truly just unfold. And I'm here for that. I'm not here to predict where we're gonna be in 3 years.

Yeah.

I don't know, don't care, frankly. There's no real advantage to me predicting that. Now, there are some businesses where you really do have to think ahead for a variety of different reasons. I mean, if you're— people always say like, what if you're Airbus or Boeing? It's like, well, we're not, and you're not, by the way. You're not building airplanes, I'm pretty sure, you know? You don't need to think about a business like that, you know? So, yeah, there are examples.

Yeah.

But ours is a very fluid— we're basically a collection of people making stuff, and making stuff that we charge for, and customers find us and like us and pay for it. And then we experiment and place bets on different ideas and see what happens. And that's where we've always been and where we're going.

Last question around this topic is, when does bootstrapping not make sense, or what are trade-offs of bootstrapping that you can think of that people should be aware of?

Yeah, I mean, there are plenty. First of all, I think the hardest thing is probably your first year. Obviously, look, if you raise money and you've got— you're flush with cash, first year's not so tough. If you have, you know, you're throwing in 10 grand or 15 grand or 20 grand, it's just you and maybe someone else, and you're working part-time because you still have a day job, like, this is a tough first year. So I would say the first year is the hardest part of that. The other thing is just keeping your own ego and ambitions in check. And, you know, as we talked about ambition a bit earlier, I think if your ambition is to Let me step back. There was a guy in Chicago I knew who was opening a tea shop, Japanese or Chinese tea. And his ambition was, he's like, I want to be the next Howard Schultz. I want to make tea as popular as coffee, Starbucks in America. I'm like, dude, just get one shop right. Like, I was kind of advising him, like, get one shop right. Stop thinking about all the different things. Can you get one right? Can you make one work? Turns out kind of did, kind of didn't. It's not around anymore. But he was thinking too far ahead. And when you're bootstrapped especially, you really can't do that. You gotta think about now. You gotta think about making, making now work. So if your mindset is always about wanting to be some superhero, it's gonna be very hard, I think, to, to stay within the bootstrapping realm. So I think that's a big part of it, just controlling your ego and your expectations. That's the other thing. The other, of course, and then other than that, like at some point, Look, it's just harder to hire people initially.

Yeah.

But I think these are good things, but they are harder. So hard and good can be the same. You know, it doesn't have to mean it's worse.

Totally. Yeah, I totally agree with that. You read my mind. Like the one I was thinking about as I was thinking about Morning Brew's journey, and I guess we weren't technically bootstrapped because we raised like $750K, but from family and friends, that was kind of all we ever raised. For all intents and purposes, We had the same issues, which is like we couldn't hire world— super senior world-class talent in the beginning. But I also think that forced a lot of creativity. And I actually think we are a better business because of it, because we hired a lot of nontraditional talent, especially for writing. We didn't hire a lot of journalists because we couldn't afford them. They didn't care about us because we didn't have a brand. And, you know, but we were able to create a voice that felt very nontraditional to people who consume content.

Absolutely. It was very obvious from the outside, too. I think that what happens is when you can't go after the usual suspects. You know, you, you instead, you, you have to figure out different characters that are different, a different character of a person, a different skill set, different levels of skills that aren't in line with like the talent war. You know, like, well, we can't, we can't go after them. So what kind of people do we want here? Like, I remember in the early days of, um, of Groupon. Remember Groupon?

Yeah.

Yeah. So A friend of mine ran it. It was a Chicago-based company. He would hire a lot of comedians and, and, and, and basically show writers to write their one— their descriptions of products that they were selling on Groupon.

I love that.

And it was great because no one else would've thought about it that way. Andrew was kind of in that world to some degree. And so he, he looked at those people and go, these people are great writers. They're also like, they're always looking for jobs on the side because entertainment's a tough business, especially in the Midwest.

Yeah.

So he was able to find people who can do great stuff and also gave the brand a very unique voice that wouldn't have come from hiring traditional, I don't know, marketing copywriters, you know? So, so there's real advantage in, in constraints.

100%. Jason Fried, thank you so much for joining the pod and look forward to having you soon.

Thanks, Alex.

Thanks so much for listening to this episode of Founders Journal. If you wanna see me feature a specific entrepreneur that you'd love to hear from or discuss a specific challenge that you're experiencing, Experiencing in your business right now, shoot me an email to alex@morningbrew.com. Thanks again, and I'll catch you next episode.