Minecraft was just acquired by Microsoft for $2.5 billion. And they were bootstrapped. They didn’t raise any money.
They had just 37 employees as of June 2014 and were profitable with $316 million in annual revenue. The company’s founder, Markus Persson, was reported to have owned 70% of the company himself prior to the acquisition.
Let that sink in.
That’s a pretty good return!
Downsides of Raising Venture Capital
There are several reasons why an entrepreneur might want to bootstrap instead of raising money from angel investors or venture capitalists. To briefly outline a few:
When you raise money, you bring on the investors as equity owners, and therefore partners. When you have partners, and don’t own as much of the company, you don’t have as much decision making power.
Where do you want the company to be based. How much do you want to pay yourself in salary or dividends. How big do you want to grow the company. Who do you want to sell the company to. Etc. All of these become at least slightly less within your control.
It often takes dozens if not hundreds of meetings to raise a round. It can quickly become nearly a full time job to manage all communications, get meetings, do follow ups, etc.. And this often takes place over the span of months (or more).
Time spent chasing investors for money could be spent chasing customers for money!
When you raise money your stock ownership gets diluted, meaning you own less off the company. Owning less the company means you have less upside if the company succeeds, like Minecraft did.
Think about it: if Minecraft’s founder owned what a typical founder owns after a few rounds of funding, his payout would be significantly less. As a fictitious example, owning 10% of a company that gets acquired for $500 million would not yield as much as owning 50% of a company that gets acquired for (a measly) $101 million (or yields the equivalent cash flow/dividends). In other words, you don’t need to accomplish as much to achieve the equivalent financial returns. And achieving a $500 million dollar exit is a lot harder/less likely than a $101 million exit (or equivalent cash flow/dividends).
Below are three trends that are making it a better time than ever to bootstrap.
Software is Eating Software Development
As discussed here, just like so many author processes, software is being built to automate software development. It’s getting easier for people with little or no coding skills to build products. It’s getting cheaper and easier to build technology.
It was reported that Minecraft’s biggest expense was the license fees it pays to a separate company established by co-founder Markus “Notch” Persson, who retains the IP rights to Minecraft. (The IP issues is a whole ‘nother conversation ha.)
Because it’s getting cheaper and easier to build products, there is less need to raise money, and it’s easier to bootsrap.
Learn Anything Anywhere
It’s getting cheaper and easier to learn anything. As the old adage goes, “information wants to be free.” One of the biggest reasons why a startup needs to raise money is to hire developers. Instead of hiring, you could learn yourself for less than it’s ever cost before. By learning to code, you become less dependent on investors, hiring and/or finding co-founders.
Opportunities for Passive Income
Networks like Amazon (Self-publishing), Udemy, Elance, and many more are making it easier to find part-time work or create passive income streams. In addition, it seems big companies are becoming more prone to hiring freelancers because of the cost and risk advantages. The passive income earned can be used to fund the business and/or living expenses.
How Minecraft Bootstrapped And You Can Too
Don’t quit your day job.
The founder of Minecraft started building it while still at a full-time job. He continued working at his full-time job, and building Minecraft on the side, for quite some time. This sounds really hard. But it’s probably safe and smart, and reduces the need to raise money.
Build stuff people want.
…and will pay for. Call me old fashioned, but I believe the amount people are willing to pay for something is often proportional to how much value it’s providing them. If you create something of value to people…you can charge them for it! Crazy, right? Earning revenue/profit makes it a lot easier to bootstrap.
Don’t go to college.
One of the biggest reasons you may feel the need to raise money is probably student loan debt. If you don’t want student loan debt, don’t go to college. I think higher education is a bubble anyways. If you don’t go to college, you won’t have student loan debt, and will therefore have more money in your bank account and less of a need to raise money.
Learn to code.
One of the biggest reasons for raising money is to hire developers. If you don’t want to hire developers, learn to code. There are so many cheap and free resources that can teach you to code, and software is eating software development, so it’s getting a bit easier to code basic stuff. If you don’t need to hire developers, your costs will be much lower, and will therefore have more money in your bank account and less of a need to raise money.
Don’t live in NYC or SF.
It’s really expensive to live in a city like NYC or SF. Given how much cheaper it’s getting to start a business, rent in these cities will probably be greater than your business expenses. Unless your customers are financial services companies, advertising agencies, publishers, or tech companies, you probably don’t need to live in one of these cities. Even if they are, you probably don’t need to live in one of these cities. Communication and other tools that support remote work have gotten better and better, making it more and more effective to work remotely. You can always move to NYC or SF once you’re more profitable.
Bootstrapping is Not Easy
Nothing is. If you’re starting a company because you think it will be easy, you may as well just pack it up and go back to your cushy job with your stable salary and four weeks of paid vacation.
Before Uber was Uber, Travis Kalanick didn’t pay himself a salary for four years and was living in his parents’ house. That does not sounds fun nor socially acceptable.
It’s tempting to want to get out of the pain of bootstrapping by raising some money or going to an accelerator, but there are considerable downsides, and the pain is getting less and less acute as the cost of software development and education decreases, and opportunities to earn passive income become greater.
It sounds great to get a salary, and some companies simply need outside capital to fund costs, but many (most?) do not. There are several downsides to raising money and upsides to bootstrapping. And it’s getting easier and easier to bootstrap a company. It’s a bootstrapper’s paradise.