A VC Says It’s Okay to Bootstrap
No, you probably won’t change the world, but you might actually make some money (and enjoy your life).
Here are today’s highlights:
Ami Kassar has advice for entrepreneurs trying to make a big decision.
Are you keeping your deposits at a bank that is likely to lend money to a smaller business?
While many businesses return to normal, others that made pandemic pivots have never looked back.
Concerns about the cost and availability of insurance just keep mounting.
David Schonthal, a venture capitalist who is also director of entrepreneurship at the Kellogg School of Management, wants you to know that it really is okay if you just want to bootstrap your cute, little business: “Now that we've all had to take a large step back from business unusual, it's pretty clear that taking VC funds may not be the best way to build a business in many cases—I say that as a current VC investor myself. For one, VC funds are hard to get, and though such investments have dominated business headlines, they are estimated to fund fewer than 1 percent of startups overall. That means many of the businesses eager to secure VC investments aren't going to get them and must consider other options including bootstrapping. But beyond that very real reason to self-fund is an even better one: taking VC funds ultimately incurs very high costs for a business, much more than bootstrapping does in most cases.”
“Think of it this way: As a rule of thumb, founders typically give up 15 to 20 percent of their ownership with every round of venture financing that they take. In the excitement of getting a deal, it can feel easy to give up decision-making power and, depending on the terms (such as having seats on the board), VCs can wield large influence even with non-majority ownership, which can prove challenging over time as opinions inevitably diverge.”
“Another benefit of bootstrapping is that now is a good time to get deals on everything from office furniture to manufacturing equipment, due to the challenging business environment across sectors and trends like work-from-home. At the risk of sounding unsympathetic, other companies' losses—some related to taking outside money—could be your gains.”
“VCs demand hockey-stick-shape growth because their business model demands it. Your business model doesn't have to, and linear progress is a wonderful way to grow.”
“You may not grow as fast, but you definitely won't ‘grow out of business,’ either, like many businesses that took too much money too soon and burned through it all on too-large operations to meet unrealistic investor expectations.” READ MORE
On a completely unrelated note, robot pizza company Zume, which raised close to half a billion dollars without testing its theory, has shut down: “Once based in Mountain View, [California] but most recently headquartered in Camarillo, the firm planned to cook pizzas in the back of a massive truck, with robots, while en route to customers’ homes. In 2016, Zume delivered its first pies, and positive reviews rolled in on Yelp. But Bloomberg reported that the company quickly gave up on the cooking-while-driving model — cheese kept sliding around when the truck hit bumps in the road — and started parking in central locations to send out typical deliveries. Nevertheless, investors were intrigued — particularly SoftBank’s Masayoshi Son, famous for the $100 billion ‘Vision Fund’ that dumped $4.4 billion into WeWork.”
“Bloomberg reported that Zume CEO Alex Garden was projecting hundreds of millions of dollars in revenue and talking about becoming the ‘Tesla of fresh food, and the Amazon of fresh food,’ trying to get Son to invest.”
“In 2018, SoftBank poured $375 million into the company, according to Pitchbook, valuing the startup, still with a relatively untested product, at around $2.25 billion.” READ MORE
Meanwhile, back in the real world, Ami Kassar writes about how entrepreneurs can get comfortable with making a big decision: “Many entrepreneurs find themselves trapped. They know what steps they need to take next, but they’re unable to make the decision. I advise taking a deep breath and seeking assistance to make sure you grasp your financials. Consider working with a fractional CFO who can help you analyze your options and develop a comprehensive projection for your financials and cash flow. During this process, I find it’s helpful to create three scenarios: the worst-case, middle-ground, and best-case outcomes. You can prepare for contingencies and mitigate risks by envisioning what is likely to happen if nothing you try works. At the same time, exploring the best-case scenario can bring additional motivation and resolve.”
“A woman I recently coached has taken important steps to expand her business geographically. But she’s now feeling apprehensive about the way her role within the company has changed.”
“Suddenly, other people are doing the things she used to do, and she’s struggling to let go. Concerned about both finances and quality control, she is feeling real anxiety about the transition.” READ MORE
Increased capital requirements for big banks will also have an impact on smaller banks: “If banks have to keep more money in the coffers, though, it takes dollars off the table and that means greater scrutiny on borrowers. Smaller banks, particularly when credit is tight, are going to favor lending to their own depositors, [Michael Chaido, president and CEO at Washington Financial Bank] pointed out. That will likely make it tougher for borrowers who have struck out with their own banks to obtain loans. ‘It may limit people,’ Chaido said. It could also make it more difficult for syndications, where several smaller banks band together to spread the risk for a loan larger than any would make on their own.”
“‘What’s very interesting is that we participate with a lot of banks in larger deals,’ Chaido explained. ‘It’s going to come down to, Who am I going to lend to with limited resources? If your own depository institution isn’t giving you a loan, that says something.’" READ MORE
For some, those pandemic pivots continue to pay off: “Sometimes, the pivot is not about what you do but whom you do it for. For LaQuanta Williams, that meant ending residential cleaning service to focus on commercial customers. It’s a change that she is making permanent. ‘Covid sent my business in a direction I didn’t anticipate,’ Ms. Williams said. ‘I lost all of my residential customers in one day. Literally, the same day.’ Ms. Williams started her company, White Glove Cleaning Solutions, as a student at the University of Akron in Ohio. She was taking an entrepreneurship course, and her professor asked the students to create their own businesses. A friend noted that she was always cleaning, and an idea was born.”
“She rented an office and started passing out postcards. Her schedule began filling up almost immediately with residential clients. They all disappeared in March 2020.”
“It was scary at first, Ms. Williams said. But she had been researching electrostatic sprayers that would let her quickly disinfect surfaces. She bought two and began calling stores and offices offering her services.”
“Again, her schedule quickly filled up. A program to help minority suppliers connected her with several contractors, who hired her to do post-construction cleanup. She has had to hire five people to help her meet the demand, and she doesn’t imagine returning to residential cleaning.”
“‘When I do, I can be picky about clients,’ she said.” READ MORE
With the Northeast currently enveloped in haze, attention turns to the staggering cost of wildfire smoke: “The earth's warming climate is contributing to the problem, with temperatures in Canada unseasonably high this year. Lytton, British Columbia — typically a temperate town — hit a record high of 121 degrees last week, tying California's Death Valley. Hot, dry weather makes it more likely that a forest will catch fire and burn longer. Already, Canada's wildfire season is on track to be the most destructive in the country's history. Globally, air pollution kills more than 3 million people a year, according to the World Health Association. In dollar terms, the costs are vast and reflected in increased hospitalizations, missed work and school days, and lower worker productivity.”
“Air pollution adds $2,500 a year to a typical American's medical bills, a recent study from the Natural Resources Defense Council found. Across the U.S., smoke, factory output and car exhaust cost the economy $800 billion a year, or about 3 percent of the nation's total economic output, the NRDC found.”
“Perhaps unsurprisingly, high levels of air pollution also reduce earnings by making it harder and more unpleasant to work, adding a significant drag on the economy. Outdoor workers, such as delivery people, and landscapers and teachers are most affected, but office workers aren't necessarily safe. Even indoor air pollution spikes to three or four times safe levels during a wildfire event, studies have found.” READ MORE
Concerns about property insurance continue to grow: “The developments also prompt questions about how real estate investments in places like Florida and Texas — high-growth states not unfamiliar with extreme-weather events — will be affected by surging insurance costs and less capacity overall from the insurance market. Michael Power, a chartered property casualty underwriter at New York-based FHS Risk Management, said during a National Multifamily Housing Council webinar Tuesday that hurricanes and flooding cost the insurance industry $120 billion in 2022, one of the costliest years on record. About half of that sum came from Hurricane Ian. Florida alone accounts for about 80 percent of all property insurance claims nationally, Power said.”
“A recent survey by the NMHC, a trade group representing rental-housing owners and developers, found property insurance costs have risen 26 percent on average among respondents during the past year.”
“‘For anyone investing in Florida, it’s the epicenter of the challenges in the property insurance market,’ he said, adding that about 30 insurance carriers in Florida are on regulators' watchlists right now. ‘The demand for capacity is significant, and the capacity being offered by insurers has never been less. ... (There's) huge demand and very limited supply.’"
“But even for groups that do business in markets not considered as risky as Florida, the real estate industry now has to be in the risk-management and loss-control business, like it or not, Power said.” READ MORE
Yet another website, HotelSlash, promises the best deals on hotel rooms: “Websites like HotelTonight have long tried to solve the dilemma of when to book hotel rooms to get the best rates. Online travel agencies like Booking.com and Hopper have added price protection programs for the same reason. And still travelers complain about how hard it is to find a good deal on a hotel. Now a new site, HotelSlash, joins the quest, promising discounted hotel rates to members and a tracking service that monitors reservations for price dips. ‘We’re travel hackers at heart,’ said Jonathan Weinberg, the chief executive and a co-founder of HotelSlash. He also runs AutoSlash, a platform for rental car deals that will track reservations and tip off travelers to any decrease in prices so that they can cancel — most car rental agencies allow free cancellations — and rebook at the lower rate.”
“Users can book hotel rooms through HotelSlash by choosing their destination (either a specific hotel or a city), dates of travel, and number of travelers. Unlike other booking sites, HotelSlash sends an email with a link to the results, adding a step to the process.”
“The email shows up within minutes, and the results are robust. Even when I searched for a specific property — the Bellagio Hotel & Casino in Las Vegas — I got its room prices as well as prices for nearby hotels, including a variety of room types and rates, such as prepaid, non-refundable and refundable.”
“It’s not for loyalty-point hoarders. The site doesn’t allow users to enter their membership numbers, and though travelers may request points from a hotel directly, there’s no guarantee a property will comply.” READ MORE
THE 21 HATS PODCAST
“What Doesn’t Keep Me Up at Night?” This week, we did something different. We recorded this session in Chicago at our very first 21 Hats in-person event. In May, some 20 impressive entrepreneurs from around the country, from different industries, with businesses of different sizes and stages, gathered to talk shop for three days. The last thing we did was to record this episode in which we gave the participants the opportunity to ask the podcast regulars anything they wanted. Those regulars included Jay Goltz, Sarah Segal, and Dana White, and the questions addressed everything from hiring to motivating to delegating to pricing to coping with stress to what they wished they’d figured out sooner and to what still keeps them up at night.
And when there were no more questions, I asked those who attended the Chicago event what I could have done to make it better. That I would invite criticism in a conversation being recorded for a podcast audience, took some of the participants by surprise. But, as you’ll hear, it worked out pretty much the way I hoped.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren