I’m trying to build the smallest company ever.

My goal is to build the smallest company anyone has ever heard of. I’m not trying to raise VC, or expand into the European market by next year. Instead, I want to build the tiniest, most unknown company that resembles a lemonade stand in terms of its size.

The smallest company looks like this:

  • Have some crap in your apartment that you want to get rid of? I’ll come pick it up and get it out of there for you.
  • Buying a pair of shoes? I’ll go get them from the store for you.
  • Need a place to crash? You can stay on an air mattress in my living room if you’d like.

These are tiny transactions, but they were literally the origin stories of the companies that became:

  • 1-800-Got-Junk?
  • Zappos
  • Airbnb

Don’t code a new mobile app. Go solve someone’s problem in under a day’s time. And today I’m aiming to help a single person find some growth funding for their 2 year old bootstrapped company. No more, no less.

Revenue-based Financing: The Trade-offs, Explained.

If you want to learn about revenue-based financing (RBF), you typically end up at a site where they are also trying to sell it to you. And as a result, the message gets muddled. All of the benefits of RBF are raining down on you from on-high, and along with them, the trade-offs have been stripped out.

If you’re thinking of RBF, you’re going to be making trade-offs, so let’s display them loudly here:

You’ll pay more cash long-term, in order to pay less during your months with lower-revenue.
That’s the primary value prop of RBF. Your repayment of the loan goes up and down with your revenue, which is great, because as a startup you’re no longer stuck servicing a debt that you may not have the revenue to properly cover if you’re going through a slow month or two. The repayment adjusts to the performance of your business. However, as a result, the lender is taking a bit more risk on you. i.e. What if every month for your startup ends up being a “down-month”? Well, to make up for that risk, they charge higher interest. Lighter Capital for example, explains that “repayment caps usually range from 1.35x to 2.0x”.

Now, admittedly that is the “cap”, but if you went into a bank and they informed you that you’d be paying 100% APR on a loan, you may look elsewhere.

You’ll give up far less value long-term, than you would otherwise with equity-based investments from an angel of VC (that is, if your startup does well).
Paying 2x the amount of the loan seems outlandish, that is, until your startup succeeds and you compare it to equity. 2x on a $500,000 RBF loan that helps you scale is certainly hefty, but it’s nothing compared to 20% of equity in a company that ends up being worth $10M. Instead of paying $500,000 of effective interest, you’re giving up $2M in equity at the exit (in this scenario at least). Those numbers obviously get even more dramatic if your company grows beyond that and becomes worth more. Imagine having a $50M startup, giving up $10M in equity – all when you could have taken out a $500k loan and paid a “measly” $500k in interest back on that over time. It kind of hurts to consider.

Revenue-based Financing is non-dilutive.
Simple. You’re trying to attract the best talent. If you have more equity on your cap table, you have more flexibility when creating compensation plans for potential co-founders or employees.

Save yourself time.
If RBF is a good fit for your company, you won’t have to spend 4-6 months doing the VC roadshow. Assuming you qualify, there are typically a few meetings, a few emails, and some paperwork and then you’re off to the races. Much better than pitch after pitch, and then driving the VCs to a close.

The obvious caveat: All of this only works if you are generating revenue.
It may be obvious, but let’s be explicit. If you’re super early-stage and don’t have revenue, RBF will clearly not be a fit. You then may have to go the angel / pre-seed route.

See what we’re working on as it relates to revenue-based financing over at Bootstrapp. I also plan to keep digging deeper into this subject moving forward so stay tuned and let me know if you’d like to see anything else in particular.

What’s left to take away?

Sometimes the most difficult path forward is the easiest one. When starting a project or building a company, there are so many elements of the product + company that need to be addressed it’s often overwhelming. A logo, LLC, social media, pitch deck, distributors lined up, etc. The list expands as you complete items at the top of it. 

However, on the flip side, you can go minimalist. For example, until recently Clearbanc had a woefully under-designed, lackluster landing page, and the UI of their web application still leaves much to be desired. However, they’ve raised $120M and have $1B of demand for their funding model sitting in their backlog – and that’s because they’ve figured out a novel way to solve a core problem for their customers (who are other startups). 

If you’re meeting someone’s need in a unique way, they don’t care very much about your logo, or how nicely designed the ‘contact us’ form is on your website. It may seem obvious, but it’s something we all need to be reminded of every day. Because there are a lot of shiny objects out there, and it’s difficult to see past them to the finish line that’s staring you in the face. 

For me, I’m currently facing this issue with Bootstrapp. There are so many features I’d like to build, but the fact is: I’ve had a few hundred people sign up and have received positive feedback on the value it’s created for those users. So why distract myself with web illustrations and more features. What happens if I just double-down on the basics, turn 200 users into 200,000 and monetize the traffic?  And why do I, and so many others, avoid doing this?
(I have some theories for why I personally do this, which is that it’s partially fear-based, along with a dose of self-sabotage – certainly warranting another post on this subject alone.)

Point being, it’s easy to come up with distractions and detours. Focusing is the hard part. A designer knows he has achieved perfection not when there is nothing left to add, but when there is nothing left to take away. I believe that often, the same principle should be applied to Founders.

The Founder’s Capital Stack

Let’s get on the same page: The “capital stack” refers to the legal organization of all of the capital placed into a company or secured by an asset through investment or borrowing. The capital stack determines who has legal rights to certain assets and income, who receives priority of payment in the event of an uncured default, and in which order each party may be repaid or given authority to take over or liquidate assets in the event of a bankruptcy.  (source)

Now, if you search “capital stack startup” you’ll see more than a few articles, nearly all of which have the baked-in assumption that the company in question is being financed with venture capital.

Certainly, a capital stack is extremely relevant during a venture raise. With the number of lawyers, investors, founders, lenders, and advisors potentially involved a founder must be sure that their cap table and capital stack is in check. However, what about a capital stack that exists to align the company to the desires of a founder, and not the preferences of institutional investors?

When considering what a Founder’s capital stack might look like, not surprisingly, it’s essentially in direct opposition to that of a traditional venture-funded capital stack. Here’s what a typical capital stack looks like, according to Chessboard Capital

Note that revenue is king. If you can generate revenue and bootstrap to success, you’ve just eliminated 3 of the 4 sections within the above stack, and you’re all that’s left when payday comes. 

Even if you have to take out debt from cash flow, you’ve now eliminated two of the sections, and two players who are going to get paid before you do. Your new capital stack emerges like this:

Now, as you pay off that debt, obviously you become increasingly in a better position as a founder.

Understanding your company’s capital stack is critical for venture fundraising – but it also provides insight into the fact that you may want to avoid it entirely.

ROI of Bootstrapping

The interesting thing about calculating the return on an investment is that for some odd reason, despite it being the result of a two-part equation, everyone always seems to focus solely on the return portion.

VC’s are usually seeking a 10x return. That’s all fine and dandy by me, because 10x isn’t wildly crazy. That multiplier is only crazy when you’re pumping $40 million dollars into a fragile young company, and then expect $400 million to come out the other end within a few years. There’s a fair amount of unhealthy growth baked into those assumptions.

However, focusing on the investment portion of the equation – and making the math work for you at small scales – is something akin to being a trader and only buying shorts. No one seems to do it, but there’s a ton of value to capture.

Let’s take a quick example: if you took $100 bucks, and gave yourself one year, I’d bet that you could turn it into $1,000 relatively easily – all while investing much less time, energy, and sweat equity than you would have if you had shot for 10x starting with a $40M cash infusion. (Yes, I know, money scales incredibly well and the absolute amount is clearly smaller in the $100 – $1,000 case.)

So now let’s turn to your decision of how to fund your startup, briefly outlining the scenarios of:

  1. Venture Capital investment + expected ROI
  2. Simple-math bootstrap investment + ROI
  3. Realistic investment + ROI for a side-hustle.

Pretty obviously, you end up with target revenue of $3,600 in the third scenario, and are generating the same rate of return.

This may not pay your bills quite yet, but if someone were to be able to do this year over year, it will add up quickly, you’ll own 100% of the company, and you truly won’t have a boss.

Interested yet?

To Code or Not To Code

I went on a fool’s errand: to code my own personal portfolio website.

I began building it, from scratch, with my worthless HTML and simply uploading the files to the server.

Turns out, that’s a waste of time. Learning to code is great, spending hours and hours to get somewhere that can take 20 minutes if you leverage other tools and technology? That’s a fool’s errand.

Analysis of a Quarter Life Mini-Crisis

I’ve been successful professionally for the most part – the problem is that I’ve jumped around too much.  The world likes specialists, and as a result, my generalist approach has been a bit of a hinderance.  

So in an effort to map out my past, and to see what has worked and what hasn’t, and what jobs I had which actually delivered on my values – I mapped out each job on three different spectrums.  These spectrums are what I want out of a career.  I want to be an entrepreneur and employ creative juices while not entirely destroying the world in my attempt to make a profit.  So what have I done with my life so far in regards to those things?  How have I fared in actually doing things I care about?  And most importantly, are there any trends that show where I’m headed?

How Businesses Unconsciously March Towards Singularity

The companies who hold out, hiding behind firewalls and not engaging consumers with openness and transparency are the same as the individuals from primitive villages who were secretive and selfish – not sharing their day’s catch or those who steal resources from the community. Eventually, those individuals were either forced to join the rest of the village in a communal effort (instead of hoarding things for themselves) or they were fully ostracized – a potentially fatal destiny as living on their own was extremely difficult at the time.  

The same is true in modern business.

The singularity, in simple terms, is simply bringing things together. Knowledge, resources, information – which is essentially the only thing that any business has ever done. From bringing spices to the Americas from India shrinks the distance between two continents. The telegram shrunk the distance between two people. And modern businesses have simply developed more sophisticated models of doing the same thing – connecting two parties that were previously disparate.

Singularity will be when all information and all the resources of the universe are available to anyone, at any time, in an instant. And we’re working together to get there whether we know it or not. Even a horrific dictator, killing in the name of greed and power, is essentially doing so in the name of creating their own individual singularity

How to Fix Corporate Social Responsibility Programs

Some consumers don’t care about whether or not a company has a corporate social responsibility program.  However, perhaps that’s because, despite corporations across the globe collectively spending over $20 billion annually on CSR programs, some of those same firms concurrently lobby for deregulation in their industries to allow for more growth and profits, consciously counteracting their own CSR efforts.

This likely works to their advantage in the short term because the general public tends to pay more attention to the press than it does to regulatory frameworks.  However, as the world continues to become more transparent and corporations are increasingly called out for discrepancies between external-facing communications (such as CSR programs) and shrouded lobbying efforts, the need for truly embodying the philosophy of those CSR programs will become apparent.

For brands who do fully embrace those philosophies, they become known instead as being purpose-driven.  As a result, studies show that those brands outperform their peers in numerous ways – such as gaining 46% more wallet share and outperforming the stock market by 133%.  Starbucks, Whole Foods, and IDEO are consistently used as examples of massively successful firms who still work daily to contribute to their employees and society as a whole, and their balance sheets can speak to how the world has repaid them for it.  

However, simply embracing a CSR program still may not be enough.  Consumer engagement with CSR programs is lacking despite the fact that individuals and organizations now strongly influence, and partially control, a corporation’s’ brand, products, services, and even operations.

This results in brands needing to answer several questions.  If they are pursuing the type of growth and profitability that comes with being a purpose-driven brand, how can they properly communicate their CSR programs so that those resources aren’t wasted?  Should media spend and creative strategies be measured differently when being employed to communicate CSR efforts?  And most importantly, if that is the case, how should it be done?

“Creating a strong business and building a better world are not conflicting goals – they are both essential ingredients for long-term success.” 

– William Clay Ford Jr., Executive Chairman, Ford Motor Company