1Mby1M Virtual Accelerator Investor Forum: With Scott Sandell of NEA (Part 3)

Scott Sandell: Just to be clear, I have been fortunate enough to have invested in and been a part of a number of unicorn companies. Not all of them were bootstrapped companies. I don’t think of that as an essential ingredient at all. What’s interesting is to think about why bootstrapping is a valuable discipline and why some of the companies have chosen to bootstrap and what it did for them.

I think the first and most fundamental thing is that it establishes an entrepreneur’s commitment to what they’re doing. If you invest your own capital or you take a lower salary, you become much more committed to making that company successful than if you just start off by taking somebody else’s money which, to some people, seems like a casual activity. I don’t mean to make light of it. It brings me to the second point.

When you decide to take somebody else’s capital, whether VC or angel investors, you’re no longer on the journey by yourself. You’d have taken on the responsibility of figuring out how to make the company successful not just for yourself, but also for your investors. It’s the same decision you make when you hire your first employee. It’s fine when it’s just you and a couple of founders who have decided to take the same risk.

When you hire your first few employees, you’re now responsible for them as well. That, I think, is a huge decision. It often comes with expectations. Employees expect your company to grow and be a successful. Investors expect that your company is going to grow and ultimately will become profitable and valuable. These are things that you may or may not want to take on as a responsibility at the beginning. After all, most entrepreneurs start out with some idea which isn’t exactly fully-baked and they’re not entirely sure whether it’s really going to work. I think it’s really valuable where you get to the point where you’re committed to the company you started and you believe in its success before you hire an employee or take on somebody else’s money.

Sramana Mitra: Experimenting on venture capital money is very expensive. If you run out of money while your experimentation is not complete, the chances of you going out of business is very high. Whereas experimenting on your own money, you’re not going to go out of business as long as you can manage your cash flow. The other thing I want to call out is that not all companies are necessarily as easy to bootstrap.

If you’re doing something in a very highly technical infrastructure, those tend to be fat startups. Although I’ve seen some companies bootstrap very capital intensive projects, largely those tend to be done as fat startups. You have to raise money upfront. The problem, for first-time entrepreneurs, to get financing to do fat startups is not at all easy.

For our audience, we cater vastly to first-time entrepreneurs. We have some serial entrepreneurs. The other thing is the investors’ psychology has changed quite a lot over the last five to 10 years. This lean startup movement has taken so much momentum. It has become so much cheaper to get something going. Even seed investors are expecting that you’re going to come to them with validation. That has changed the early stage capital game completely.

Scott Sandell: It’s also worth noting that the venture capital industry, itself, has contracted enormously in both dollar terms and in terms of the number of venture capitalists and venture capital firms. I don’t have the exact data off the top of my head. Anecdotally, the NVCA probably had 800 members in 2000. Today, it has 400 members. Of the 400, probably a hundred are active in the United States. Of the hundred, a huge amount of the capital is concentrated in the top dozen or so. It makes the challenge of raising money that much harder.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Scott Sandell of NEA
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