“Is Your Startup A Cash or Equity Business?“, post by Elad Gil
This week I’m looking for outside opinions on the wisdom of bootstrapping an equity business.
Recently, I ran across the above blog post and have found it useful in describing startups to “big business” people. By “big business” people, I refer to people who haven’t interacted much with startups and who really only understand 401Ks and regular W-2 paychecks.
Elad’s post makes the point that there are really two kinds of startups:
- Equity Business: Those whose hopes and dreams come from their equity value (i.e. one day they want to exit and exchange the equity for a chunk of change).
- Cash Business: Those whose hopes and dreams come from generating cash quickly and being their own boss (i.e. not really building towards an exit).
My co-founders and I are working to build a great company and one day hope to convert our equity into a chunk of change. In the categories defined by Elad, we resemble an Equity Business in every way, except in our approach to raising money. For instance,
- We believe that our employees will ultimately make a chunk of change themselves through their equity. They are in turn willing to take less than market salary, yoking themselves alongside us founders in building value into that equity.
- Each month, we choose to spend more than we make as we reinvest to grow. So we are not “throwing off a lot of cash” upfront, as discussed by Elad.
- We are creating a uniquely valuable position in the marketplace that will ultimately provide nice returns for the company, even though our first few years will be cash losers.
- There are strong network effects with the technology that are slowly coming into motion.
- There are strong barriers to entry, including patents, trade secrets, and the fact that our product is really hard to build (much more so than a website startup for instance).
- There is customer lock-in as people finding great results with our product come back to order more from the menu.
With all of the above characteristics, we are an Equity Business. Yet in raising money, we are bootstrapped and small angel funded – which are the hallmarks of a Cash Business.
As far as I understand, this is a unique position for a startup, especially one like ours that has been generating revenue for 18 months already. This provokes two questions:
- Are we in a startup “no man’s land” from which few ever emerge successfully? If so, why do you think? If not, can you name bootstrapped companies that have had nice exits?
- Or, are we just part of the increasing “cool” trend for startups to reject traditional VC funding avenues, opting instead for the Super Angel-like alternatives?
What do you think? I’m looking for honest feedback – I have a thick skin so don’t worry about offending me!