Last year Intuit Inc bought a company called Rocket Science Group for approximately $12bn - a business that was founded in 2001 and focussed on email marketing - trading as Mailchimp. The founders initially started an e-greetings website but launched MailChimp after one of their most popular e-greetings card characters. The most interesting part of the journey to eventual acquisition was the fact that the founders, Ben Chestnut, Mark Armstrong and Dan Kurzius did it by ‘bootstrapping’.
The definition of Bootstrapping by Investopedia is when the entrepreneurs 'rely on money other than outside investments. An individual is said to be bootstrapping when they attempt to found and build a company from personal finances or the operating revenues of the new company’. Now this is rarely possible - as Beauhust, the data provider, points out in its research ’The Stake of the Founder’:
“The stake of high-growth UK founders is greatest at the seed and established stages. For seed startups, whose funding typically stems from grants, angels and the crowd, founders own an average of 48% of shareholdings. Average founder stake is 33% for companies at the venture stage."
Source: The Stake of the Founder, Beauhurst Research
There are plenty of examples of successful exits at strong valuations but, having been diluted so much, a less than appropriate exit value for the initial founder.
It is all very well trying to minimise dilution; however, delaying an equity raise may mean not taking advantage of the growth opportunities ahead or building the economic moat to beat your competitive set. Bootstrapping is not possible for all. However, at the core of Finstock Capital’s philosophy is that there should be more non-dilutive solutions for founders. For example:
Don’t sign a short term CLN when you have a Term Sheet on the table - use debt to bridge you to your next round. We have seen this time and again where founders decide to use the support of their incumbent investors rather than use external parties. It’s great as they have supportive shareholders who are keen to help the business. However, this help comes at a c.20% discount to the next fundraise (which is known). If this is going to complete in less than 6 months time this is an annualised 40% rate. The incumbent investors will invest the amount anyway - don’t give your equity away for less than its worth!
Use your debtors to your advantage. Early stage businesses may not have that many debtors but they are likely to have a few - perhaps a small amount of regular paying customers, some outstanding invoices, or an R&D reclaim. Access to the cash may seem unreliable but there are ways to get access to capital which is non-dilutive. ARR funders, an increasing area of growth both in the US and the UK may look at loans against your ARR book, or invoice financiers may be able to support against those invoices or finally R&D lenders may be able to accelerate those payments. Or bespoke operators like ourselves who can look at the business in its entirety to see how we can help.
Build your business structures correctly. Like any building, the foundations of a business and the structures around it are of paramount importance. If your business has a profitable UK division but loss making international growth arm or if it has a product that is profitable but is loss making as a group, make sure that the reporting is clear and defined. The clearer the business breakdown the more likely that lenders will be able to support it - against the individual component parts. A recent example of this was a loan we provided to a technology business which as a group was loss making but underlying had a profitable arm and a cash thirsty growth arm. Lenders can support this growth with the knowledge that there is a fundamentally sound core business. Think outside the box.
Companies such as Finstock Capital exist to support growth businesses in a non-dilutive fashion. We aren’t looking to take warrants - but we seek to find ways to support the business and its founders. It could be that its a combination of all of the above! However, we do believe that founders should protect their own ownership as much as possible and not roll over to incumbent investors to keep them happy. There is always a counter-argument.