When starting a new side project that may or may not become a company, it’s common to have a “fuck the world” attitude. You’re going to blaze a new trail, your thing will be different. You will embrace the latest things and shun the old things. No one else understands.

A certain level of this is healthy. It drives you. It gives you a fire. It gives you a voice. The problem is when you start getting carried away with this and apply it to all aspects of your young company or side project. (You’re not sure quite what to call it yet.)

Sooner or later, you start innovating where innovation is not needed. You have ideas and you apply them to problems that don’t exist. We did this at LayerVault, and it caused for some problems down the road.

When you poo-poo something that others are doing, there are two ways to do so: with a surface-level understanding or with a deep understanding. Whilst moving fast and breaking things, most of your opinions will be surface level. For things that are important to your company, stop, take a deep breath, and examine the options under a critical lens.

We thought we were special and above-it-all in two big ways: our approach to raising money, and how we structured the company from the get-go.

When and How to Raise Money for Your Startup

In the very early days, my cofounder and I were religiously against raising money for our startup. This was mid-2011. After reading our share of Signal vs. Noise1 and other like it, we decided against the idea of raising money. We had even gone so far as to create a site called Bootstrappers’ Discount, which would offer discounts to other bootstrapped companies.

Fast-forward 9 months and we were raising money.

Currently, it’s not hard to find a backlash to the idea of venture capital. From the outside, venture capital can seem very silly. When running a venture-backed company, silly things can happen. Valuations can feel like a name-the-highest-number-you-can-think-of competition. But if you pull back the curtain a little bit, you realize that valuations don’t mean much. The cap table gives you a much better picture of the company. It decides how the spoils will be split in a liquidation event. Just because the valuation for a company is sky-high does not mean that the original founders have more than a nominal stake in the company.

Part of the problem around a certain backlash to venture capital is rooted in one of two things: a lack of understanding or having had a bad experience with it in the past. In our case, it was a lack of understanding.

So, why do companies raise money? That depends. The good companies raise money if and only if they need it. This is not a need as in, “If we don’t raise money we will go out of business.” This is a need in the form of, “If we don’t raise this money, we won’t be able to follow the plan and we’ll miss out on some big opportunities.” They are categorically different, and the latter is also more susceptible to investor storytime.2

Money can and should only be raised for businesses with a potentially “venture-scale” outcome. That is to say, your business needs to be worth $1 billion one day (usually 7-10 years from when you first take money). If that’s not possible for your idea or side project, the economics for venture capital don’t make sense. You can and probably should bootstrap your business. You’ll be better off down the road.

And if you do think your side project could use some VC dough, realize that successful companies start out all sorts of wacky ways. The bar is lower the earlier the stage. As you start raising successive rounds, the definition of what your business is starts to crystalize. It becomes harder to change the older your company becomes. One of the things you will run into after your seed round is the question, “How big can this really get?” You need to have a strong story for how you’ll continue growing. I recommend checking out Steve Blank’s definition of market types3 to help answer this question.

From the outside, it looks dumb, even frustrating. People are raising money for the Netflix for dogs, and the Uber for cats. If you take more than a surface level look at some of the established firms out there, you’ll see careful calculations and reasonably smart investments being made. Investors don’t want to be left behind on the next big thing.

But the best SaaS companies often don’t need the money or would be fine without it.4 When it comes down to raising money, terms—not just valuations—are decided by leverage. An investor can always walk away from the table at any time and wait for the next good-looking deal. To raise money successfully,5 you also need to cultivate that position for yourself: the ability to walk away from the table at any time.

The way to do so is not to learn the lingo or to lifehack investor conversations. It’s to build a business that looks similar enough to other startups at your stage. This is a business with cash flow, happy customers, and still plenty of room to grow. If push came to shove, you should be able to tighten the proverbial belt to not have to raise money. This is the position your startup needs to be in, every time it goes out to raise money. If it is not, your chances of a successful raise will fall close to zero. This is what happened with LayerVault and we experienced the Fatal Pinch.

The rule to be derived from this explanation is to only raise venture capital when it is absolutely necessary for the opportunity at hand. If possible, delay fundraising as much as possible until you have demonstrated concrete progress.6

Generally, people who swear by bootstrapping are failing to maintain a full awareness of their financial options in all situations. People who swear by venture funding may not value every dollar in their possession, and will have a hard time when things get tough. Venture capital should always be an option. When it becomes the option, your company is in trouble. You want to have the grit of the bootstrapper with the vision of the venture-funded founder.7

I’ll expand further on the topic of raising money in “The Hourglass,” and about what your company needs to look like to raise money at each different series.

How to Structure Your Company

Unless you have experience running a venture-backed startup before, this is not an area where you want to innovate. Keep it as boring as possible. Listen to Kirsty Nathoo and Carolynn Levy’s lecture on legal and accounting basis for startups. Every hour you invest getting it right now will probably save you ten (lawyer) hours down the road.

At one point, LayerVault was an S-Corp (because we were going to do it differently, dammit). This caused for some extra headache during the process of getting our Series A closed.

Don’t let this be an excuse for not understanding the intricacies of different aspects of your company. You still need to learn everything. Just know that thousands of other startups have been in the exact same position as you, and whether they were an S-Corp, LLC, or C-Corp probably didn’t affect the success of their product. Certain corporate setups, bylaws, and so forth are the default because they remove as much work as possible from managing a venture-backed business.

Realize that you should be innovating with your product, not with the internal structure of your company. Keep it simple, stupid.

Your company is a snowflake

Every company is different much like a snowflake is. Just don’t forget you might just be part of a grimy snowbank on the side of the BQE.

Know that folks like Paul Graham and Joel Spolsky have thought about these issues a lot more than you have. They have many more data points. Their advice is not some fever dream. Study their works carefully. Startups have more armchair quarterbacks than ever. Try to ignore them as best as you can, and formulate your own playbook based on those that have seen thousands of companies that look like yours.

Your company’s product should be special, but your company structure should not be.

Focus on fixing your customers problems, not playing house.

  1. For those unfamiliar, the two partners of Basecamp née 37signals, David Heinemeier Hansson and Jason Fried, are big proponents of bootstrapping business. They have a section on their site dedicated to the superhumans capable of bootstrapping a business called Bootstrapped, Profitable, and Proud. They also write about it regularly on their blog, Signal vs. Noise

  2. This might be my favorite phrase I’ve come across in the last year. It perfectly encapsulates the storytelling and sometimes silliness that goes into a good pitch. As far as I know, it was originally coined by Maciej Cegłowski in his talk at the Beyond Tellerand festival. When you’re having trouble raising money, every round raised looks like a strong case of investor storytime. 

  3. Blank talks a lot about this in The 4 Steps to the Epiphany. Realizing what market type you are can also help you with product and customer development. 

  4. I can’t speak much for consumer products that go the volume-then-ads route, since I neither care much for services that look like that nor do I know much about them. 

  5. Raising money successfully is not just the terms of the deal upon close. It is also how much time you spend raising and how much of a distraction it was to the process of running your business. 

  6. Within reason, obviously. 

  7. Those that are able to bootstrap venture-scale businesses without taking outside capital are superhuman.