I am a big fan of Joel On Software blog & FogCreek Software.
Yesterday Joel announced that, Trello, their visual Project Management product, is now an independent venture funded entity, spun off FogCreek Software. One of the comments in HackerNews caught my attention and got me thinking about an issue — how do you decide if your product idea needs external funding or not?.
“I am no longer a Fog Creek employee (I left to join an education startup a bit ago), so this is not an official opinion, but anyway:Joel wants Trello to grow a lot faster than Fog Creek could bootstrap it. In my personal opinion, a big reason why Copilot and Kiln never quite made it was that we didn’t have the developer resources to dominate the market when we were in a good position to do so. Because we insisted on bootstrapping, we necessarily had very small teams, meaning that competitors, who were willing to go into debt to have larger teams, were able to come from behind and surpass us in both marketing and features. In other words, while both products are successful and profitable, they likely could’ve been a lot more successful and profitable if Fog Creek had thrown a lot more resources onto them back at the beginning.”
How do you decide if you should bootstrap to profitability or raise funds at the beginning?
There is 37signals and Zoho school of thought to bootstrap your way to success. And then there is SalesForce at the other extreme. There is no generalized right or wrong answer to this question and very often you find startups challenging these norms.
Related Article: The AppDynamics Story — From Idea to $3.7 Bn …The Journey Continues
Bootstrapped model: If you are in an established (read commoditized) market with lots of competitors it makes sense to build your way to profitability by bootstrapping. If you are building yet another Mailchimp competitor, solving “bulk emailing” for a niche ignored by them, and solving it elegantly while building your way to profitability may be the best approach.
Venture funded model: If you are in a new market with lots of business model or technology innovation happening around it, you should try to build / grow as fast as you can. At Chargebee, we are in this category with a fast changing Subscription business model that is disrupting the way you think about customers & sales, and creating new growth opportunities across sectors.
In the case of applications like CRM, you always evaluate something like SalesForce though you may like a Close.io or a Pipedrive. And you tend to hear opposing voices within your team, advising you to choose an established solution because “it can scale”. By scale, they mean feature richness, integrations, small aspects of product features that makes every day life easy — the benefits of being in market for years & having fixed nagging issues for customers (ex: SalesForce automatically creates follow-up tasks based on rules. It is a simple thing, but I have repeatedly seen this being a reason for sales managers to choose this because it is important for them).
Though you can get funded as a new player in the CRM space, it takes years to challenge the established player unless you are complimented by market forces. Ex: Cloud + Behavioral Analytics + Inside Sales could be a game changer & could leave SalesForce behind. Let me explain. If behavioral analytics becomes the key to doing sales in SaaS (like it is now), established products like SalesForce can be challenged by players like Intercom that provides a totally different dimension to doing online sales and they can dominate that market. Everybody else in CRM space, playing by established rules is trying to play catch-up with the leader and not disrupting in a big way. This is one category.
Another category is one in which the market leaders are not well established, yet. The market itself is being defined by new way of doing things, across several verticals and products are still maturing. The early mover is even probably at a disadvantage making mistakes along the way, building & rebuilding stuff while lots of new players are emerging building better solutions (this is the space we believe we operate in with Subscriptions).
The comment in HackerNews resonates well here with the second category explained above — the opportunity probably missed by Kiln & Copilot, when they could have totally dominated the market. Github totally dominates the market. Kiln probably missed the bus by not moving fast with Git & SaaS model. If they had deep pockets, they could have been the market leader taking on Github.
Both these models work and there are always exceptions (isn’t that exactly why we startups exist, to buck the trend?). Choose whichever suits your style. But if you are in second bucket, we should be aware that competitors may take the market further away from you, if you don’t do justice to your startup with right resources at the right stage.
Krish is the co-founder & CEO of ChargeBee Subscription Billing.