Raise When You're Holding the Business Back

There is a badge of honour in the startup world worn by those who bootstrap. We wore it proudly for a long time. We liked the control, the freedom of not answering to anyone but ourselves.

But there is a dangerous trap in bootstrapping: you can become addicted to efficiency.

I think a lot of founders look at metrics like the "Rule of 40" or a high LTV:CAC ratio and think the higher the number, the better. That’s what we thought. We were running a business that was ridiculously efficient. Our metrics were off the charts.

But the reality is, you don’t get extra points for being too efficient. If your sales efficiency is four times the industry average, investors don’t look at that and say, "Here is a higher valuation." They look at that and say, "You are under-investing in your growth."

At a certain point, efficiency stops being a virtue and starts being a liability.

The Opportunity Cost

Tobi Lütke (founder at Shopify) has talked about the feeling he had before their Series A - that by not raising money, he was holding the business back from its true potential. That concept really stuck with me.

In early 2020, just before the pandemic hit, Rewind was having our best month ever. January was a record. Then February beat January. But we looked around the market and saw a competitor, OwnBackup, raise $50 million just to do Salesforce backups. Later, they would raise another $150 million.

We looked at our own numbers. For every dollar of capital we had raised historically, we were generating four dollars of ARR. That’s a 4:1 ratio. In the VC world, a 1:1 ratio is considered world-class - 4:1 was awesome (and very Canadian from what I was told!).

We were doing four times "better" than world-class, but all that really meant was that we were leaving massive growth on the table. We realized that if we had raised that extra money earlier and spent it on sales and marketing, our revenue wouldn't just be efficient - it would be significantly larger.

We didn't want to look back in fifty years and wonder, "What could Rewind have become if we had actually added fuel to the fire?"

From Bootstrapped to Series B

So we changed our strategy. We raised our Series A, and then very quickly after, our Series B led by Insight Partners.

We didn't raise because we were running out of cash. We were actually profitable at one point (if you counted some government credits). We raised because we had built a machine that worked, and it was irresponsible not to feed it.

Because we waited, we had leverage. We didn't take the highest valuation offered to us in our Series B. We chose the investor who understood the backup space best. When you have a solid business with real unit economics, you get to choose your partners, not the other way around.

The Verdict

I still believe you should bootstrap for as long as you can. It forces you to build a real business, not a venture-subsidized experiment.

But once you have the engine built, look at your efficiency. If you are killing yourself to save a dollar when spending that dollar could bring in five, you aren't being disciplined. You're being fearful.

Don't raise money to start your business. Raise money because you are holding your business back.