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Summary:

VCs might dismiss small startups as “lifestyle companies,” since with only small investments needed they’re often too small for big VC firms to work with. But for the entrepreneurs themselves, it’s a way to keep control and avoid dilution. And there may be another reason not to take money, particularly if you’re targeting other small-businesses as customers: Personality.

Five years ago, Michael McDerment built an invoicing system for his web design business. Today, FreshBooks lets nearly 400,000 users invoice their clients, track time and manage expenses electronically. Not all are paying — the service is free for users with up to three clients — but it’s growing fast. “We’re seeing double-digit growth for both users and paying customers each month since our May 2004 launch,” he said.

McDerment, who is also a co-organizer of this week’s Canadian Mesh Conference on Internet technology, has grown the company slowly; four years later, it has only 17 employees. And he hasn’t taken any VC funding, choosing instead to bootstrap from his web design agency and some individuals close to the company.

Another small-is-beautiful powerhouse, Infinity Box, runs a web forms service called Wufoo. The company has 75,000 users, of which 3,200 are paying customers. It launched in July, 2006, and was profitable less than 10 months later.

VCs might dismiss small startups as “lifestyle companies,” since with only small investments needed they’re often too small for big VC firms to work with. But for the entrepreneurs themselves, it’s a way to keep control and avoid dilution, a sentiment echoed by David Heinemeier Hansson of 37 Signals at Startup School 08 and by Bo Burlingham in his book, “Small Giants,” which is all about small companies:

“To excel in all those things, they have to keep ownership and control inside the company and, in many cases, place significant limits on how much and how fast they grow. The wealth they’ve created, though substantial, has been a byproduct of success in these other areas.”

Infinity Box, which was spun out of Y Combinator with $18,000 in seed financing and has taken another $100,00 from undisclosed angels, currently has three employees. “One reason not to take money is that it slows you down,” said Kevin Hale, co-founder and head of user experience. “You start worrying about hiring, office space, facilities, taxes, and suddenly you’re spending a third of your time on that stuff instead of building the product.”

Many of the capital costs that used to force startups to seek money are now available on demand. McDerment cites hosting provider Rackspace.com as one reason FreshBooks has reasonable capital costs, and Hale says Infinity Box relies entirely on BitPusher for their hosting.

But traveling down such a markedly independent road meant these small business have had to find ways to stand out from the crowd and build lasting, loyal relationships with their customers. In other words, there may be another reason not to take money, particularly if you’re targeting other small-businesses as customers: Personality.

Wufoo’s site is a study in personality, with Shakespeare quotes peppered across its pages. “There were lots of other form builders out there, so our whole target was to be distinctive with the personality of the application,” said Hale.

FreshBooks’ site is also whimsical, with service tiers like “Time Machine” and “Private Jet” — playful language that wouldn’t fly with enterprise customers, but soars with smaller clients. “We’re an experience business and the currency of our business is relationships,” said McDerment. “Word-of-mouth marketing is our biggest driver.” It’s what 37Signals calls Opinionated Software.

If you’ve got big financing, you have big investors with big expectations. It’s harder to have attitude and personality when you’re targeting large enterprises, so if a startup needs personality, it’s important to make sure the investors agree with the philosophy. VC backers will want name-brand customers, and an enterprise CFO probably can’t put “friendly” on a balance sheet.

And keep in mind that enterprise customers typically need customization. “The chances are, big companies can’t take [the software] as is,” said McDerment.

Hale, however, thinks it’s possible to keep your personality even with enterprise customers, pointing out that Wufoo users include several big companies. “But you have to be firm,” he stressed. “Don’t take money to do features because you lose sight of your original vision. You have to be conscious of saying, ‘Don’t let the money change me.'”

  1. Absolutely love it – As a CEO of another bootstrapped company (and we compete with Wufoo also ironically) I could not agree more. I would also point out that you _can_ bootstrap and serve larger clients at the same time — just takes longer and a much more toll on you.

    In our case (questionpro) it took a longer time to build the company cause we had to chase every dollar since we completely relied on self-funding, and more importantly client funding (aka license revenue.) — but after some time, we got good at it.

    Of course you could say we are lucky – (which we definitely are.) – but we were quite frankly also not “plugged in” the VC scene either in the Seattle or Bay Area – so it was easier for us to ask money from clients than from VC’s!

    -v
    http://blog.questionpro.com

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  2. I was at MeshU today in Toronto, and I was pleasantly shocked at just how great this event actually was.

    I learned something significant at every session I went to, and everyone was eager to introduce themselves… to ask what I did. That’s a change!

    Congrats to Michael and team; great article, Alistair!

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  3. Thanks for the great article. My wife and I have been bootstrapping our company – trunkt.org – for 2 years.

    Now the company – a wholesale directory of creative entrepreneurs targeted to specialty retailers – makes us a lovely “lifestyle” income and makes our clients happy. Isn’t that really why we’re all entrepreneurs?

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  4. In case you’re interested, it’s http://www.trunkt.org

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  5. I like the sound of this. It’s tough being a small company starting out, though.

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  6. In my experience, taking seed financing for s startup is the worst way to do it since you lose motivation by working very hard… for someone else who, apart from bringing in money, does nothing.

    Furthermore, starting very small makes for an awesome experience and while “seeded startups” will waste most of their time writing up “reports” for their “angels”, the “free agents” will be investing 100% of their time growing their company.

    Others might see things differently and that’s fine with me.

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  7. [...] Croll has a really insightful post on GigaOm in which he talks about the benefits of being a small start-up, and features two of my [...]

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  8. I suspect bootstrapping is more common than many expect. There are many advantages. As noted above, it’s great to be able to focus on the core value offering rather than on getting the next round of cash. Crucial business decisions are made by the best-suited people: the company founders and their hires, who know the product and the opportunity. Fiscal discipline. And while VC-backing once held a certain cachet, that was tarnished when the Internet bubble burst.

    Having a prominent backer can provide some visibility, but lack of it hasn’t hindered us. McObject (www.mcobject.com), which develops embedded database software, has grown a customer list that any VC-backed venture would die for. In our biggest licensing yet, just yesterday we announced DIRECTV would use our eXtremeDB database technology to manage programming in its set-top boxes (see http://money.cnn.com/news/newsfeeds/articles/marketwire/0399106.htm ).

    You see many veterans of successful bootstrap ventures go on to utilize this model – it’s as though, once you see it can be done, there’s no going back to the distraction and loss of control of venture funding.

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  9. [...] with its 300,000+ new users since 2004 doesn’t exhibit too many technical problems and is said to be doing very well with zero external investment. But it is only one of many vendors vying for attention in this [...]

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  10. [...] “VCs might dismiss small startups as “lifestyle companies,” since with only small investme… Posted on June 9th, 2008 in Interesting [...]

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