How to raise venture capital: Bootstrapping and beyond

8 min read
11 Dec 2018

rom bootstrapping to raising a series B round and beyond, most startups will need to bring on outside investment in addition to revenue in order to grow.  

This article was written by the original owner of, Ryan Allis, and published on his website in 2012. Read more about why Ryan was happy to hand over his website domain to us here.

In the ten years before my company iContact was acquired in 2012, it grew from a two-person startup to a 280-employee company with one million customers and $50 million in annual revenue. We raised $53 million over the course of three rounds of funding. During the process, I learned a lot about venture capital.

The first thing I learned was a bit counterintuitive: to raise capital you should get as far as you can without raising capital.

Instead of planning to raise $500,000 and then getting started, plan to raise $20,000 from your own savings and close friends and:

2.Figure out how to convince people to work for you for next to nothing (in exchange for equity and deferred salary).
3.Create a product or service that you can sell.
4.Start selling.
5.Use the revenue you are making to finance future product improvements and development.
6.Once you get to $20,000 per month in sales (or 50,000 users in a consumer web/mobile startup), which can take a year or more, go look for seed funding to improve your product scale up your model if needed.

It can be very challenging to raise capital until you have a team established and a company that has a product. So it’s important to learn how to bootstrap. Bootstrapping essentially means building something from nothing. Doing this can’t be modeled in a Goldman Sachs spreadsheet. It is the magic that entrepreneurs and entrepreneurial engineers have.

This difficult process filters out talkers from doers. Investors know that investing in someone who has figured out how to create something from nothing provides a much higher chance of generating a return than investing in someone who just has an idea and “needs” your money to even get started.

Once you get to around $15,000-$20,000 per month in recurring revenue, it will be so much easier to raise equity funding. Don’t wait until you are there to start building relationships with investors – but do wait until your business has existing revenue before you actually ask for their money. You will receive much better terms and give up a lot less control and ownership.

Firms like Instagram that sell for hundreds of millions of dollars without generating revenue are extraordinarily rare and unfortunately have the side effect of inspiring lots of companies to get started and invest time in a product that has no way of generating revenue.

How to bootstrap

At iContact, we bootstrapped for the first three years, from 2003 to 2006. I met my business partner Aaron in October of 2002 at the Carolina Entrepreneurship Club’s first annual meeting at UNC Chapel Hill. We began working right away on turning his Preation list builder into IntelliContact which later became iContact, an email marketing software program.

In the summer of 2003, after my freshman year, I lived in the office, sleeping on a futon and cooking on a George Foreman grill. We did everything we could to keep our expenses low while we built up our revenues, built out our product, and built up our customer base.

At the end of my first year of college, I had saved $12,000 and I was living on about $1,000 a month between my car payment and food. I didn’t have to pay rent as I was staying in the office. I lived on that $12,000 I’d saved, and both Aaron and I deferred our salaries for the first three years. It was a great moment when we got to a million dollars in sales three years later, which contractually stipulated that we would get paid the salary that we had deferred.

Learning how to bootstrap – and how to live on just a little – is very important to entrepreneurial success. Because we bootstrapped for the first three years, when we finally did raise capital, we were able to raise it at good terms. That’s what enabled us to control the company and direct it for years to come.

In the beginning, do whatever it takes to keep costs low and make as much progress as you can on as little capital as you can. Even if you have to use some personal funds or funds from friends and family, keep your costs to a minimum and get along the path towards success before you go out and raise angel capital or seed investment capital.

Pre-selling your product

A new trend is pre-selling your product on Kickstarter and Indiegogo as a way of raising money for your firm. Kickstarter usually only allows technology/hardware products. If you are building a technology/hardware/art product go with Kickstarter. Otherwise, check out Indiegogo.

This can be a successful model. For example, Pebble pre-sold $10.5 million worth of watches in 2012 through Kickstarter. My friend Lisa Curtis pre-sold over $50,000 in nutrition bars to launch her company Kuli Kuli.

The downsides of crowdfunding campaigns include having to reveal a lot about your product to competitors months before you’re ready to deliver and that you are then tied into a promise to deliver product at a pre-paid price before you are sure what your unit costs will actually be. The upsides include a relatively easy way to raise $20,000 or $30,000 to get your first sales, find press, and attract new team members into your business.

Recently, a new wave of sites have come out following the passage of the JOBS Act in the United States that allow individuals to invest directly in private companies. You can now raise money for your startup online using AngelList, Fundable, and WeFunded. There were over 1,900 startups currently raising funding on AngelList the last I checked.

Learning how to bootstrap – and how to live on just a little – is very important to entrepreneurial success.

Raising outside capital

After you’ve bootstrapped for as long as needed to develop your product and prove that users are actively using your product, you are ready for capital.

Where should I look for capital? This is a question I often get asked by aspiring first-time entrepreneurs. So I created what I call the Green Matrix, which shows where to look for capital, depending on how much you need and what stage you have reached. If you’re looking for less than $25,000, credit cards, your personal savings, friends and family are great places to start.

Some people say, “Well, I’m just starting my company and I’m going to apply for a $10,000 loan from a bank.” What we found at iContact and what most people find is that unless you have an asset to securitize that loan, to provide collateral in case you default, it’s often very difficult to get a loan until you have revenue.

Once you have revenue, and especially once you have profits, banks will lend you money. As the saying goes, money is only available when you don’t need it. Banks are often the most conservative institutions, which we appreciate when it comes to being able to safely deposit our life savings with them. But that doesn’t help start up businesses.

Angel investors

Once you’re looking for more than $25,000, then you can start going out to what are known as angel investors and super angels.

Angel investors are high net worth individuals who will invest between $25,000 and $500,000 in your company in exchange for an ownership interest. That can be done through an equity investment or something called “convertible debt,” which is a short-term loan that is turned into equity if and when the company raises further venture capital in a Series A offering of shares through an institutional firm like a venture capital fund.

Super angels are just super high net worth individuals. Whereas most angels might be hard pressed to put in more than $50,000, super angels are able to invest $500,000, or even $1 million, in a venture. These are often people with significant assets who can put up that kind of money, knowing that it represents only 1 percent or less of their total assets.

Getting to know super angels and angels is often quite difficult. It takes time networking in the community, and talking to other entrepreneurs who have been successful in raising capital and building relationships with them.

You can also go to venture capital conferences or other gatherings that bring together investors with entrepreneurs. Incubator programs like TechStars or Y Combinator are another way to connect with angels and super angels. AngelList is one of the best ways to share your pitch directly with high net worth individuals.

As the saying goes, money is only available when you don’t need it.

Venture capital

Once you have raised your seed round of funding, and you’re ready to raise half a million dollars or more, that’s when you can start going to early stage venture capital funds. This is what is known as your Series A round of funding.

Next, as you go into your second round or third round of funding, your Series B, you will need between $5 and $25 million (known as growth stage venture capital).

Once are five or six years in to your growth, you have built out your product and generated more than $20 or $30 million in revenue, and you’re looking for more than $25 million, going to late stage venture capital funds and private equity shops is often possible.

Regardless of where you seek capital, a rule of thumb that I think is an important one for most companies to follow is: do your best to avoid raising too much money. Where I draw the line, when possible, is: don’t raise more than your current annualized revenue.

Of course, that may not be possible before you have a product. You might need $100,000 or $200,000 before you can actually get to the point where you have any revenue – maybe even a little bit more. But once you have some revenue, there’s no need to raise too much more money until you have increased your revenue.

To summarize my key advice on raising capital: wait to raise your Series A until you have revenue that is growing predictably each month. Don’t raise money until you know how you’re going to use it and you’ll end up controlling your destiny and controlling your company and being able to be much more creative with a lot less stress in your life.

At the end of the day, equity capital, or venture capital, is the most expensive type of capital you can raise. So only raise what you need and make sure you know what you’re going to use it for before you take it on.

Regardless of where you seek capital, a rule of thumb that I think is an important one for most companies to follow is: do your best to avoid raising too much money.

Main photo: Unplash/ Dylan Gillis

*This article was originally published on October 17th, 2018 and updated on December 11th, 2018.