Why We Decided to Raise Money for Our Startup

In the beginning, all we wanted was to eat ramen on our own dime. Now, we’ve raised $1.7 million from Silicon Valley VCs. In this post, I’ll tell the story of why we decided to raise money from investors for our online video editing startup, Kapwing.

Background

There’s humble glory in bootstrapping a business because you can take full credit for every dollar in revenue. Eric and I celebrate every uptick in daily video count, every Stripe notification, every new link from bloggers and journalists. Since launching our website in October, we’ve bootstrapped customer support, outreach, content marketing, design, development, and everything else ourselves. For Kapwing, I learned Python, interviewed on IndieHacker, and incorporated a business for the first time. Kapwing grows despite skepticism from our friends and from investors. We make what we want to and don’t answer to anyone. We’re proud of our frugal small business that adds value with no marketing or operating expenses.

But things change quickly in Startup Land. Three months ago, an advisor and friend of ours wrote me an email saying that he wanted to invest to help propel and sustain our momentum. That Wednesday, we met with a Silicon Valley veteran, and on Friday we talked to an institutional investor who offered to lead our seed round. In the week after that, we went into pitch hyper-drive to generate some heat around the deal and get more VC exposure. 4 weeks, 26 meetings, and 3 pitch events later, the original term sheet had expired and we were in the trenches of despair, thinking no one believed in us. Now, more than 8 weeks later, Kleiner Perkins has led our seed round, and we’re very happy to say that we’ve finally closed the round with money in the bank.

Disclaimer

For us, the choice of whether or not to raise money was difficult because we could have gone either way. We realize that even having this choice is a privileged position. Some businesses are so capital intensive that they require upfront investment; others never get interest from investors despite initial traction; some have founders who don’t have the option of bootstrapping because of other financial obligations. We’re grateful to have been able to boostrap or raise money, and we wanted to write about this decision for other founders facing similar questions.

Xoogler demo day Pitch event for X-Google founders

So what changed your mind?

When we started Kapwing, we had a focused “Indie Hacker” mindset. We, like many other bootstrapped founders, disliked that so much money in the Valley was pouring into seemingly frivolous ideas. We didn’t want to waste other people’s money, so we focused on getting back to the basics: users, feedback, and a business plan. We planned to bootstrap our way to an IPO.

Along the way, however, we’ve learned that raising money is a natural and important part of building a successful software business. It’s true that some companies burn money wastefully, and some founders care more about raising money than building a business. But investment can also help startups capture market opportunity.

Xoogler demo day pitch

Why we decided to raise money

  1. We can build the product of our dreams Video editing software sucks, and there’s a lot of headroom for better tools. But with just two of us, we don’t have the manpower to get us there fast. With more engineers, we will build the best modern video creation platform before our competition can catch up.

  2. We can stop stressing the small stuff Everything about startup life is great except when it comes to paying the bills. Each Kapwing dollar is sweet, but it’s still just $1, which doesn’t take you far in San Francisco. Backed by Google savings and our parents’ health insurance, we’re lucky to be able to quit our jobs and work on a side business without becoming homeless. But thrifty living is difficult and stressful. We over-engineer to avoid paying $20 fees. We don’t have leeway to try out strategies that could pay back the business tenfold in the long run. We do everything ourselves, including legal and financial work that we’re not qualified to do. With some cash, we can stop wasting time debating the small dollars and focus instead on the product and growth bottlenecks for the business. We can afford lunch again We can afford our own lunch again rather than regularly mooching off of our friends

  3. We can can try our hand at Greatness If you’re in Silicon Valley long enough, you’ll realize that money and connections legitimize a business. The tech inner circle is small and tight, and acquisitions, sales, and partnerships really do happen on casual handshake deals. VCs bring exposure, which brings inbound leads, press, legitimacy, and lots of other connections that accelerate your business. Just in the few hours since making our seed round announcement, we’ve had several highly-qualified engineers, journalists, and potential partners reach out to us. Big companies don’t take bootstrapped startups as seriously when considering vendors and partners, and capital is powerful in a capitalist market.

  4. We will learn a lot no matter what Eric and I are the kind of people who get frustrated, bored, and restless when something feels attainable. Our revenue goals that seemed ambitious a few months ago now feel within reach. My 2018 stretch goal for Kapwing’s annual revenue was $40k; we’re on track to make >$100k. The execution path is clear….and so it’s less interesting.

Alternatively, the road to growing a venture-backed startup is fraught with risk, leadership opportunities, and uncomfortable exposure. I’ll learn how to recruit, talk to the press, manage a team, take care of finances, manage a board, and much more. I’ve already learned so much just about fundraising itself. I’m intimidated by the prospect of a CEO role, but I have been intimidated by every new position I’ve held in my life, and there’s no way to manage that fear other than to confront it with confidence and calm.

There’s only one The only way up is to climb

Even with a VC behind us, we will probably fail - most startups do. But if we miraculously succeed, the upside is tremendous. Some of my life’s best experiences and achievements have resulted from low-probably opportunities. It’s rare to be offered a turn at the plate, so I feel compelled to lean in and swing. We’re 25 years old, and there is so much more life to live.

Bootstrapping myths

If you’re an entrepreneur and you’re not sure if you should raise money, it’s wise to build a product that has some traction before you talk to investors. But, we have also realized that some of the tropes of the bootstrapped community are myths:

“Raising money narrows your exit options because the price is necessarily higher” It will be difficult to attract talented engineers if you can’t pay them, which means your team is less attractive M&A target and your product won’t grow as quickly. Taking money might raise the price of a good acquisition, but it also increases the likelihood of any acquisition dramatically. Plus, if you don’t believe your business is going to be big enough to run it yourself, you should probably reconsider your growth plans.

“It’s so cheap to start a company, you should be able to do it without VC” It might be cheap to host a website, but it’s expensive to live life. Even though Eric and I have the privilege of being young, healthy, and without financial burdens, we need to eat, pay rent, buy insurance, etc. It takes a LONG time to go from zero to a point where we can pay ourselves and hire employees.

It’s also not so cheap to start a company. Server costs can add up, and they can be stressful when there is spikey traffic, with the costs coming out of our own pocket.

Our office space, nothing fancy

“People raise money because they want a fancy SOMA office, catered meals, goat yoga, and a boosted ego” Eric and I don’t care for a fancy office (we’ve been squatting for free in friends’ offices so far), and certainly are not raising money to hype our own egos. We are raising now because we care deeply about making video creation and editing better, and we need money to make the product possible. That might sound cheesy but it’s the truth! This problem and the learning we gain along the way matter to us more than the fancy perks.

“If you actually have a good business, you shouldn’t need VC money.” Kapwing is a really good business. We’re growing 30% MoM, and we add new recurring customers every day with low costs. Regardless, taking investment enables us to grow faster because we can hire more engineers. It will be harder for competitors to react and potentially take our market before we can get off the ground. Good businesses are built step by step, and raising money is a part of that process.

“VCs just want growth at all costs, and make you lose sight of building a real business” It turns out that every investor is different. The partners that we are working with are folks with a long term perspective on growth and revenue. They understand the importance of building our foundations first and that we need to nail product-market fit before we pour gas on the fire.

“Investors reduce your flexibility and control” With an investor to report to, we are worried about giving up some flexibility - after all, we can and have stopped everything to build fun stunts that attract website traffic. But we’re working with investors who support us and understand how much we value agility. They encourage us to take risk, adapt, and pivot our product offering towards new opportunities.

presentation Julia presenting at a female founder pitch event in May

Conclusion

I’ve thought about what life would be like with a stable lifestyle business. In many ways, it would be paradise: traveling and side projects without any professional obligations. But, at this point in my life, I’m ironically happiest when I’m pushed to go farther and do better. The pressure of investors will certainly motivate my intensity and push us onto a new learning curve. We will miss the days of just the two of us, hacking together and pushing out new features. But we also are excited for the days ahead.

When someone offered me a check for millions of dollars and valued my business more than 100x revenue, I could have walked away. I could have turned my back on the investor and gone back to work nurturing my bootstrapped startup. But if I did, I would have been accepting that I’d plateaued. Instead, we’re taking on the challenge to become the people we most admire, the chance to earn a place among the most influential people in the world. If I succeed, then I’ll have achieved my highest ambition. And if I fail, well, at least I will have tried ¯\_(ツ)_/¯

Last days of just the two of us

My new theme song, from Disney’s “Moana”

See the line where the sky meets the sea?

It calls me

And no one knows

How far it goes.

If the wind in my sail on the sea stays behind me,

One day I’ll know.

If I go there’s just no telling how far I’ll go

Thanks for reading! Now that we’ve raised money, we’re hiring engineer :) If you dream about video or you want to work with a truly scrappy startup with bootstrapping in its blood, please reach out at [email protected]!