Bootstrapping has undergone a shift over the last few years, says Rob Walling, and that the amount of opportunity in this industry has grown significantly as founders turn to raise one-time investment rounds as a bootstrapper. Rob Walling, General Partner of TinySeed, has developed the first online-based accelerator designed for bootstrappers.
TinySeed’s vision is simple: to bring the option of funding to tens of thousands of companies that have been overlooked by the traditional startup ecosystem. Walling has been working with startups for years and has recently decided to expand his work with bootstrappers, a high-growth investment opportunity, by founding TinySeed to help bootstrappers get off the ground and become profitable.
There are already many investors who are developing alternatives to traditional venture fundraising, such as Indie.vc, and Earnest Capital. However, TinySeed is taking this a step further by providing a one-year accelerator program to batches of 10-20 founders from around the world, looking to build profitable businesses, while retaining maximal ownership of their company.
The bootstrapping landscape
TinySeed was founded based on Walling’s observance of a shift in the way founders raise money. In the last five years, more founders have been opting to raise money from one-time investment rounds and working as a bootstrapper, rather than raising capital through the traditional VC path. This transition has meant that founders can take the leap to focus on their business on a full-time basis without having to work an additional job, and allowing them to grow outside of the “traditional Silicon Valley fundraising treadmill”.
Exploring the current ecosystem
Walling initially started as a bootstrapper, working on a variety of different products that meet a real need in the market, without raising money from Venture Capitalists (VCs). He quickly realized that this method of financing creates less pressure on the founder to perform, and allows them to explore their own path without being coerced into doing what is profitable for an investor. This epiphany caused him to quickly start advocating for the benefits of bootstrappers though books, a podcast, a conference, and essays, which gave him the perfect platform to share his ideas and better understand the psyche of a bootstrapper.
As an angel investor, Walling had an inside-edge and was able to participate in the growth of bootstrapped companies. He said that his thesis was to help get companies to profitability without needing to raise an additional round. This means that they can slowly reduce their dependency on their traditional job, and start to carve their project into a sustainable business that was capable of growing at its own pace. Interestingly, Walling said that from his experience as an angel investor, he has seen more “base hit” companies than home runs in the bootstrapper community, which generally see a greater rate of success because they can grow at their own pace without becoming the next Apple.
However, the traditional VC model is structured in a way that pushes out these companies and focuses on those that are able to yield a higher return of success. The economics of traditional venture investing gas created a landscape where if funds do not find at least one home run company, then the firm will fail and will not raise a second fund (the goal of VCs). This means that VCs are under pressure to focus purely on high-growth startups that have the capability to generate revenue quickly, and have a strong potential for a future exit.
Like businesses, VCs have their own set of customers (referred to as “Limited Partners”, which are sovereign wealth funds, pension funds, etc) that they have to satisfy. Limited Partners expect a high return from a fund that can only be achieved by companies that can return 100x at least on their investment. If you cannot achieve a valuation of $1 billion or more and reach “unicorn status”, then VCs cannot justify making an investment because your company would not create enough of a return to ensure the safety of their fund.
Most companies do not fit this description, and many founders working on smaller business are now stuck looking for funding from VCs that are not actually interested in their work because it does not have the potential to be a home run. These founders that are overlooked are often high-potential individuals that are capable of doing amazing things if they are allowed to work at their own pace. There are many SaaS businesses out there right now which are generating hundreds of thousands, if not millions of dollars per annum in revenue that have been overlooked because of their economics, according to Walling.
Walling has noticed this transition over the last few years. Last year, he realized that he should dive deeper into the concept of investing in bootstrapper, based on his observances as an angel investor, and thought that there was an opportunity for an accelerator that focused on bootstrappers.
Founders approached him frequently, especially after his talks, and would say “Someone should really raise a fund and make it easier for bootstrappers to do this”. Rob would nod and casually respond with, “Yes, someone should”. After talking to his now co-founder, Einar Vollset, he realized that because he had so much unique wisdom on the concept that the “someone” he used to talk about should be him. Thus, TinySeed was born, a startup accelerator for bootstrappers and makers.
Crafting a structure
Walling was determined to deviate away from the traditional venture capital structure that stunted innovation amongst smaller startups with less potential to become a unicorn. He knew this meant taking a more hands-on approach to investing and ensuring that people had all of the resources they needed to grow, without imposing high targets and planning out an exit strategy for the future. Walling and Einar based the terms of TinySeed on those Rand Fishkin used to raise money for his company, SparkToro.
The TinySeed team believed that the accelerator should integrate free structure that left bootstrappers to innovate without having to move or quit their job, as he saw that most bootstrappers were not at the stage to completely change their lives and move yet. Therefore, they instituted a remote-first thesis at TinySeed where the program would be hosted over the period of a year for early-stage SaaS founders, focused on helping founders transition from nights and weekends to a full-time focus on their startup.
The team also knew that he needed to provide more founder-friendly terms that were specifically designed for bootstrappers, rather than the one-size-fits-all terms offered by many traditional venture investors. This resulted in TinySeed investing between $120k-$160k in exchange for 8%-15% equity, which was designed to be enough money for portfolio companies to survive for at least a year while they reached a sustainable level of profitability. The system was based on the observance that many bootstrappers only wanted to raise one round, and the capital TinySeed provides is enough to get going, without having to sacrifice more equity by raising another round.
In order to make TinySeed even more founder friendly, they have decided to make one or two payments each year (initially a monthly stipend) to help founders adjust to full-time work on their startup. This created a low-pressure environment for bootstrappers where they could drop their job and maintain their lifestyle while working on their startup. If the startup’s founders didn’t need any money for living costs, they could invest it easily to marketing, design, or whatever else was needed to grow the business.
Walling also decided a salary cap with the founder should be incorporated, which is based on a software engineer in a nearby city. This would mean founders were appropriately compensated for their work and would create a path for TinySeed to make money. TinySeed only receives a return when founders take out money above the salary cap, referred to as a “dividend”, which will be distributed based on percentage ownership in the business.
The dividend structure means that TinySeed can earn a fair return, without needing to chase a unicorn to return the fund, so they can continue to expand their platform. Walling said that TinySeed would be happy to participate in any exit, but are equally as happy for you to turn your business into a revenue-generating entity over the long-term, as they can earn returns through dividend sharing. This also aligns the incentives of founders and the accelerator, as both can only see a return if they work hard, which creates a system that is fairer for all and based on building a sustainable business, rather than rushing to an acquisition or an IPO – chasing the illusive unicorn.
Walling believed that these terms meant that founders could maintain flexibility in the business and makes sure that control of the business is vested in the founders, where it belongs, rather than in the hands of VCs. He also said that startups can grow at a healthier pace and do not need to focus on reaching specific goals that would make it easier for them to raise their next fundraising round. This model also allows companies to deliver a return for TinySeed even if they stay small by VC standards, which makes it ideal for both parties.
Walling affectionately referred to this as building a “sane startup”. A startup that actually values the talent and people over results, and offers people the benefits that they need to avoid burnout, such as reasonable working hours, thereby creating a high level of satisfaction as a founder.
After deciding the terms, Walling decided that in order to meet the needs of bootstrappers, TinySeed needed to be mentorship-oriented, and provide more non-capital benefits (similar to Y Combinator). Bootstrappers are not just interested in the capital that TinySeed could provide, but also the advice and wisdom they could impart which would help them grow their business.
TinySeed has cultivated a relatively broad investment thesis so they can support as many different types of companies as possible. According to their website, they are primarily looking to fund subscription-based software businesses that are looking to grow quickly, but are open in terms of whether you are SaaS-based, operating a marketplace et cetera. They have also stated they are willing to accept applications from almost any stage, and have not implemented any limits on revenue, which means that any early-stage founder can apply to their accelerator.
TinySeed has developed a strong mentorship program with a network of mentors that offer support and advice to all portfolio companies. TinySeed says that it is game-changing to have access to successful founders who have been on the same path as you. This is because these founders can share best practices, help founders avoid making the same mistakes that mentors have made, and ultimately save time on pursuing counterproductive work.
Their mentorship program has expanded to over 27 successful mentors in addition to the TinySeed team, including DHH, founder of Ruby on Rails, and Joanna Wiebe, creator of Copy Hackers. Their experts cover a wide range of different areas who can provide in-depth and insightful counsel on everything from SEO to business development, and are at the fingertips of founders when they need their advice. These experts also host office hours throughout the program, giving them a chance to share their experiences and have Q&A sessions with founders at many points during the program.
Walling described this as the TinySeed “community”, that essentially acts as a vast support network throughout the program, and after graduation. Another core component of this community is the fellow founders in a cohort, which can share experiences and hold each other to account. TinySeed chose to invest in batches because founders would be going through the same program at the same time.
Walling has been a strong supporter of tight-knit support groups where you share your experiences and unique journey with other founders. This creates an environment based on knowledge-sharing that is capable of building life-long relationships, which is an important part of being a founder. He believes that by having everyone go through everything synchronously, they will be working at approximately the same stages, and can share their best practices based on experience and help each other avoid the costly mistakes they have made in the past.
Deviation from Venture Capital
As aforementioned, a key part of Rob Walling’s vision behind TinySeed was to be as flexible as possible, and to provide a founder-friendly structure that offered bootstrappers everything they needed to succeed. One of the most important distinctions that Walling implemented was to make TinySeed fully remote, which is a concept many accelerators have been exploring over the last few years, but have not managed to successfully execute yet.
Most startup accelerators have a very strict structure and require founders to relocate to a specific location, like Y Combinator in SF, and TechStars depending on the location you apply for. TinySeed eliminates this requirement which means they can target talent who aren’t able to relocate for various reasons (family, personal obligations etc) but are still on a good trajectory for success.
By fostering this value, TinySeed can, therefore, access many founders that show great promise that would not be supported by many accelerators due to location requirements. This also allows them to become more diverse as they can support people with any commitments, which gives them a significant advantage over other competitors. Diversity in founders has become a very prominent issue at the center of venture capital and startups over the last few years, and TinySeed’s commitment to no location requirements is a step in the right direction to support all underrepresented founders.
Another way that TinySeed is moving away from the traditional accelerator structure is through reducing the dependency of a demo day, and instead focusing on growth. Considering bootstrappers tend to use their funds very productively and can live off their investment for an entire year if they participate remotely, then there is no need to raise capital at the end of the program like seen in more traditional accelerators such as Y Combinator and AngelPad. Instead, they focus on sole growth and working on your product, so that you can continue to maintain your lifestyle after the program, and reach a sustainable and increasing level of profitability as your company scales.
In addition, Walling has identified an industry-wide “bias” against founders who are working on their startup alone. Many accelerators prefer to work with founders that have a co-founder as it makes work easier to distribute and means that more expertise is available. However, Walling challenges this by saying that most of the successful $1m-$20m per annum SaaS companies that he has seen were started by founders working alone. He has made clear that TinySeed will be working hard to ensure that single founders are well represented and have the resources they need to scale.
Acquiring deal flow
One of the most important aspects of running an accelerator is acquiring deal flow. There are many different ways to acquire deal flow, from having industry experience working with influential people, to participating in online startup communities. In Walling’s case, his source of proprietary deal flow originates from his activity in the bootstrapped startup scene.
Walling has spent the last 14 years of his life talking about using capital efficiently, through his essays, his podcast “Startups for the Rest of Us”, hosting MicroConf 16 times, and participating in numerous other activities. He said that his initial intention was not to build a community of bootstrapped founders, and got involved with these projects to further his knowledge of the venture capital landscape. At a certain point, Walling says, he realized that he was building a community and was leaning into it, accompanies by his conference co-founder, Mike Taber.
Being such an active member of the bootstrapped startup movement has allowed him to cultivate strong connections with the biggest players in the community, and has resulted in him acquiring his own channel of proprietary deal flow based on his investment into this community. He said that he has spent little time spreading the word about TinySeed because the community is so strong that the word spread quickly, signaling how bootstrappers feel about an accelerator for their specific needs.
Walling believes firmly that a community of people with a shared understanding around a concept and similar goals will help each other grow. This belief was solidified through his experience building a startup community for so long. He was responsible for starting with a small group of people who were interested in bootstrapping, and scaling it up to provide value to more supporters of the bootstrapper movement.
He said that while TinySeed is a new accelerator, the community that the accelerator is built on has been around for many years. Overall, he believes that you need to take a community-first approach, and first build a community, then an accelerator. This allowed him to easily develop and scale a network of mentors, investors, and prospective participants who could benefit from a small investment, mentorship, and advice in their future endeavors. This made it easier to spread the word of TinySeed and gauge initial support for the concept, which made product validation more efficient.
The future of TinySeed
TinySeed has a strong team that is focused on helping founders grow and transition to the life of a founder, without imposing strict requirements to move or raise money. They have also demonstrated a strong commitment towards deviating from the traditional venture capital model, and focus on mentorship and providing advice to founders, rather than preparing for a demo day and an eventual fundraising round and exit.
The main challenge of building TinySeed, according to Walling, was collating all of the elements of starting an accelerator together. Starting any company results in dozens of different things going on at once, and they are actively working to ensure they can keep up with demand and interest in their accelerator. Walling also noted that he is not as excited about the future, but rather how things unfold.
“We’re at a unique time in the history of startups, where the ability to raise funding is moving from the top 0.1% to a world where an order of magnitude more can raise. I believe that’s going to bring a fundamental shift in the nature of starting software companies that don’t fit the traditional venture model.”
TinySeed’s immediate goal is to expand their program to support as many different founders and startups as possible, across as many different regions and geographies as they are able to support. There is a massive amount of startups that could benefit from founder-first financing as provided through TinySeed, and other alternative fundraising models, and TinySeed wants to expand their efforts to discover the most passionate founders who can create value.
As TinySeed becomes more established as an accelerator, they are hoping to expand their community for founders so they have access to even more wisdom and knowledge, and spend time reflecting on the current state of their model and how they can improve in the future. They are very proud of the “stamp of approval” that they hope will grow as their accelerator generates successful companies, and will be working hard to build their reputation and show that they are a real challenge to traditional accelerators such as Y Combinator, 500 Startups, and TechStars.
Walling and TinySeed are about to launch their first batch and put their model to the ultimate test with 10-20 founders demonstrating high-potential. Walling believes that as the alternative funding space continues to grow, the programs that cultivate the largest and most participatory communities will emerge as the best. Upon asking Walling about their plans for the first batch, he responded: “We are in the process of finalizing the companies in our first batch so I feel like this one is TBD :-)”.