Startups Working At Venture Scale Without Venture Capital

There’s a stereotypical trajectory for startups.

Start a company by working nights and weekends, ideally in a garage. Launch a product and get some traction. Raise venture capital funding. Grow fast. Raise more VC money. Keep growing fast. Then, when the timing is right, sell or go public, making yourself, your employees, and your investors a truckload of money. Optionally, repeat the cycle.

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It’s kind of a rat race. That may be part of the reason why founders in certain industries are either trying to get off the VC treadmill or are eschewing the venture-backed growth model altogether. No doubt, bootstrapping a business, or growing it without much outside capital, is hard. But why go through the hassle of raising round after round if you’re in a business that can achieve venture scale without (much) outside backing?

As Recode’s Jason Del Rey noted, many popular direct-to-consumer companies managed to grow fast and get a big exit, even without raising much venture capital investment.

The Recode article cites a number of recent examples:

• Native, a natural deodorant and personal care brand, sold to Procter & Gamble for $100 million. Native’s CEO Moiz Ali held approximately 90 percent of the company at time of acquisition, netting himself and his family a fortune.
• MVMT, the direct-to-consumer watch brand you’ve probably heard advertised on podcasts, entered into a $200 million acquisition deal with luxury watchmaker Movado. The company’s founders and employees own 100 percent of the venture.
• Tuft & Needle, one of the many internet mattress brands, got started with $6,000 in founder contribution and a half-million dollar loan. The company is in acquisition talks with Serta Simmons—the epitome of Big Mattress—in a deal rumored to be worth between $400 million and $500 million.

As an aside, another mattress company, Purple Inc., was sold to a private equity group for $1.1 billion after raising a modest $2 million in an equity crowdfunding campaign, according to Crunchbase data.

As Del Ray pointed out in his article, these direct-to-consumer companies follow an incredibly simple pattern: “Sell differentiated products for more than it costs to make and market them, and reinvest the profits in the business if you want to grow faster.”

In software, that’s easier said than done. Though there are many examples of successful software companies that didn’t raise from VCs, most of the biggest software companies have venture backing.

Nonetheless, some companies are trying to get out from under their obligations to VCs. Yesterday Joel Gascoigne, the CEO of social media management company Buffer, published a post explaining how and why his company spent $3.3 million to buy some shares back from its Series A investors. Because of Buffer’s seniority structure, it had to liquidate its Series A investors before even getting the chance to provide liquidity to seed investors, who were the ones looking for a liquidity event.

Even if a business fails to become a billion-dollar behemoth, it’s likely preferable to operate a business (assuming its profitable) than let it die. Whether that means buying out VCs directly or working with buyout firms, where there’s a will to get out from under investors’ thumbs, there is a way. And that may mean avoiding that kind of relationship in the first place.