Why The CEOs Of These Once Bootstrapped (But Still) Profitable Companies Took VC Money

On Nov. 14, Toronto’s 1Password announced it had raised a massive $200 million Series A, marking its first external funding in 14 years.

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The ensuing debate on Twitter, Hacker News and other social media channels expressed disbelief and criticism. Why would a previously bootstrapped and profitable company take so much money from VCs when it had been operating perfectly fine without it? There were also concerns about the quality of the company’s offerings declining because of “pressure” to grow.

At the time of the funding, 1Password co-founder Dave Teare  published a blog detailing why the move would not in fact be a death sentence for the company. In it, he wrote:

“Our partnership with Accel doesn’t represent a change in direction. Our values are what make 1Password 1Password-y. They’ve guided us this far, and they’ll lead the way through the next 14 years and beyond. Partnering with Accel allows us to be more 1Password-y than ever.

But all the talk got us thinking. While 1Password’s situation was certainly unusual, it was not the first time a bootstrapped, profitable company chose to take VC money after a number of years in operation. So we decided to talk to a few of those companies to find out why they chose that path and what came out of it. And here’s what they said.

Atlassian, Scott Farquhar, co-CEO and co-founder

Atlassian, an Australian enterprise software company, was profitable from its inception in 2001, according to Farquhar. Rather than take on VC money, the company used credit cards in those early days, he said.

The now publicly-traded company, took its first round of external capital, a $60 million financing led by Accel, in July 2010. The purpose of that first raise, Farquhar told me, was “entirely secondary.”

“It didn’t go into the company at all,” he added. “We definitely didn’t need the money. We chose to do it.”

But what the company did need was to give its existing shareholders “a way to cash out” and to build out its board so that it could grow into “a long-term lasting company,” Farquhar said.

“One of the points of bringing in external investors is to set yourself up to share some of your upside your employees,” he told me. “We also wanted the ability to attract and retain some of the best talent, and grow faster and be more sustainable.”

By 2014, Atlassian had gone public.

The company today has over 150,000 customers. Its “big, audacious goal” at its founding was to have 50,000 customers. It took the company a decade to get to that point. After that, it only took “a couple of years” to triple that number, according to Farquhar. Its market cap is $30.76 billion.

Qualtrics, co-founder and CEO Ryan Smith

Provo, Utah-based Qualtrics, an online survey software company, was bootstrapped for 10 years before deciding to raise money. The goal, at the time, was because Qualtrics “wanted to scale and wanted to go big.”

For the company, it was a conscious decision to not raise money too early. It was a strategy that provided a lot of benefits, Smith said.

“You have to build a real business and go through hard pivots, trade-offs and face constraints early on,” he told me. “A lot of companies skip over that because they raise a lot of money, so they’re not having those conversations that they maybe should be having.”

The logic was that it was easier to scale “if you know where you’re going” as opposed to raising money and then trying to figure that out.

“For us, it was ‘nail it, scale it,’ ” Smith said.

Qualtrics raised its first round of VC funding in May 2012, a $70 Series A co-led by Accel and Sequoia Capital.

Delaying funding, in Smith’s view, worked out better for employees, founders and early backers.

“This way, there were a lot of millionaires created,” Smith said. “Which is a way better outcome than if we had taken VC early on.”

Another motivating factor was the desire to go international.

“We realized it was time to take what we had to the world,” he said.

When the company did put its flag up that it might be interested in taking VC money, it had nine term sheets, Smith recalls.

“It was super competitive, just as I’m sure 1Password’s raise was,” Smith said.

The argument that taking VC money makes founders complacent doesn’t fly with Smith, who said that every time Qualtrics took a secondary or cash off the table, the team just “drove harder and harder.”

“I think it’s great when founders can cash out a little bit and focus on going 100 percent into the business,” he told me. “We haven’t slowed down at all.”

In November 2018, Qualtrics exited when SAP acquired it for a staggering $8 billion.

Webflow, Vlad Magdalin

Webflow started officially in 2012 but launched publicly in 2013. It started as a professional website builder and is now expanding into the broader no code software development space.

“Our internal goal is to empower people to be able to build an Airbnb or Twitter without developers,” said co-founder and CEO Magdalin, “so that more startups get built without this big barrier of having to create an engineering team.”

Webflow did do an early seed round right after going through the YCombinator program in 2013. In late 2015, it had its first break-even quarter. From then on, it’s been either profitable or break even “depending on the month,” according to Magdalin.

The company wasn’t actively resistant to venture funding. It wasn’t completely for or against.

But Webflow had attained profitability and didn’t need it. What it came down to, according to Magdalin, was having a partner who had “a lot of experience” doing what Webflow wanted to do its next stage.

“It’s like climbing some really tall mountain, and you might be able to afford all the equipment and the trip there, and you start training yourself slowly to do more and more intense type of climbing,” he said. “But then you realize nothing replaces working with an expert who’s been climbing mountains for 20 years.”

So in August 2019, Webflow closed on a $72 million Series A led by… you guessed it… Accel.

For the company, taking VC money was more about the expertise than the money or cash-outs. It was also about fast-tracking its ambitions.

The profitable company had reached a point where it felt constrained, according to Magdalin.

“We needed larger teams, bigger marketing budgets and experts to help guide us in the right directions,” he said. “We could have not taken VC money but we would have to grow slower. So for us, it was about accelerating our mission and being able to do the things we wanted to do much sooner without risking the business.”

The investment allowed Webflow to “take massive risks and much more calculated bets” by expanding its product initiatives.

Today, San Francisco-based Webflow has about 150 employees with a 70 percent remote team working across 25 states in 20 countries. It’s been roughly doubling its revenue over the last four years, according to Magdalin.

He admits the company had initial concern about perception.

“There is this perception that once you raise money from VCs, you have to grow at all costs,” Magdalin said. “But we believe we found investors that we really aligned with on a values level. They were on the same page with us in regard to what matters most at the end of the day. We believe that there are many ways to grow revenue but if you do it in a way that breaks the soul of the company, that’s not good for anyone in the longer term.”

VSCO, Joel Flory

Joel Flory and Greg Lutze co-founded VSCO in 2011. Prior to that, Flory was a wedding photographer and Lutze was an art director.

The pair grew the business without raising any capital for the first three years. It was profitable.

Early on, the company experimented with different products and business models.

“We knew we wanted to build something of value for creatives, but we spent some time figuring out what the community wanted and needed most,” Flory told me via email. “Bootstrapping in our early days gave us the freedom to build solely for creators.”

By 2014, VSCO had grown to 40 employees and was profitable. Investors were reaching out and were interested in the technology and community that it had developed.

“Almost every major VC came around but what clearly stood out was Accel’s intentionality of seeking us out and long term belief in creativity,” Flory said. “Accel’s approach was, ‘how can we help,’ and this continues to be the case.”

Ultimately VSCO decided to take venture money to “accelerate” on its “mission of helping everyone fall in love with their own creativity.” So in May of 2014, Accel led its Series A round of $40 million and in 2015, Glynn Capital Management led its Series B round of $50 million.

Raising venture money helped the company build out its team and proprietary technology.

It also helped it grow its subscriber base to more than 2 million paid users by the end of 2018.

VSCO currently has more than 160 employees working out of its headquarters in Oakland and newly-opened office in Chicago.

“We’ve built Ava, our machine learning technology that understands not only the content of an image, but the mood and tone it evokes,” Flory said. “We’ve been able to expand our subscriber base, which will surpass 4 million paid users in the coming quarters.”

So while all of these companies had different reasons for taking venture money after so many successful years without it, they do have a common denominator. Storied venture firm Accel either led or participated in their first external funding rounds. The venture firm has made a name for itself for backing profitable, bootstrapped companies. And, that approach seems to be working, both for the companies and Accel, so far.

Illustration: Li-Anne Dias