What do VCs think about startups that bootstrap as a service first then trying to evolve into products?

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JASON LEMKIN

Generally, VCs think negatively about service company -> software product transitions.

I’ve invested in one very successful one (Logikcull), and am a long-time advisor to another super-successful one (Showpad), so it does happen all the time. All the time.

But VCs are somewhat negatively biased.

Why?

  • Tough to “let it go”. Is the services business still making cash? Spinning out is tough. Where do the profits go? Who stays where? Are the founders involved in both? That’s a non-starter.
  • Tough mental transition. Can you change your entire outlook? Can you make less money, for now at least? Can you share equity with employees, VCs, and more?
  • Tough to move from clients to customers. This shouldn’t be so hard, I guess, but it is. Going from $250k “gigs” to a $5k a year product is very … different. Much more different than most expect.
  • Worries about Optionality. A lot of services company set up in-house start-ups as experiments. But they don’t really go 100% all-in, No Matter What. VCs don’t invest in founders that want to preserve optionality. The odds are too stacked against you as it is.
  • Feeling services companies CEOs and founders are “worse” / not as good as software founders. OK this may not be fair. At all. But most VCs think “real”, Unicorn-hunting CEOs and founders aren’t in services businesses. They’re off building the next Uber. So there is “prejudice” here of some sort. No doubt.

So … if the transition has already happened, it’s papered, the old services business is wound down, or doesn’t have any of the “good” people in it … these negative biases fade.

But they hang around you up to $1m in ARR and beyond. For quite a while.

Bottom line is … done right … this is one great (if tension-filled) way to bootstrap. Just realize there may be some negative pattern-recognition among many VCs until you prove yourself by really cutting the cord 100% between the two businesses.

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Published on July 4, 2016
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