As described in the last post, the most frequent question I get is “what are you doing”. It’s true that I often answer “we’re making software for consumers.” I’ve also often tried this alternative: “we’re making an independent consumer software company.” Not as short, but more accurate. Those in the industry often ask what I mean by “independent”. I explain that we’re not looking to take anyone else’s money and our goal is to bootstrap the business by engaging in revenue-generating activities from day one. And that in the long term we prize independence so we can stay focused on building the kind of software (as well as the kind of company) that suits us. It’s at this point in the conversation when I invariably get a look of polite disbelief. The look says something along the lines of “oh aren’t you precious”. It’s as if I were 9 years old and stated, with absolute certainty, my intention of being a professional baseball player.

I think my favorite quote in the world is:

“The reasonable man adapts himself to the world; the unreasonable man persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.”

– George Bernard Shaw, “Maxims for Revolutionists” Man and Superman, 1903

I appreciate the sheer logic of this. If you accept everything the way it is, then nothing ever changes. Yes, that nine year old may never become a professional baseball player, but then again maybe he will–unlikely is not impossible. But one thing is certain—he’ll never get to the big leagues if he doesn’t believe that he can from the outset. So when people give me that look, I console myself with the study that showed that individual success is a direct result more of hard work and perseverance than innate talent. :)

But let me be clear—the decision to forego outside investment is not a moral, idealistic stance. We have no inherent dislike for outside investment, it’s simply about minimizing risk. Books on the topic will tell you that contrary to many people’s assumptions, most entrepreneurs are not huge risk-takers. In fact they are usually primarily risk minimizers—we’re simply following that model. If we grow more slowly and without angel or venture capital investment, that’s simply a way to minimize the number of parties which have expectations around performance and can put pressure on the business to perform in (possibly) unnatural ways. Of course this doesn’t mean we don’t see the benefits from potential investors, or that we will never take anyone’s money, but we’ll just do it in a way (for example, on a per-project basis) that is compatible with our long-term goals.

We do have one ideal, which is to truly own our own business. VCs are looking for liquidation events. In other words, some point in time where the company is turned into cash and they can get their portion out on behalf of their investors. This is perfectly reasonable. There are basically two types of liquidation events: either the company is a) sold, or b) goes public. Both allow the VC to get their money out. So what do you do if you’re a company that wants to a) stay independent, and b) stay private. VCs also have time limits on the funds they use for investing so their goal of getting your business to a liquidity event (on terms that they find acceptable) is under time pressure. This can cause decisions to be made that are in the best near term interest of the investors, but not necessarily in the best long term interest of the business. Of course the best VCs want to leave a healthy business even after they’ve gotten out their returns. But conflict can exist especially with divergent long term goals. Angels are another source of funding but even with increased flexibility and (sometimes) decreased oversight they too ultimately are looking for a liquidity event.

You may ask, “what startup doesn’t ultimately want a liquidity event themselves? What’s wrong with going public?” Well, there are plenty of businesses that retain their independence, don’t go public, but generate healthy profits which the shareholders and employees extract on a regular basis. These companies don’t have to answer to anyone but themselves and their customers. They don’t have to comply with Sarbanes Oxley regulations. And they don’t have to worry each quarter that investors will send their stock price (and likely employee morale depending on the compensation model) heading downwards.

Now of course the stock market is a great way to add a multiplier to the amount of money a business can generate. And for anyone looking to hit it big that multiplier is key to getting a windfall. The problem is that eventually the multiplier of the public sale fades and the business has to perform on its own. Eventually big multiples can no longer be the way employees are motivated, and the fundamentals of the business are all that remain. Many “serial entrepreneurs” aren’t as concerned about the post-IPO realities of running a healthy business and motivating employees because they are already working on their next windfall. That’s a perfectly legitimate way of doing business, it’s just not for us.

In addition to the loss of the multiplier and windfall opportunity with the (hopefully) eventual sale or public offering, the lack of angels or vc presents a fundamental challenge to a brand new business – no capital. There is no doubt that not having lots of cash severely constrains you on multiple fronts: the kinds of businesses you can enter, the kinds of people you can hire, and the rate at which you can grow. However, there are still attractive opportunities (especially in an intellectual property industry where COGS are low such as ours) to make great products on which a business can be built. Also, having a lot of cash often masks the reality of your business situation. Sure you can keep the columns separate in a spreadsheet, but it’s a difficult emotional transition to move from the amount of money given to you by the VC to the relatively miniscule amount generated by your business. This difficult transition is evidenced by the countless startups who after a time of big spending have to radically downsize when reality (and their investors) start putting the pinch on the business and asking for directional changes. We will know from day one what our cash flow reality is (for better or worse). ;)

I’m a big believer that constraints force creativity. So given our constraints we’re going to need to be very creative here at Jackson Fish. In the long term, however, when we have a healthy business, with a sustainable economic model, and an independence that allows us to pursue all kinds of products that interest us and our customers, we will have no regrets.

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As an acknowledgment that I can’t predict the future, I’ll add here the following statements so if I ever have to eat my words they are slightly easier going down:

• We may take outside investment some day. Sometimes in business there are situations where you need a capital infusion just to fully realize the potential of a vein you’ve struck with customers. Of course our goal would be to find financing that was compatible with our long term vision of independence and stability.
• While it is expressly not a goal for Jackson Fish to have a liquidation event, that doesn’t mean that we may never get an offer to purchase the company. And while this is just as silly as like worrying about how we’ll spend all our future lottery winnings, it’s still important to be honest. While we may get offers down the road some day, I feel confident that unless the offer is completely obscene we’ll consistently respond “thanks, but no thanks.”