M&A Case Studies: WhatCounts

We continue with our M&A case studies on MBA Mondays. Last week we saw the impact VCs can have on your exit. This week we are going to look at the opposite situation: what happens if you've entirely bootstrapped your company. AVC community member @daryn introduced me to David Geller who, over ten years, bootstrapped, built, and sold an email company called WhatCounts. It's a great story, but a bit long for one blog post. So we've cut it in two. This week, the events leading up to the sale. Next week, the sale itself.

As always, the comments will be the most interesting part of this dicussion. Make a point to stop by, check them out, ask a question, or answer one.


Daryn Nakhuda, a friend, Fred Wilson groupie, former colleague and my co-founder at Eyejot before he left to become CTO at TeachStreet.com, suggested to Fred that I write about my company WhatCounts. WhatCounts was bootstrapped several years ago and was recently acquired. I agreed to accept the invitation knowing that bootstrapping is a sometimes under-appreciated funding path that startups often dismiss too quickly. Why is that? What's the attraction for new businesses, particularly technology-focused ones, to seek VC funding?

Iʼm a believer in self-funded companies. When I started WhatCounts it was seeded with $50K of my own money. It grew organically to be successful and was acquired in late 2010. With my co-founder, Brian Ratzliff, we were able to operate the company autonomously. Initially, I did all the product development and Brian orchestrated our sales and marketing programs. We jointly pursued new clients. Brian had more formal business training, including an MBA, but we both shared the same pragmatic approach to operating and growing a business. We liked the independence that came with self-funding and knew that the success, or failure, of our venture would hinge entirely upon our ability to win and keep business. Instead of VC funding we used customer funding. Our exit event was successful and the transaction benefitted the companyʼs original shareholders without any dilutive effect.

Is bootstrapping your business and funding it without outside capital a good idea? It was for us, but I have to admit that we arrived at that position more out of necessity than prescient planning. We actually tried to attract outside funding, without success, when we founded WhatCounts in 2000.

A brief introduction to WhatCounts may be useful.

WhatCounts developed a SaaS platform for creating, managing, deploying and analyzing mass email campaigns for transactional and marketing applications. It grew from the two of us to 50 employees and attracted clients like Costco, Alaska Airlines, Virgin America, MSNBC, FOXNews, Ziff-Davis, Pandora, REI and many other, well-known consumer-facing brands and media organizations. Many of you received emails over the years that were generated by our platform. WhatCounts became known as a technology innovator (later releasing an on-premise appliance solution to compliment the SaaS offering) and a company that did a surprisingly good job (for its size) attracting prestigious clients and providing them with exemplary service.

Thus far, so good.

We decided to do some informal investigating to see if WhatCounts could get VC funding. Using contacts Brian and I had established during our time working at Paul Allen's Starwave (me running an engineering team and Brian a marketing team) and later at other startups, we setup informational interviews with a few Seattle VC firms. Not surprisingly, our few meetings failed to generate a lot of excitement. Weʼre both good communicators and present strong messages, but I suspect the VCs we visited knew that we didnʼt believe in the hockey stick growth story – for us or anyone else in our space.

As cool as we thought what we were doing was (or was going to be), we also came to realize that the email industry, in the 2000-2001 time-frame, was not an overly attractive investment space for VCs. This was certainly true for pure email service providers, of which we were one. Other businesses involved in email were still garnering excitement from investors. Fred mentioned the 2002 merger between Return Path and Veripost in his Dec 6, 2010 post. He highlighted the fact that both of those firms had received VC funding. When we started we were confident weʼd be successful operating a small business but didnʼt believe we were going to turn the company into a $100 million juggernaut. We became convinced that we would not be able to grow to that level in the time horizon we believed VCs were typically interested. We also looked suspiciously at some of our competitors that were making VC-friendly (and overly optimistic) growth projections.

Now, we could have retreated and tried to retool our business model and presentation materials in preparation for a new round of meetings. We could have created a more exciting story or twisted things to appeal to our potential investors. But we liked our business model. Our customers did too. We were making money! We knew that if we decided to ignore outside funding opportunities weʼd potentially be jeopardizing our chances of growing the company at an accelerated pace. But the benefits we saw and were experiencing running things ourselves seemed to out-weigh the potential value and overhead VC funding would deliver.

To recap, the facts Iʼve described, so far, are the following: (1) we started a company; (2) we had some early VC meetings; (3) we didnʼt gain much traction from those meeting (admittedly we didn'tʼ try very hard);  and (4) we settled back onto our original plan of utilizing a customer funded growth strategy.

One of the most obvious benefits to a simplified, self-funded growth strategy is that if youʼre lucky enough to grow the business and get acquired youʼre going to gain all the benefit from that transaction without sharing it with outside investors. Calculate your ownership position and compare it with a diluted position after one round of funding. Then identify the intersection where they deliver the same benefit to you. Now consider a second round of funding and further dilution. Or a third. Of course, building simplistic models like this is for illustrative purposes only. Yet, itʼs important to know that a bigger piece of a smaller pie, at some point, is the same as a smaller piece of a much larger pie.     And, donʼt let anyone tell you that baking a bigger pie isnʼt a whole lot more difficult.

Self-funded businesses, by their very nature, involve fewer outsiders. So there are control benefits that can be enjoyed in their absence. Fewer outsiders dictating (or strongly suggesting) direction means that you will be able to pursue your goals more closely and with less friction. Back in 2001 Brian and I knew we had a great platform. Our customers told us so. Slowly, but surely, we started gaining traction by winning new customers. Weʼd hire additional staff whenever we had a large enough financial buffer to keep them employed even if our growth were to slow or even regress a little. Itʼs the model we had been told Microsoft had adopted early on. We both felt personally responsible for every person that trusted us and trusted our vision enough to join the firm. Many of the people that joined WhatCounts had sacrificed potentially higher salaries from larger companies to work in an environment that was smaller, people and pet friendly and somewhat more lifestyle-oriented – with the belief that we would grow. So, we tried to make sure there was always enough in the bank to cover payroll for approximately six months. We also disbursed bonuses to everyone each year.

Despite our early success, we were still aware that we were a relatively small company. When new competitors began appearing we decided to consider additional sources of funding. We had about $1 million in the bank but, with an increasingly growing employee base, considered a large portion of it to be part of our special payroll reserve. That led us to apply for an SBA loan that was quickly approved and provided us with an additional $500K in the form of a line of credit. We never needed to draw on the credit line and turned it off within the first year.

Throughout the years WhatCounts continued to grow. New engineers were hired. Our support and account management teams grew. New leadership for engineering, sales and customer service all helped the company to mature and appeal to larger, more sophisticated clients. The business continued to invest in our technology and the infrastructure required to support ever-increasing client expectations and requirements.

Two events in 2010 proved to be important for the company. First, after operating the business for almost ten years Brian and I decided to see if we could find a buyer. We had started to see consolidation in the space and M&A activity appeared to be increasing after an almost two year lull. Second, a few weeks after inking terms with a banker we were approached, literally out of the blue, by another firm about the same size as WhatCounts asking if weʼd consider being acquired. They had the backing of a large PE firm and quickly delivered an LOI. The process that began with their first phone call and ended with their acquiring our company was complex, challenging, long and, at times, nerve racking.

Next week Iʼll share some of those details with you.

#MBA Mondays

Comments (Archived):

  1. William Mougayar

    Fascinating story.Why were you not successful in attracting VC funding?And would you have grown faster or done things differently if you had taken VC funding?

    1. davidgeller

      Part of the VC disconnect may have been Seattle-related. I probably wasn’t patient enough to have a slow dance with the local VC community and we quickly started generating a revenue stream from clients. It was small, at first. But, we always considered the possibility of later seeking VC funding. It remained an option.In fact, I didn’t reveal it in my post, but we explored this in greater detail in 2009 and actually received a term sheet from a Seattle VC firm that believed in our story and the market. But, I had a suspicion that they didn’t entirely believe in our whole management team and, me, in particular. This and some less-than-favorable terms pushed me to reject their offer – to their great surprise. I’m glad I did. I’m convinced they would have pursued a board initiative to remove me as CEO and I was too attached to the company to let that happen.

      1. Guilherme Toussaint

        Nice story! I had a similar one, in the email marketing too, but it was in Brazil. Problem is we didn´t went through the M&A path b/c my partners was in a different mood them me, so they walked away from selling. One time entrepreneur always entrepreneur. I leave the company, joined, another internet company as an sales executive, but I´m in my sabbatical time from my new start up. Thanks for sharing, looking fwd for part II!

  2. LIAD

    I like the integrity of the ‘special payroll reserve’.Not sure about the cliffhanger though. Would have preferred to read the whole story in one sitting.

    1. fredwilson

      that’s good feeback on the cliffhanger. i want to keep all the postsrelatively short on avc. but i understand your point.i also was very impressed by the “special payroll reserve”that is a very telling moment in this story

      1. JLM

        Hey, I like the cliffhanger aspect. It builds suspense and interest.Glad you got home from the Middle East in one piece.

      2. Tereza

        Consider splitting it Monday/Tuesday instead of week to week.BTW I’ll be v interested in the conversation that ensues on the post-merger integration piece. That’s the part where most people it seems get disappointed around unfulfilled opportunity.And yet in my experience so many major errors are made in that handoff from financial transaction to operations. I’ve done many merger integrations as a consultant (albeit very large ones, not small tech ones).It’s staggering the disconnect between what was at the deal table and the operational reality (unfortunately — no offense — the deal guys have no clue about ops). Mergers that work are done ‘deals’, they are painstaking long-term projects to bringing very different skill sets and market actions together in a 1+1=3 kind of way. It requires operational persistence, brutal detail, and creativity.Respect is utterly critical but generally in short supply, by about 3 months after the deal. You have different ‘social contracts’ coming together. Everyone feels under threat, wondering if they’ll gave a job.Best comparison I can give is the blended family example. Two sets of parents with kids divorce and marry each other. How do you get the kids to be a functioning family? Really freaking hard and frankly a third party might be needed. That’s the rub.

        1. Dale Allyn

          I agree with you, Tereza, regarding the Monday/Tuesday split. But of course, it’s not up to me. 😉

    2. davidgeller

      Quite honestly, the cliff-hanger element was more of a bridging vehicle. I proposed to Fred that a description of our exit process might be valuable to other entrepreneurs and he agreed. It was an incredible learning process for me. So, instead of giving me a break, he asked for a follow-up piece right away.

  3. awaldstein

    Terrific story.I don’t know of many companies that were bootstrapped like this but know of a few that grew to significant size through only friends and family funding. Certainly not as free of strings as with VC funding but still with a great deal of autonomy.

  4. RichardF

    An idea (range) of the exit size would be nice.

  5. DonRyan

    I work at a self-funded start-up so this is especially interesting to me. Also not sure I’m in love with the cliffhanger approach but the story to this point has been presented in a very interesting manner.

  6. mattb2518

    Great post. I know David, Brian, and WhatCounts well, and they’ve built a great business over the years. I love the “customer funded growth strategy” concept and wish more companies did that (not necessarily to the exclusion of venture funding, but at least in part, or at some stages). Most companies that have spectacular flameouts do so because they could never get customer traction, even as they were good at selling a dream to wide-eyed investors (and convincing themselves of it as well along the way).I also think David’s concept that an entrepreneur’s share of a business and exit can be the same as a big slice of a small pie and a small piece of a big pie — but that baking a bigger pie is a lot harder. Amen to that.The one thing that I will disagree with is the notion that outsiders around the table is inherently bad for a business, or at least that the friction from insights or suggestions provided by those outsiders is problematic. While that certainly CAN be the case, it can also be the case that outside views and suggestions and healthy debate, as long as incentives are aligned, people are smart, and founders manage the situation well, can be enormously productive for a business.Looking forward to part II.

    1. fredwilson

      VCs can be very disruptive to the businessor they can be very helpfulor they can be a non issuethe second and third situations are goodthe first is not

    2. davidgeller

      Thanks Matt. Your comments are greatly appreciated. My post didn’t get to disclose that you and I worked together and that Return Path was a valuable and trusted partner and vendor for WhatCounts. You guys offer ESPs a great service!

  7. kagilandam

    Great post.While reading the post it sounded like a cake-walk all through except for not finding a VC, which eventually proved better i guess … awaiting the next post.But as a story “Charlie Crystle’s” had many turning points and excitement 🙂

    1. davidgeller

      I enjoyed Charlie’s piece too. I’ll try and do better in the next installment.

  8. vbarris

    Great story, thanks for sharing.

  9. baba12

    Makes sense to be self funded if you can do it.I am not sure one could self fund a company like say Tesla or Genentech unless one is pretty heavily loaded to begin with. Those kinds of startups can’t get of the ground with 50K or even 100K.Self funded efforts in certain specific areas makes sense and if successful the VC’s will come looking for a way to get a piece of the pie, but on your terms not theirs. That is always a good thing.The ability to have been able to sustain the growth without attracting outside capital or having a rift between the two partners over it is remarkable.

    1. ShanaC

      Different industries though…

      1. baba12

        Yes, but that is my point. You may want to boot strap etc but it works only in very few areas and for the rest you hope you can find some funding sources. Im not sure there are many VC’s out there who have the desire and propensity to work in those sectors as most of the ones you hear about in the tech space are extremely risk averse.Self funding something like a Tesla requires that you have made your monies elsewhere.

    2. davidgeller

      Funny you mention Tesla. I put my name down for their new Model S [family] Sedan last year and watched, over the course of several months, as the company spent gobs and gobs of money building out a network of fancy show rooms and sponsoring big events. After a while I started to believe that they weren’t spending their money wisely (like in building the car!) and ended up canceling my pre-order. To me, they seemed to be behaving like a startup that, after receiving their first round of funding, goes out and buys Herman Miller Aeron Chair chairs for everyone.But, you’re right about some companies requiring robust funding. Clearly, a large manufacturer or biotech company has capital requirements that are vastly larger and more complicated than a small software company capable of hosting their entire platform inside of Amazon’s computing cloud for $100/month. Still, those bigger companies can be self-funded. They just need much wealthier entrepreneurs to begin them.

  10. Brian Dosal

    A question I would have for anyone is if there is any value to the notion of:”I need to raise money in order to grow quickly. If I wait for customers to fund me right now my larger competitors wake up, move faster, and take me out”.

    1. Mbonner

      If you have something really new, and not evolutionary, then you and I have twin guardian angels: Inertia and Branding.Inertia is not just the competitor’s need to make countless internal decisions to focus on something new, it’s also the marketplace’s reluctance to adopt what we offer. If a competitor steps in or even announces that they will step, it validates the space and raises awareness, saving us countless marketing dollars. Remember the old saw about one lawyer in town vs. two. When they begin to make our idea into their idea there is always the possibility that they’ll do it better. Can’t think of when tho. Consider one of the biggest steals: I don’t think anyone could seriously say that the history of Window releases were ever produced an edition better than Mac’s. The trick is to find the niche where you can continue, innovate and make the math work. If you happen to be in low/no overhead software development, there’s a lot of room for little fish – and if you’re a survivor, the big fish may feel forced to buy you at some point.

    2. fredwilson

      i think raising money as a competitive defense is way overratedit largely does not workif there are things you know you need to do and don’t have the engineering resources to do them, and you believe those things are key to achieving your goals, then raise the capital to make the hires you need to make

      1. yofrez

        Have you seen many company raise capital for connections, advice or relationships ? For example, do companies take unnecessary capital just to get a particular investor in a round? I’m just wondering if the need for capital is the only reason to seek funding.

        1. fredwilson

          yes, but i think that is a mistake

          1. Guest

            Would you say it’s always a mistake? VC funding also builds credibility IMO. That’s one of the reasons I chose mongoDB. It made me feel that they were both credible and long term, which is something I desire in a new technology.But perhaps thats more B2B. VC funding certainly wouldn’t have affected my usage of Facebook, YouTube, Twitter, etc.. and I’m sure all the contacts in the world wouldn’t have made a difference in user acquisition.

          2. fredwilson

            that’s a good point

      2. amin

        In my country there is a saying that would translate to english to something like:”The winner is not who gets there first, but who gets there in better shape”(Sorry if there is the same saying in english but at least I am not aware of it.)Obviously this is not true in all cases but I think in the case of certain companies and services this it is very true.

        1. Alex Murphy

          This makes sense in Business in a lot of ways, because Business is not a race, it keeps going. And if you exhaust all of your resources just to get to the finish line and you have nothing left, then the business fails going forward.I think this is what happened to AOL and Time Warner. All of the effort went into “doing the deal” and they failed to keep on running.

    3. Alex Murphy

      I think that you should raise VC level money at the point when you are ready to scale. (at least in tech / web)

  11. JLM

    When is the second half coming? LOLI can’t wait.Great, well written story. I wonder if you realize how unusual it is to be able to do what you have done? Your story already is 1 in a million.Can’t wait for the second half.Worked ten years to become an overnight success! You gotta love that.

    1. davidgeller

      Thank you for your kind words. Ten years sounds like a long time. It is. But, most of those ten years were a complete joy, professionally. Brian and I were married when we started WhatCounts, and we’re both still married – each to the same women!

      1. JLM

        Life is a great adventure and what makes it even more fun and blessed and fulfilling is to make that journey with a damn good woman. My wife and I spend a lot of time laughing and wondering how things happen to happen.Good on you for recognizing the importance of your womenfolk.I am waiting with baited breath for the pay window portion of your story.Keep on outsmarting the world and the money and life.

      2. Volnado

        Are you saying that bootstrapped startups and marriage typically dont go together?Does that make you another one of JLM’s 1 in a Million stories?

      3. fredwilson

        that’s saying something

    2. PhilipSugar

      I don’t think its one in a million….it happens a million times more than a Facebook. Just not ever celebrated.

      1. Alex Murphy

        Here’s to the celebration!

  12. ShanaC

    What particularly about your business model led you to believe that self-funding was a better option? How should someone in general try to find that out before seeking funding?

    1. davidgeller

      I’m not sure the choices we made were tied, specifically, to the type of business we were in. It may have had more to do with our personal backgrounds. Both of us came from modest backgrounds where compassion was highly valued. So, our focus on employee well-fare certainly influenced the cadence of our growth and the type of risks we were willing to take.I’m not nor have I ever been opposed to VC funding. Just the opposite. I think it’s important for entrepreneurs to seek the funding path that best allows them to operate their business in the manner they’re most comfortable doing so, and at the rate most likely to make them successful. Unfortunately, it’s a calculus without an easy to follow formula and it has to be applied to something – a business – that’s rarely static in nature.

      1. ShanaC

        well thank you. That is somewhat more insightful into the situation

  13. ShanaC

    JLM, it has gotten way less dangerous there in the past year or two. I was reading in the economist this morning that Israel is starting to junk security guards at cafes. The Palestinian economy is growing like crazy, and it seems overall there is a ton of investment activity in the region (something that happens when the investors feel the country is safe)It looks even sunnier in the Middle East, or at least the regions Fred was visiting. I would feel very comfortable telling you to go.

    1. fredwilson

      we felt very safe our entire tripbut we also left egypt before a string of events happened that would have made us a bit nervous

  14. Fernando Gutierrez

    Great story and congrats for making it to the pay window!I would love to know more about the equity structure in the beginning, if you feel comfortable talking about it. Did your cofounder also put down 50K? if not, how did you value each founder’s stake in the business? thanks anyway if you can’t answer that.

    1. davidgeller

      That’d be a great conversation to have at one of the AVC mixers – over some drinks!

      1. Fernando Gutierrez

        In that case I’ll wait until then!

        1. Volnado

          I will wait with you Fernando its a question I have on my plate right now thanks for asking

  15. Orestis Roussopoulos

    Why did they decide to sell ? Why not grow?

    1. davidgeller

      We had run the business for a long time and had reached an inflection point that required significant capital to break out and jump into the next revenue bracket (the 100-200 FTE size company). We saw the M&A market improving and calculated that an exit now, without any dilution, was roughly equivalent to a strong exit in a much larger company several years in the future. We cut our risk profile and decided to leave. We were also impressed with the plans and vision our acquirer had. It was exciting to hear what they thought was possible with a combined, larger entity – and one with the backing of a $3.5 billion PE firm behind it.Could we have stayed in and grown the company much larger? Perhaps. But, I think I had probably reached the limit in terms of what I could provide as a CEO. For the business to grow we would probably have needed a stronger and more experienced management team.

      1. fredwilson

        you are starting next week’s blog post. i do that a lot in the comments

      2. Ali Aydar

        Congrats on having the foresight to make the calculation of what you and your team would make in the two scenarios. I’ve unfortunately seen too many people that didn’t have this foresight (or for that matter the ability to objectively say “this needs a more seasoned CEO now”) and ended up sticking around too long (and of course not even getting what they could have).

  16. yofrez

    A few people in the comments mentioned trade off for self funding vs VC and I would like to understand how you considered them when deciding to self fund your business instead of pushing for an investment round. Good venture capitalist provide a lot of benefits outside the actual capital they give to entrepreneurial such as advice, business connections, publicity, and creditability. Where their any examples of competitors that took vc funding ? If so, where they able to ramp up or get meetings that helped them out perform the competition ?

    1. Guest

      You make a good point about a VC investment being much more than a monetary investment. It’s also an intellectual investment and a networking (in the social sense) investment.I’ve seen people take on VC investment when they don’t need the cash, and people will often question it. Well, there’s the answer.

    2. davidgeller

      I agree with you that VCs can provide great value. In our case, though, we were in a field that, back then, wasn’t very sexy. Additionally, Seattle’s lending community was, and remains, too conservative in my opinion. Deals don’t appear to happen here with the same velocity and energy that they do in the Bay Area. I had similar experiences with Eyejot in 2007. I’ll have to see if Fred wants another post one day about that business. Though, its history is still being made.

      1. fredwilson

        we passed on eyejot. VCs are a tough lot.

  17. Kevink

    How concerned were you initially that competitors with VC funding would crowd you out of the market? Also do you think it’s often clear cut whether a company would be better suited to bootstrapping versus VC funding, and why do you think you initially thought VC funding was the way to go? Was it a belief that funding would help the business expand rapidly, a desire to keep up with competitors, something else?Thanks so much!

    1. davidgeller

      Kevin – I think we originally thought VC funding was required and important because, frankly, that’s what everyone talked about. For a long time you couldn’t open up TechCrunch without reading about a dozen new startups receiving a ton of cash to fund their dreams. It almost seemed as if convincing VCs to fund a business was more important than actually operating one.I also believe that I wasn’t terribly sophisticated when it came to running a business. Perhaps I was even naive. Brian was much more skilled in this regard and was also far more comfortable working with and understanding more complex funding strategies. As a software engineer CEO I may have spent too much time in the weeds of the business developing the platform. That may have, to some extent, hamstrung efforts for us to seek VC funding and kept us on our self-funded path.

  18. daryn

    Why do I have a feeling that “Fred Wilson groupie” is a title that is going to stick? That *is* two AVC posts in a row with @daryn in the intro though, Fred :)Thanks for sharing the WhatCounts story, David. Bootstrapping has gotten more popular in the past few years, but was certainly a lot more difficult for an internet business back in 2000 when you guys started. I’m sure at times, it was frustrating to see the growth of your well-funded competitors, but by focusing on your customers and growing the company only as you could afford it, you guys were able to build a solid long-term business as well as achieve a successful exit for yourselves.Congratulations again!

    1. fredwilson

      any increase in twitter followers as a result?

      1. daryn

        a small bump – I was a little surprised by your choice of “@daryn” – got me thinking more about Albert’s posts on a global namespace for people.

        1. fredwilson

          everything i do is for a reason 🙂

  19. Mbonner

    A huge thanks to a VC who will talk about sales/self-funding! Are there VC’s who have a practice of actively mentoring self funders? This seems like all upside to me. Bootstrappers have everything on the line and will only survive if the marketplace proves their ideas valuable. They are far lower risk, have no burn rate, need less equity etc. etc. When they are ready for an event of some point, they’ll reach out for help, so the relationship is already in place. Yet I have not found that there is any kind of formalized ‘farm-club’ for bootstrappers among the VCs I’ve spoken with. Am I looking under the wrong rocks? Asking the wrong questions?

    1. fredwilson

      i do a fair bit of advising self funders1) they might someday decide to raise capital and i want to be there if they do2) i want to support entrepreneurs in all shapes and sizes

      1. Donna Brewington White

        “i want to support entrepreneurs in all shapes and sizes”That’s what makes you a great VC — the funding part is just putting your money where your mouth already is — so to speak.

  20. Jon Katzur

    Great story, thanks for sharing!I have a question about your employee compensation structure. Clearly you truly cared about them to have the integrity to hold the payroll reserve (really wonderful lesson there). I was just wondering if you also gave employees options, or equity in any form? I am not sure if that is more common in a VC-backed or self-funded company.Thanks again!

    1. davidgeller

      We never created a formal option pool. Around the 2000-2001 time frame it had almost become unpopular to do so, if I remember correctly. We knew a lot of folks in the high-tech world that were burned when the tech bubble burst and didn’t seem particularly enamored with a compensation plan that had a significant portion of it tied to future, potential success. Surprisingly, we never encountered any strong desire by potential employees to have one. We did bonus people every year, and that was usually very appreciated.So, without an option plan things were really simple – both in operating the business and, eventually, in selling it.

      1. daryn

        This is an interesting point to me.I see equity-based compensation as key to getting employees on-board and behind the vision, even if often those stock options end up worthless.And when you’ve built a very practical platform that has healthy revenue and can pay good salaries, with good job security, and even offer year-end bonuses, I think it’s hard for employees to complain.That said, in retrospect, would you do it the same? A lack of employee ownership seems as thought it would breed a different culture, much more based around “I work for a good company”, than “I am part of this company, lets make it great.”

        1. davidgeller

          That’s a little tough to answer. It was a different time back then. I would still try to keep things closely held until there was an outside investor and then allocate a pool for employees. Delaying that until a funding event still makes sense, to me, because it reduces the number of times you have to restructure the company. Fundamentally I believe in sharing the success the business achieves. That may come in the form of options, stock disbursements, bonuses or phantom stock – perhaps other vehicles I’m not aware of.

          1. Jon Katzur

            Thanks for answering my original question! And for this response as well. I am guessing that the climate post bubble was very different and many people were dissatisfied with options that never panned out. It does seem like that tide is changing now, but who knows what the effects of that will be.

  21. Sebastian Wain

    Very good post, one question:- What were/are the repetitive bottlenecks of your business processes? that is the stuff that always consumes more time (like software dev), even that theoretically it can be done more quickly. For example updating web content, longer sales processes, etc

    1. davidgeller

      Sebastian – great question. The biggest problem we faced in self-funding the company and limiting ourselves to an organic growth rate was that we weren’t able to hire as quickly as we, perhaps, should have. After a while we hit a rhythm and a number of aspect of our sales process became formulaic. So, we knew that if we could just add n number of new people we’d see a corresponding rate of x applied to the growth of the company. More capital would have been applied toward growing our sales and marketing teams.

  22. SteveD-

    Really interesting story! I’m curious about how that first $50k was spent and it would be useful to know the definition of “customer funded growth strategy.” I assume it means growth was funded from cash flow but it could mean customers directly funded some growth perhaps by pre-paying for new features. Thanks for the great post.

    1. davidgeller

      Steve – I don’t have access to the detailed records anymore so I can’t say for certain, very exactly, where the first $50K went. But, I suspect it got applied to rent, servers, data center fees, software licenses and the salary of our first employee.We had a file cabinet at WhatCounts that was perfectly usable but had a pronounced dent in the front of it. It was one of the first pieces of non-IKEA furniture we bought and it was an “as-in” discounted item we found at a local office supply store (Ducky’s, I think – if you’re from Seattle).Talking about that first $50K reminded me of it. It was still in the office when we sold the business and I was always pleased to see it when I walked around. It reminded me how grounded we were in starting the company.

      1. SteveD-

        Hi David, Thanks for the response. Great story about the file cabinet. I can just about picture it. Thanks for sharing.

  23. Ali Aydar

    Inspiring story. As someone running a bootstrapped startup for the first time (after 3 venture-backed startups), it’s nice to hear the inside of a success story.One piece of information that would be helpful to me in my current role that wasn’t discussed: what was the revenue ramp like over the ten years? Also, the story mentions one point where you had $1M in the bank. How many years in was that?Thanks for the informative post. Looking forward to the rest of the story next week.

    1. davidgeller

      Ali – we had three big periods of growth and two periods of relative flatness in revenue. The first of those came around 2007 when the economy tanked. Overall revenue stayed flat as a fewer number of new clients were acquired and some existing ones left, in most cases due to their own insolvency. So, the fact that we didn’t shrink was fine. Flat was the new growth curve back then.The next period of “non-growth” happened when we decided to restructure our sales organization from a largely in-field, remote team to one entirely based in Seattle. We were growing and believed that the operational dynamics required our sales team and sales leadership to be located close to our marketing, support and product development groups. The fact that we were self-funded allowed us to make the decision. It was a risk because, in effect, we were accepting the fact that we might be stalling new business growth for six to 12 months. And, we were right. It was harder to find a strong, new sales team than we had hoped. Thankfully our business delivers a lot of revenue on a recurring, monthly basis from existing customers – most of whom had year or longer contracts. So, the business was fine, but it showed a period of slow growth.With regard to the $1MM in the bank – we reached that point pretty early on. But, that level fluctuated up and down as bonuses were paid and improvements to our technology infrastructure were made. Having that much cash, for a business our size, was always a point of subtle annoyance to our accountant.

      1. Ali Aydar

        David, thanks for the helpful response. Your point about cash being an annoyance for your accountant warms my heart. I have the exact same issue! I’d love to keep the cash around for strategic purposes, but we all start to grumble when there is too much cash in the bank. It’s a really subtle point about bootstrapped startups that you don’t realize exists until you’re running one.

  24. JamesHRH

    Fred:A bit surprised by the lack of business model discussion in this piece.Self funding works in low overhead development, solution sales environments – where customers or industry insiders have long funded startups.In your opinion, what models inherently require VC involvement?

    1. davidgeller

      You’re assuming we had a business model.

      1. JamesHRH

        I hope you did not take that as a shot David, as it was not meant to be attacking, in any way (I respect your record of building and selling the business). The threads on AVC are regularly about the how, why and who of VC investment (see other comments).FWIW, I was taught that business models are like shadows (you have one, even if you don’t know it, unless your story is so cloudy that you don’t cast a shadow in the world of business……..)

        1. davidgeller

          James – I didn’t take it as a criticism at all and I’m sorry if my response was too flippant. A simple plan was constructed very early in the company’s history. It was made primarily as preparation for discussions with potential investors. After we committed ourselves to running without outside assistance we didn’t find ourselves needing to reference it much. Instead, we set about, over the years, refining how we pursued new business, servicing existing customers and gauging success. We operated the business in a pretty simplistic manner. Brian and I set direction for the company and we all set out to achieve our goals. We had all-hands meetings weekly and, eventually, started driving the business through a series of operational dashboards which provided all the metrics we thought were necessary to monitor sales and help in moving the needle forward.

          1. JamesHRH

            David – You should check out the Business Model Canvas by Alex Osterwalder, author of Business Model Generation. It would have fit in, handwritten of course, on the wall above the dented file cabinet (pretty simple, but really effective)! All the best.

    2. fredwilson

      models that require scale to execute the business model often require some form of funding

  25. John Clyman

    Love this. A wise startup veteran once told me, “Funding only delays the inevitable. You’ve gotta get to profitability.”When you’re bootstrapping, you’ve really got to find a way to delight customers *and* to make sure they’re willing to pay. Certainly there’s little motivation that can match the sleepless nights wondering how you’re going to meet payroll if you don’t. Keeping an explicit payroll reserve is a brilliant move on many levels.

    1. davidgeller

      John -For most of the life of the business Brian and I slept well each night (each in our own homes with our own wives, of course). Our marriages survived and we had great employee and customer retention. Our oldest employee has been at the company nine years. Our oldest customer has also been there nine years. I’m really most proud of both of those.

    2. fredwilson

      what a great quote – “funding only delays the inevitable”i’m going to use that frequently going forward

  26. Trevor McKendrick

    David thanks for the great story. Two questions:1) How long did it take to get your first customer?2) How did you acquire your first customer? Cold call? Friend of a friend? Etc.Much thanks!

    1. davidgeller

      We technically won our first “customer” before we began operating the service. Customer is in quotes because they were our first user, but we agreed to provide our service gratis in exchange for good feedback. That pro-bono account is still active ten years later. It was someone I had met years earlier and kept them up-to-date about what I had been developing,Our first paying customer came very quickly and was through a referral – someone Brian and I had known at Starwave. The customer was based in Seattle. Geography was important then. That customer grew, went public and remains a customer to this day.

      1. Trevor McKendrick

        Thanks for that response Dave. Great story all around. And sorry Tesla didn’t work out for you. 🙂

  27. Volnado

    This is fascinating I am so glad to be a part of this blog I cant wait till next week what a cliffhanger!! A real entrepreneurial whodunit!!

  28. allubarbosa

    Our customers also. We were making money! We knew if we decided not to consider the potential of the sea outside funding potentially compromise our ability to grow the company at an accelerated pace.Canadian Pharmacy

  29. Blsavini

    I thoroughly enjoyed this particular post. It illustrated alot of what I personally define as “old school” business practices.Congratulations for being able to get a company built within your own terms.And, … Thank you for doing the blog, Mr. Wilson. I learn alot here, when I wander in from Twitter.

  30. PhilipSugar

    What a great well written post. Thanks to both you and Fred.

  31. Donna Brewington White

    Very interesting and inspiring story, David. Thank you for sharing this.The one good thing about coming late to the party is that I got to read more of the back-story in the comments which helps to better explain why you made certain choices and decisions.Very impressed with your approach to hiring (waiting until you had a buffer) and ensuring you could meet payroll (reserve fund). Have seen a lot of heartache when companies have not taken this approach.Wonder if you’ve ever wished you were the company with the PE backing doing the acquiring?Also, as others have mentioned, one of the great benefits of VC funding is the non-monetary support you receive — they can be venture “catalysts” as well as venture “capitalists.” Did you ever regret not having this type of input and support, or did you find this through other channels?BTW, a marketer and an engineer seem like a winning combination for a startup founder team!

    1. davidgeller

      Thank you for comment Donna. We were extremely fortunate, perhaps from both planning and luck, never to have issues related to funding – either having enough of it or watching it run out. Granted, it was never enough to scale faster than we did, but things worked out in the end. I think, in retrospect, our approach was perfect for us and that aside from the inherent challenges of running a business and attracting clients, we had very few crisis during the company’s lifetime.As for whether we wished we were the roll-up instigator and leader, with a PE partner…good question. We talked about it quite a bit over the last few months. There’s a side of me that says yes. The other side realized that I had an obligation to kick-start my other company, Eyejot, so I was glad to end my tenure at WhatCounts.

      1. Donna Brewington White

        Which is perhaps another advantage to the route you took — more flexibility and control with regard to the exit. But, perhaps, this is jumping ahead to the next installment… Look forward to it!Thanks for taking the time to respond, David.

  32. allubarbosa

    This is fascinating I am so glad to be a part of this blog I cant wait till next week what a cliffhanger!! A real entrepreneurial whodunit!!Motorcycle Parts

    1. davidgeller

      Thanks for your comment. Fred has a great blog and I’m fortunate to be part of the community of readers, and now contributors.

  33. dougan

    Fantastic read, David. You and Brian did a great job with WhatCounts.

    1. davidgeller

      Thanks Dougan.

  34. Matthew Tucker

    David, thank you for the contribution (I am looking forward to part 2). I have a sneaking suspicion that a good deal of your success was your modesty and ethics – this comes shining through in the piece and your responses to the comments. I can see how you attracted employees and clients and retained them throughout the life of the company. There is a lot to learn from here, whether a company is venture funded or not.

  35. AnaRC

    Just discovered this blog and love the MBA Mondays! Learning sooo much and can’t wait for tomorrow’s part II.I have self funded all my start-ups. It has its pros and cons of course. The sense of freedom is priceless. However the pressure to become profitable the next day you launch to meet payroll is huge. Thank you David for sharing a real story. Most entrepreneurs do what you guys have done. You are an inspiration to us all.

  36. Ido

    So well written, it was a joy to read. Congrats on the sale.