Trends #0005 — Bootstrap Funds

I've been doing these reports for a while. Just getting around to sharing them with IH. Would love your feedback.

Trends #0005 — Bootstrap Funds

There's a big gap between billion-dollar unicorns and small businesses.

🔍 Problem

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Founders of niche businesses struggle to find smart, aligned advisor networks.

Venture capital funds provide capital and guidance. But this comes with billion-dollar expectations.

💡 Solution

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Bootstrap funds are built to provide funding, connections and thrive without billion-dollar exits.

In order to survive, VC funds rely on one or more companies to return the fund.

VC funds are built on the premise that most investments will fail or break even. This is a feature not a bug. But VC doesn't work for most companies.

This model may work when major network or scale effects are at play. These are powerful forces that blunt competition and protect margins. Think Google, Facebook and Uber.

Bootstrap funds are designed for less extreme outcomes. They tend to invest post-traction and operate in niche markets.

Think Castos (podcast hosting), MakerPad (education) and StaticKit (developer tools).

These are not billion-dollar rocket ships or traditional small businesses.

🏁Players

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Bootstrap Funds

• Earnest Capital
• TinySeed
• Indie.vc
• Smash.vc

Portfolio Companies

• MakerPad (Earnest Capital)
• Yeluchi (Earnest Capital)
• 1 Second Everyday (Indie.vc & Earnest Capital)
• Castos (TinySeed)
• Nice (Indie.vc)
• Hostifi (Earnest Capital)
• StaticKit (TinySeed)
• FirstBase (Earnest Capital)
• MemberSpace (Earnest Capital)

Advisors

• Courtland Allen (Earnest Capital)
• Ruben Gamez (TinySeed)
• Natalie Nagele (Earnest Capital)
• Asia Orangio (TinySeed)
• Hiten Shah (TinySeed)
• David Heinemeier Hansson (Earnest Capital & TinySeed)
• Rand Fishkin (TinySeed)
• Kevin McArdle (Earnest Capital)
• Patrick Campbell (TinySeed)
• Laura Roeder (TinySeed)

🔮 Predictions

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• Advisor networks will make or break bootstrap funds. Post-traction companies have no shortage of funding options. Founders are choosing bootstrap funds to align interests with and get access to experts.
• Nearly all bootstrap fund LPs (limited partners) will be experienced advisors. Operators have capital to invest. Bootstrap funds will prefer to feed the flywheel rather than add deadweight.
• Some companies will harness network/scale effects and jump from bootstrap funds to VC funds. Bootstrap funds will have a chance to exercise equity rights.

☁️ Opportunities

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• Study Islamic Finance to make better shared earnings agreements. Specifically profit and loss sharing. Sharia law prohibits interest payments and creates a natural experiment to study the history and practices of profit sharing.
• Invest in a bootstrap fund.
• Start a bootstrap fund in a meaningful niche.

😠 Haters

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"Bootstrap funds?! That's an oxymoron."
Yes. What's life without a little cognitive dissonance? So roll with it.

"These companies have traction. They should not give up equity."
Some founders beg to differ. They can find cheaper, non-dilutive capital but opt for bootstrap funds instead. Hint: It's not about the capital. They want help.

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I've also covered other trends:

Issue #0001 --- Cloud Kitchens
Issue #0002 --- Podcast Memberships
Issue #0003 --- Co-Living
Issue #0004 --- Income Share Agreements