Bootstrapping vs. venture, R&D spending, and more- Tactician #0015

05/12/2023

BOOTSTRAPPING VS. VENTURE

Elad Gil, Founder at MixerLabs and angel investor, outlines the factors contributing to capital efficiency, such as customer willingness to pay and cost-conscious operations, and discusses the strategic considerations for startups in deciding whether to bootstrap or raise funds in "Capital Efficient Businesses"

• Prioritize Capital Efficiency:

  • Insight: Capital efficiency is crucial for demonstrating a strong business model and founder mindset.

  • Quote: "The capital efficiency tends to reflect that (a) people really want your product and will pay you for it and (b) the founders are cost-conscious and frugal, and do not overhire."

• Be Wary of Over-Bootstrapping:

  • Insight: In some cases, bootstrapping for too long can prevent quick scaling or market capture.

  • Quote: "In many cities and regions people bootstrap for too long, do not scale quickly enough, or do not think about time to winning in a big market."

• Understand the Dangers of Excessive Capital Efficiency:

  • Insight: Overemphasis on profitability may lead to missed opportunities in market capture and growth.

  • Quote: "Some companies that focus on or hit profitability early then forgo winning the market - their focus shifts too much on maintaining cash flow versus growing faster to take the market."

INTERVIEW

Harry Stebbings, Founder at 20VC interviews Tooey Courtemanche, Co-Founder at Procore, discuss challenges and lessons learned from expanding internationally, the journey of building a successful company, and the personal experiences and strategies that have contributed to the Tooey's success in "Tooey Courtemanche: From Construction Worker to Billionaire CEO"

• Patience and Market Timing in New Markets:

  • Insight: Understanding and adapting to the pace and unique characteristics of each market is crucial for successful international expansion.

  • Quote: “It’s really tempting to say what worked in the US market is going to work in another market. I would say some of the biggest lessons learn was you have to build a brand and you have to build loyal custoemrs and referenceable customers in those markets before you reaclly can expect any sort of scale and growth"

• Learning to Lead Rather than Do:

  • Insight: As your company grows, transition from hands-on work to focusing on leadership and strategy.

  • Quote: “...in the early days of a tech company you do everything your job is to do like literally I was writing code I was taking out the trash I was I was doing everything at a certain point in your leadership scale you have to learn how to stop doing and start leading.”

• Empowering Team Members, Even Allowing Failure:

  • Insight: Allow team members to take ownership and even fail, as this fosters growth and learning.

  • Quote: “...it takes a lot of like trust in order to do that but you have to do that.”

R&D SPENDING

David George, General Partner at Andreessen Horowitz, guides growth-stage CEOs on effectively allocating R&D budgets, emphasizing the critical nature of this task, especially for technology companies incorporating AI into their products in "How to Think of R&D Spend"

• Challenges in Assessing R&D Spend:

  • "Assessing the ROI of R&D spend is far less straightforward. The return on R&D is variable and often happens over a longer time horizon compared to other budget line items... R&D is perhaps the most important capital to allocate, it’s also the hardest capital to efficiently allocate."

• Using Benchmarks for Initial R&D Spend Estimation:

  • "Benchmarks are helpful to reference when you’re allocating capital across all budget items, and your board and investors can help with identifying the most relevant benchmarks for your company... Many companies have good reasons not to conform to R&D benchmarks, especially if they’re creating new categories or building at the forefront of a new technology like generative AI."

• Mapping Spend to Product Roadmap with ROI and Timeline:

  • "While benchmarks can provide some guidance on appropriate overall spend, really effective R&D capital allocation involves mapping your spend to clear product roadmap priorities... The challenge, of course, is that product roadmaps operate on multiple time horizons, and the ROI of different R&D spends typically maps to those different horizons."

• Framework for ROI of R&D:

  • "Generally, I think of the ROI on R&D investments as a 2×2 grid, in which bets are offensive or defensive with a short- or long-term time horizon... The mix of short- and long-term, offensive and defensive bets depends on your product and business priorities. At the board level, it can be helpful to discuss the thinking behind your priorities as well as your expectations for the returns on your R&D spend."

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