The Basecamp Way
In the world of bootstrapping there is one company who’s story has turned to lore and, in many cases, doctrine. The company- Basecamp.
Started in 2003 within an agency, 37Signals, Basecamp rose to infamy for their early production use of Ruby on Rails, picking fights with conventional Silicon Valley startup wisdom as a marketing strategy and for vocally shunning the traditional VC path.
In the subsequent decade, they‘ve also become a lightning rod for bootstrapping purists who’ve felt betrayed.
Betrayed because their missionary message of boldly bootstrapping came with an asterisk.
That asterisk is relevant today as many wrestle with whether to take on investment or dig deep into personal savings and nights/weekends to make the dream of running their own business a reality.
In a recent series of posts, Justin Jackson has been wrestling with both the hidden costs of bootstrapping and something he calls the Bootstrapper’s Paradox, which he defines as
Bootstrappers have created a religion out of building something from scratch and self-funding the entire thing.
But what if that ideology leads to burnout? Or bankruptcy? Or not being able to go the distance?
Basecamp is featured prominently in each piece for both the ideology they espouse and that pesky asterisk. Unfortunately, what gets lost in the ideological back and forth within bootstrapping v. taking on investors is the human needs that drive both.
On the one side, you have deeply independent people who want to run their business on their terms. They started a business to be their own boss and want to be able to control the people, pace and payout for the work they do. Those bringing on investors are often looking for support and validation for their work. They want a financial cushion to quit their jobs, go all in, and scale faster than their paychecks or nights and weekends will allow.
Both are natural human conditions. Neither should be lionized or vilified. But they should be considered on a spectrum with more nuance than:
Bootstrapping good. VC bad.
The asterisk that marks the Basecamp story is far more instructive for founders that such a stark contrast regardless of which ideology you subscribe. In that asterisk is the actual Basecamp way.
After launching Basecamp, 37Signals had a flood of press. Which led to a flood of inbound interest from investors. Because they had revenue coming from consulting and Basecamp subscriptions, they didn’t HAVE to take anyone’s money. Instead, they were able to only take a deal on terms they were able to dictate.
Some of the nuances of that deal may be lost in the current frothy funding environment so I think it’s worth unpacking a few unconventional elements in order to convey just how much they were able to shape a series of unorthodox investment terms.
Firstly, Basecamp was, and is, an LLC. On the whole, VCs don’t fund LLCs (I won’t get into that whole rat's nest here but this is a good piece on why that’s the case). So, taking any investment for an LLC is highly uncommon. Second, none of the investment went to the balance sheet to fund operations. It all went to the founders. Today, any round of over $5M likely has a piece going to the founders, but in 2005 this was not only uncommon it was taboo, bordering on heretical. Third, given the pass-through nature of LLCs, any return to investors would be coming as a distribution of profits. This is unconventional for several reasons; namely, most funded startups don’t promise profits, they promise an exit and most investors don’t want to see profits they want to see exponential growth. How much profit does Basecamp generate? In this Mixergy interview from 2016, Jason notes that they do “tens of millions in profits every year”. I’m fortunate to know folks on both sides of the Basecamp investment and can say with confidence that it has been a great return for both the founders AND the investor.
The point of revisiting this decade-old investment arrangement is to shine a light on a path (bootstrapping v. funding) that many founders view as diverging when in reality they are continually meandering and intersecting.
The Basecamp way is NOT to never raise money or dogmatically bootstrap a pure and independent business even if it means putting your, or your family’s, financial wellbeing at risk. No, the Basecamp way is to put yourself in a position that should you choose raising money is in your best interest that it can be done on your terms and on your timeline and embody your definition of success.
And, far more founders should follow it.
