Why is Peter Thiel NOT a Fan of the Lean Startup Movement?

This question was recently discussed on Quora. I wrote an answer there, which I have expanded on for this post.

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Who Makes More Money: A Bootstrapped Entrepreneur Or One Who Raises A Lot Of VC Money?

The answer is, it depends.

There are some off the charts success stories like Facebook, Google, and some others where the entrepreneurs raised huge amounts of VC money and also ended up creating huge amounts of personal wealth.

In the cases where the exits are modest, it is generally the case that peopole who bootstrap end up creating a lot more personal wealth than those who raise a lot of VC money.

Here’s a cartoon video that explains the latter case:

Cartoon: Book by Sramana Mitra and Irina Patterson. Art by Mike Varouhas.

Bootstrapping Using Services First, Raising Money Later: Rohyt Belani, CEO of PhishMe (Part 7)

Rohyt Belani: Then, we’ll help you analyze this. We’ve built technology to not only  help with the analysis but also leverage existing security investments. If they’re using FireEye, we’re not competing with them. We actually fit along side them. Let’s say the Sandbox from FireEye, or the URL analysis product from WebSense, and take all these factors and say, “What is it that I’m looking at? How bad does it really look?” It’s very difficult to come up with a binary this-is-bad-for-sure or this-is-good-for-sure answer. It’s more of a confidence rating. That’s really what we look to do—operationalize human intelligence.

Sramana Mitra: What’s the competition? What’s the direct competition?

Rohyt Belani: If you look at the product portfolio that I just talked about going from simulation, assisting with reporting, to assisting teams analyze these reports. If you look at it holistically, we don’t have any company that offers this entire gamut of offerings holistically. We have competition on each one of these verticals, I would say. The simulation is the one that we’ve had around the longest. That’s where we have the >>>

Bootstrapping Using Services First, Raising Money Later: Rohyt Belani, CEO of PhishMe (Part 6)

Rohyt Belani: If you want, I can explain with a really good example in a story.

Sramana Mitra: Yes, go for it.

Rohyt Belani: If you think back to 2010, there was a bomb scare at Times Square. There was a Nissan Pathfinder parked right in the middle of Times Square, which is very unusual. If you’ve ever been to Times Square, you see that there are a lot of cops there walking around. None of these systems and technologies caught this anomalous SUV parked right in the middle of Times Square. It was two vendors who stood there everyday selling $2.99 I Love New York T-shirts that said, “This looks whacky.” They went to the cop and said, “We don’t see cars parked here.” The next thing you know they call the bomb squad. It was loaded up with explosives.

While these guys weren’t bomb experts, they were contextually aware. Our whole idea is how do we take that contextual awareness to cyber security. How do you do that? An example is I got hit by a phishing attack myself. We launched our most recent product. I guess the phishers just go after us for bragging rights. >>>

Bootstrapping Using Services First, Raising Money Later: Rohyt Belani, CEO of PhishMe (Part 5)

Sramana Mitra: One of the things that’s obviously a huge benefit of this model is valuation. I imagine your Series A valuation is way larger than many others who would try to go raise money early. We did the story of Tableau. Tableau raised Series A at a $20 million pre-money valuation. They bootstrapped for two years and they were $6 million before they raised their first round of financing. Their first round Series A valuation was $130 million. What was your experience in terms of valuation and where were you raising money?

Rohyt Belani: Our primary institutional investor has been Paladin Capital based in Washington DC. Especially in this latest round, we had a lot of interest from Silicon Valley investors. As you rightly pointed out, the valuation was pretty wide. By the way, I’ve read quite a few of your blog posts and I find them very intriguing. I’m not one of those entrepreneurs who’s solely focused on valuation. That’s not a criterion of success for me. A lot of people get the Unicorn status but they signed away for liquidation preference. I’m more of, “What’s the deal holistically?” If you seduce me with >>>

Bootstrapping Using Services First, Raising Money Later: Rohyt Belani, CEO of PhishMe (Part 4)

Sramana Mitra: Walk us through the process of building the company. You spun the company off at what point? Did you already have clients when you spun it off?

Rohyt Belani: We did. We had about 20 customers at that point. It was a tightrope walk. As you can imagine, a product company in its early days does lose money. What we did first was, before we spun it out completely, we actually made PhishMe a subsidiary of Intrepidus Group for a year so it could still share financials. That gave us a year’s worth of overlap to figure out what exactly would be needed from a financial standpoint. A year later, we also realized that we had to get a blessing from the IRS to do a tax-free spin off. We were able to spin it out completely with much more of a level of comfort when we understood what it would take financially to support PhishMe. We then started looking for capital.

Sramana Mitra: How were you charging these 20 clients that you had before you spun off? What was the financial arrangement with these guys? Had you zeroed in on a pricing strategy for your product?
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Bootstrapping Using Services First, Raising Money Later: Rohyt Belani, CEO of PhishMe (Part 3)

Rohyt Belani: Just to lay it out, Farm Stone was acquired by McAfee. I worked there. Then I worked at Mandiant, which was acquired by FireEye. The group I had founded with Aaron was also acquired in 2012. Along that journey at Intrepidus, we had already come up with the product idea for founding PhishMe. PhishMe has been around since early 2011. It had a bit of an overlap with the Intrepidus Group. We’re coming up on five years of existence this January. We’ve set out to solve a problem, which is still the problem of the day when it comes to cyber security, which is targeted phishing attacks.

Sramana Mitra: Let’s go back to five years back when you were starting PhishMe. You had already gone through several exits, whether you co-founded or not. I presume that you, at this point, had a bit of capital available to yourself?

Rohyt Belani: We actually bootstrapped the early days of PhishMe because it was incubated inside of Intrepidus Group. >>>

Bootstrapping Using Services First, Raising Money Later: Rohyt Belani, CEO of PhishMe (Part 2)

Rohyt Belani: Here I am on a student visa with eight weeks to go till graduation, and I was starting to scramble for a job. Then, I just ran into a job. I ran into a gentleman, literally, in the hallways of Carnegie-Mellon. I was introduced via email to him. He was an Adjunct Professor. He was teaching a security course that I was not taking. I ran into him. I was naïve enough to not think of it as an interview. I literally showed up dressed in flip-flops, shorts, unshaven for three days, and looked completely sloppy. I met this gentleman who was the founder of a security company and an adjunct professor at Carnegie-Mellon. 45 minutes into the conversation with him, he actually offered me a job at his company.

Sramana Mitra: This was all happening in the Pittsburgh area, right? >>>