Over the last 18 months, we’ve had conversations with over two dozen VC firms who cold-reached out to us. We’ve also had conversations with about a dozen customers and friends who expressed interest in investing in us (including my physician when he found out that I worked on Typesense)!
To everyone who has reached out to us about investing in Typesense, I really appreciate your support. While some of these conversations almost convinced us that we should be raising funds, after a lot of soul-searching between Kishore and myself, our current state of mind is that we want to build a business around Typesense that’s primarily funded by customer revenue, rather than external capital.
We’ve been bootstrapping Typesense over the last several years and I’m thrilled and grateful to say that we are currently fully funded by revenue from paying customers 🙏
So setting aside the monetary aspects, we are hesitant to raise Venture Capital for a number of reasons that I want to highlight in this post.
Selling Stock vs Selling Search
One key realization we had is that when we bring on investors, we are essentially bringing on a new group of customers - customers for whom the product is our company stock.
The value this group of customers (investors) gets from the product they are buying (stocks) is appreciating stock prices. And the way we can keep this group of customers happy is by regularly raising the next round of funding which is when stock prices appreciate, or having a liquidity event to make a return on investment.
We are concerned that “launching” a new “product line” (selling stocks) and bringing on a whole new group of customers (investors), would cause us to lose our precious bandwidth that could have otherwise been spent on our core search product that our primary group of users and customers expect from us. After all, the “company stock” product line would not exist without the core search product.
Pressure to Hire and Grow
We’ve seen more than a few companies raise millions of dollars in funding, go out and hire an army of people in an attempt to grow faster. However, unlike most other software products, search tech is an inherently hard thing to get right. It requires a lot of tedious R&D iterations over long periods of time and it cannot be parallelized by having X number of people working on it in parallel.
When a large team congregates around work that cannot be parallelized, we’ve observed that new work gets created to keep everyone busy - new nice-to-have features get worked on. This ends up adding complexity to the product. New team routines are invented because there’s bandwidth available. This ends up adding communication overhead and layers between users and builders and slows down the pace of innovation. This sadly becomes a vicious cycle that dilutes the core product.
So we’ve now come to see our small team size as a significant competitive advantage to make deep progress in relatively short periods of time.
Each of us knows exactly what we’re responsible for, we consult with each other at a high level and we get the job done. We talk directly to our users, get feedback, build, ship, get feedback, ship, rinse and repeat. We don’t have strategy treatises, elaborate roadmap planning or time-consuming routines. This has been our operating model for the last several years and we’ve made meaningful progress that some of our well-funded competitors with larger teams have not been able to match. We’d hate to lose this advantage we have.
Pressure to Show Progress
Having worked at VC-backed companies in the past, I’ve seen the pressure that mounts around every quarterly board meeting to show progress by any measurable metric. Q4 / Q1 of every year is a tedious exercise in trying to come up with an annual financial plan for the coming year and get it board-approved. Then it’s off to the races, with very little room for deviation in that year.
In Typesense’s case, given the deeply technical nature of building a search engine from the ground up, and the amount of time it takes to get things right, we’ve sometimes gone 3 to 6 months without seemingly shipping any customer-facing features.
We’d hate to be in a position where we feel indirect pressure to show progress by shipping half-baked features or by inventing a metric, just because a board meeting is coming up and we need to check some boxes.
I do recognize that the role of an investor is to protect the interest of their own LPs and make sure their money is being used responsibly, and I recognize that board meetings help give important signals around this. I also recognize that board meetings are helpful as sounding boards and help provide a venue to hear different perspectives. But I’m concerned that after that 2nd consecutive board meeting where we report that we’re still working on improving X because it just takes that long, or we decided to work on Y instead since users asked more for it, it might come across as not enough progress.
The Enterprise Software Playbook
Our mission with Typesense is to make great instant-search technology accessible to teams of all sizes and expertise, and not let budget or seniority be an obstacle. This is one reason we made 100% of Typesense free and open source. We do need to monetize to be a sustainable product, so we’ve chosen to monetize with our Cloud offering, Support and Sponsorships.
But, we’ve priced all our offerings in a reasonable way, with the hope of reaching the Fortune 10 Million, rather than just the Fortune 100.
It seems like the typical playbook for VC-backed software companies these days is to initially price their product free or really cheap, spend raised capital on marketing and user acquisition, dominate the market, and then slowly start raising their prices and go up market towards the Fortune 500. It almost feels like selling that $1M deal is the holy grail every VC-backed software company is aspiring to crack, while using the small and medium business market as a means to an end.
I’ve been on the other side of this a couple of times now unfortunately and been burnt by it. I start relying on a product that works great and is seemingly affordable. Years pass and I suddenly find myself in an old grandfathered plan, that would cost me 5x more to upgrade to the latest plans. “You get much more value”, “We’ve added all these awesome features” they tell me. But in reality, a 5x cost increase is something majority of companies can’t just absorb. So they’re either stuck in a stale plan, or have to start looking for the next equivalent product with reasonable prices, and hope the same thing doesn’t happen again.
With Typesense, we want to build a company that doesn’t look at the SMB market as a means to an end.
We want to explicitly serve this market well. We do not want to unreasonably raise prices and chase that $1M deal. If the $1M deal happens, we welcome it, but that is not our holy grail. This is not an easy thing to do, in fact it is quite painful to watch - customers switching over from one of our competitors to Typesense routinely save 95% in costs, to get an identical end-user experience and we’ve been told that we’re leaving money on the table by charging so low and that we should raise prices. Sure, we could be at 10x revenue of what we are if we had a different pricing model, but then that’s exactly the cycle we want to break for SMBs. We want them to build on top of us with the confidence that we won’t end up pricing them out as we grow.
Pressure to Build Bloated Software
One of our competitors prides themselves in being able to solve for every single search use case there is, and then offers additional layers of search-related products on top of it. Looking at their landing pages these days, it’s hard to figure out exactly which one of their offerings you really need to solve this particular problem you have. Sure they have hundreds of pages of documentation, but that also makes it harder to find a needle in a haystack.
My theory on why this particular company ended up adding so many complex offerings on top of their core search use case, is the pressure to find new revenue opportunities as a company and show progress by adding new features and supporting more and more use cases. Unfortunately, this now has the ramification of their product being so complex to the point of being unapproachable to engineers who are just starting out with search.
We’d hate to be in that position with Typesense. Our explicit stated goal is to be an easier-to-use alternative.
The last thing we want to end up doing is add more layers on top of Typesense in an effort to find bigger revenue streams and end up going the way of the very folks we’re trying to build a simpler alternative to.
We want our product to be powerful in its continued ease of use, simplicity and performance.
Pressure to Dominate
We understand that the VC-model is to pick that next market-leading unicorn as soon as possible, and then help it become the primary player in its space. This unfortunately carries with it a significant element of risk. You ramp up hiring, increase your burn rate and then your only option is to keep raising more rounds of funding to sustain it.
If any metrics aren’t appealing enough for the next round of investors, that’s a big existential risk for a company with a high burn rate. So it’s a game of go big or die trying.
We’ve also heard several non-public stories of investors wanting to pull out for factors not related to company performance, VC partners changing and new ones losing interest in the space, investors promising rounds and then backing out later citing reasons outside their control, etc.
We’d hate to be in a position where Typesense the company ends up risking Typesense the product.
While we do have big aspirations to get Typesense out to as many developers as possible, we also don’t want that effort to end up hurting the product that we’ve invested so much of our time and effort in over the years. That would be painful to watch.
Open Source vs Source Available
We’ve now seen a couple of examples of companies that started out with a permissive license like MIT, which helped with their adoption and helped build a strong developer ecosystem around them. But then, as revenue pressures mount along with the pressure to dominate their space, they end up either going with an open core model or adopting proprietary source-available licenses like SSPL or BSL.
This practice feels off to us - that a company chooses to use open source for the visibility and then abandons it, once they’ve extracted all the value from it and then actively harms the community that has come to depend on them.
This sounds like a version of the Enterprise SaaS playbook I mentioned above, but applied to VC-backed commercial open source companies.
There is also the more nuanced topic about who gets to benefit from the OSS ecosystem. In a permissive license model, besides the company (primary contributors), the ecosystem benefits from it when people write plugins/extensions (and maybe even capture part of the value). In a source-available model, the company and the shareholders look to maximize their revenue channels at the expense of the prosperity of the larger community.
We’ve licensed Typesense under GPL, modeled after the most successful open source project of all time - the Linux Kernel.
We want to enable our community to safely build on top of us, without any fear of having the rug pulled under them in the future.
We do not want to change our license because of revenue pressure or the pressure to be the only player in town that has to capture all the value that Typesense creates. We want our ecosystem to share in the value we are collaboratively creating through open source software.
The Tradeoff
Now we do realize that by not raising VC funds we are giving up the spotlight that fund-raising events typically give companies - 1000+ liked LinkedIn announcement posts, rite of passage TechCrunch and VentureBeat coverage, etc. We’d also be giving up on the network effects investors bring, with being able to partner with other companies in their portfolio, and other industry experts in their vast networks. And of course, we’d be giving up on the actual money to fund operations.
However, given that we’ve now started building revenue from our customers, we’ve significantly de-risked our financial position.
So the most appealing benefits to us are the non-monetary ones among the ones I mentioned above. But between playing a high-risk game of all or nothing, and growing slower because we don’t have as big a spotlight or network, I’d rather we play the long and slow game vs not being in the game at all.
Conclusion
We are certainly not taking a moral stance against raising VC funds.
The Venture Capital model has helped many entrepreneurs take bold risks which has resulted in many of the modern luxuries that we take for granted today.
However, given Typesense’s deeply technical nature and the not-so-ideal precedent our VC-backed competitors have unfortunately set, we think that raising VC funds might pressure us to go down a similar unfortunate path.
We are definitely open to having our minds changed, as long as it doesn’t compromise our core mission with Typesense and addresses our concerns above.
