Reformers [Episode 3]: Michael Segal, Skylight
By: Andrew Oved
Tags: VC, Bootstrapping, Hardware, Startup, Entrepreneurship

Reformers [Episode 3]: Michael Segal, Skylight

A VC-turned-Founder shares thoughts on transitioning from side hustle to full-time, the benefits of bootstrapping, and why VC funding is not meant for most companies Andrew Oved Follow Nov 2, 2020 · 6 min read

Skylight picture frame (https://www.skylightframe.com/)

For our third episode of Reformers: The gritty details behind the world’s greatest bootstrap successes, we interviewed Michael Segal, the Founder & CEO at Skylight. Skylight is a digital picture frame that allows users to effortlessly upload photos for display. After a failed startup, multiple stints at a top-tier VC firm, and an introspective two years at Harvard Business School, Michael launched Skylight as a side hustle, later transitioning to full-time and scaling the business to tens of millions in revenue without raising any venture capital. Below are some of Michael’s key insights and lessons learned that he shared during the interview, which can be implemented in your own business. You can listen to the full interview here:

Making the leap from side hustle to full-time

Michael started Skylight as a class project while at Harvard Business School. Upon graduating, he did not pursue Skylight full-time and instead chose to return to Bessemer Venture Partners. As he continually sought advice from third parties as to whether he should go all-in on Skylight, he would hear diametrically opposite advice from equally reputable people: “you can’t do a startup as a side hustle; you must go all-in”, or “you should only do your startup as a side hustle; don’t leave your great job”. Ultimately, though, Michael decided to take the leap and leave Bessemer to pursue Skylight full-time. How did he reach that decision? According to Michael:

“The most important thing to consider when deciding whether to transition from side hustle to full-time startup is whether you’ve found something people actually want.”

Finding something people actually want is extremely difficult (especially when your creative energy is going toward your full-time job), so if you’ve discovered that, then it is likely the time to take the leap. In Michael’s case, he had enough conviction that he had found something people wanted because Skylight was doing a few million in sales. Additionally, he had the added benefit that his business was generating enough profit for him to pay himself a mild salary, which somewhat de-risked making the transition.

To raise or not to raise?

There have been two key moments in Skylight’s early history when Michael needed to decide between raising outside capital and continuing to bootstrap. The first was in business school, when Skylight was at its inception. Given Michael’s strong academic and professional background, he likely could have raised outside capital (from family and friends) for his new startup. However, Michael and his co-founder Ricardo Aguirre ultimately decided to hold off on raising capital.

“At such an early stage of Skylight, there was too much risk involved and too much uncertainty about the potential size of the opportunity for me to raise outside capital.”

The second key moment came later on when Skylight eclipsed a few million in sales and Michael, along with a talented technical partner Jake Kring, had come on board full-time. This was perhaps an even more appropriate moment to raise outside (institutional) capital given the business was in full swing and executive leadership in place. After careful consideration, Michael decided once again to forego raising outside capital for one simple reason: they didn’t need to. Skylight had a team in place that they could afford to compensate with the cash-flow from the business. Additionally, Skylight only had a mid-year cash need for inventory (in preparation for holiday season), and there was sufficient cash on hand. Michael also realized that, despite his background and Skylight’s traction, raising money for a digital picture frame would be difficult and distract him from the business.

The VC path is not for everyone (in fact, it’s for a very specific few)

More generally, Michael points out an interesting fact that gets lost in today’s world of unicorns:

“People assume Venture Capital is the standard funding path. In fact, raising VC is the rare path and is often over-used today.”

As Michael notes, you’re not going to build the next search engine bootstrapping, but for a business like Skylight, he had to be realistic about his expectations for the company. While he was very confident in Skylight’s ability to become a great business, he wasn’t sure that there was necessarily a venture-scale opportunity. Furthermore, hardware tends to be a tough category for the VC model, making it difficult to raise money both at present-day and later on in future rounds. All of these considerations, combined with the in-depth knowledge Michael had from his time at Bessemer, made Michael wary of the traditional VC model for Skylight.

Reflecting back on his decision to continue bootstrapping Skylight, Michael sees some significant benefits to remaining VC-free.

“The freedom is really nice. Our owners are tightly aligned. We can do whatever we want with this business. It’s a load off of our shoulders not having to worry about someone else’s expectations.”

Scaling a hardware business capital efficiently

Making really great hardware from scratch — like FitBit — is really hard and capital intensive. However, Michael had a different perspective when it came to scaling Skylight:

“We knew we were really in the software game.”

That insight assured Michael that they didn’t need to reinvent the wheel on the hardware component of their product; instead, they simply piggybacked on existing hardware (Android tablets) for version one of Skylight and have largely leveraged off-the-shelf hardware ever since. This tactic of leveraging existing technology has enabled Skylight to save millions of dollars in R&D costs, making it possible for them to continue growing without the need to raise outside capital.

Additionally, with CACs for consumer products becoming increasingly expensive due to Facebook and Instagram saturation, Michael realized they needed to have a differentiated customer acquisition strategy if they were to continue growing profitably (on a contribution margin basis). After some experimenting with ad dollars, Michael realized that there was a specific time period when it became very efficient to market their product: the holiday season. Despite the increased holiday ad budgets from other consumer product companies, Skylight performed extremely well as it makes for a natural gift option for just about anyone. The company was seeing immediate CAC payback plus a manyfold return on advertising spend during this period. As a result, Michael decided to focus their ad budget (and inventory planning) around Q4, which enabled Skylight to acquire customers at scale pretty cost effectively.

Recruiting top talent to a non-VC-backed company

Many people have been burned by the venture model. Employees at companies like WeWork, Fab, and Outdoor Voices have seen the cycle of a startup transitioning into a rocket ship, only to see it fall from outer space and correspondingly see their paper gains go from a lot to nothing. Many of these people do not want that erratic work experience again. While one may think soon-to-be-unicorns are the most sexy type of company for prospective employees, the people who have been burned at previous jobs by the VC model find working at a profitable, secure company very compelling. In Michael’s case, he was able to recruit an excellent technical partner who had previously run a VC-backed company. For this partner, the prospect of building a new business without VC backing was actually a significant selling point, and other new hires have since joined for the same reason.

Make every hire an argument

Skylight debates every prospective hire at the company. They have tried to avoid chasing employee headcount for its own sake and instead focus on doing a lot with so few people. For every candidate, they ask themselves three key questions: (1) Do we need this person? (2) How do we know we need this person? (3) How will we know if they’re really adding value? The team then debates these questions and comes to a conclusion. While that may result in a slower hiring process, Skylight has seen every hire become a star within the company. As a result, with only 15 full-time employees, the company has been able to reach tens of millions of dollars in revenue, which equates to an extremely high revenue-per-employee ratio relative to peers.

A lesson from business school and entrepreneurship

As Michael reflects back on his past experiences as a failed founder, a budding VC investor, and a business school student, he shared a takeaway that often gets lost in today’s fast-paced, never-ending race to the top: