Running your own startup company is very popular topic nowadays. Tons of stories in the Web tell’s us about huge investments in hottest startups, sometimes it even seems like easy money, it is essential and you can not build a successful company without VC. But do not forget that most companies never get venture capital funding, especially outside of the technology world. That’s not to say that VC hasn’t played an important rule in the growth of many of the biggest and best companies, sites and apps. It’s just not the only option. So, can we create without the investment and what are the advantages / disadvantages of both scenarios? I would like to reflect a little on this topic. Below my personal opinion and opinion of our team.
I do not want to say that VC is always a bad thing and further I will give examples when in my opinion it is important and how I’d personally approach this. Guys from 37Signals even created a series of case studies honoring profitable companies that did not attract investors.
I personally was surprised not long ago reading news about GitHub and that they finally received investment. Bootstrapped company has been one of their good ones. However, as explained by Preston-Werner, “You can be much more creative when you’re not so focused on the money aspect of things” . They build a unique culture which is based on doing things differently and not having to answer to investors. It would be really sad if that goes down the drain – and for what? Not sure what goals they think they need a 100m for … Most software companies can’t convert that amount of money into great software anyway.
For some, bootstrapping is a choice. For others, a necessity. But no matter the reason, and despite the hardships bootstrap entrepreneurs face, there are some benefits of launching on the cheap:
Speed. Raising capital can take 3 to 6 months or even longer, and it’s pretty much a full-time job. Good bootstrappers spend those months generating revenue instead.
Efficiency. If you don’t have money, you can’t spend them. Bootstrappers tend to use their money in a more disciplined manner, tracking expenses carefully, and spending only on the most efficient tactics.
Equity. As a rule, when you raise a lot of money for an early stage company, you give up a lot of ownership, or “equity”. In some cases, especially when factoring in risk, a founder can make more money owning 100% of a small but profitable, bootstrapped business, than owning 10% of a company backed with millions in venture capital. Also, note that you can bootstrap part of the way toward your goals, and then raise capital. That way, you’ll have more progress under your belt, and can raise money at a higher valuation – giving up less equity per dollar invested. That’s also known as gaining “traction.”
Flexibility. Bootstrappers have the ability to learn as they proceed, and modify their approaches as necessary. Once you’ve raised money by convincing investors “Plan A” will work, it can be difficult and time consuming to get those investors to embrace “Plan B”. Typically, bootstrapped businesses can change direction more quickly.
Last but not least, especially for our team is that you can keep focusing on being cool rather then just being profitable
Jason Nazar, CEO of DocStoc saying “Raising venture capital is like adding rocket fuel to your business and for most businesses this a) isn’t warranted b) creates the wrong incentives and c) even if it is successful means that the founders don’t make enough personal money when the ultimate business is sold“.
Of course, bootstrapping is not possible for all start-ups as it will depend on a number of factors ranging from the nature of the product or service, whether the business is capital intensive or not, and whether low-cost guerrilla-marketing techniques are suitable in the industry context, etc.
Besides, who said that receiving VC is an easy thing? I’ve heard that only 5% of startups get VC investment. In any case it cannot be your Plan A.
Alternative Funding Options
crowdfunding – this method becomes more and more popular. This is in some degree promoted by the JOBS Act. In case of success, you will have a crowd of ready to buy enthusiasts. Although not every project clicks. There are special tools for this such as – Kickstarter. I think this option is interesting because it does not require any serious time/cost investments from you. Why not try?
moonlighting – the point is not to quite your main job and invest in the idea of a new (another) business to a certain point. Thus, you will minimize your financial risk. Certainly will not be easy to devote yourself between 2 classes.
cash prizes – try to participate in various startup events, where you can win money. Read about Techcrunch Disrupt
small business grants – this source often gets overlooked, but it should be a major focus these days due to government initiatives on alternative energy and technology.
An excellent article on this topic here
Why to Seek External Financing
Great article on this topic in Forbes
To me the following points seems as important advantages:
Marketing budget: Indeed, I have often heard about a certain threshold, which you can reach yourself, and after which your growth slows down.
Smart money: In successful scenario, you will attract a team of very smart and shrewd investors who can give you good advices. Having motivated, smart, and connected partners on your team comes with obvious benefits beyond the bank account. VC investors may not always be right, but they will be interested in guiding you to the best possible return on their money.
Visibility: name of well known investor as the fact of large investment will be covered in the press.
What I’d Consider
First of all, I’d never waste my time trying to raise money unless I know exactly what I need it for and truly believe it will make a huge ROI for me and the investors.
I’d keep in mind that fund raising sucks up an enormous amount of time out of my business and I should have this time. Same way managing investors also takes time.
Lawyers are expensive, so if you’re raising a small round, a good portion of it might go toward legal fees.
Once you raised money, your investors will probably want to put a cap on your compensation. So if your company suddenly starts to make hefty profits, you can’t simply pay yourself more.
And of course some examples of cool companies with no VC:
- Envato – CrunchBase
- WooThemes – CrunchBase
- Litmus – CrunchBase
- Techsmith – CrunchBase
- Logik – CrunchBase
- Balsamiq – CrunchBase
- MailChimp – CrunchBase
- Grasshopper – CrunchBase
- Kissmetrics – CrunchBase
But that’s just our take on things, I’m pretty interested to hear what do you think. Don’t hold back.