Estimated reading time: 6 minutes
Posted on October 16, 2012

Bootstrapping Startups

Launching and running your own startup company is a very popular topic nowadays. Tons of stories on the Web tell us about huge investments in hottest startups, and sometimes these investments seem to be easy money. People begin to strongly believe that VC is crucial and one can’t build a viable company without it. However, we often forget that lots of companies (even the most up-and-coming) have never get venture capital funding, especially outside the IT world. The most successful teams around the world haven’t relied on investing, they focused on developing great products in the first place. So third-party funds are not necessarily the only option.

Is it possible to create something decent without investments? And what are the pros and cons of both external funding and so-called bootstrapping?

Starting my own company, I’ve faced these problems and made up my mind on that score. Here are my team’s and my own thoughts and opinions regarding this hot issue.

I do not want to say that VC is always a bad thing, and further I will give examples of cases when it is important and explain how I’d personally approach this. Guys at 37Signals even created a series of case studies honoring profitable companies that haven’t used investors’ help.

I’ve personally got really surprised reading news about GitHub finally receiving $100m investment. I’m sure, among other things, they have been looked up to for bootstrapping. 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’ve build a unique culture based on doing things differently and not having to account to investors. It would be really sad if that went down the drain – and for what? Not sure what goals they need 100m for … Most software companies can’t convert that amount of money into great products anyway.

For some, bootstrapping startups is a choice. For others, it’s a necessity. But no matter what the reason is 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. Smart 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 and wise manner, tracking expenses carefully and spending finances only on the most efficient tactics.

  • Equity. As a rule, when you raise a lot of money at the early stage of company development, you give up a lot of ownership, or “equity”. In some cases, especially when factoring risk, a founder can actually make more money owning 100% of a small but profitable bootstrapped business than owning 10% of a company backed with millions in venture capital. Keep in mind that you can stay in bootstrap mode part of the way toward your goals and raise capital after. That way, you’ll have more progress under your belt and can raise money at higher valuation giving up less equity per dollar invested. That’s also known as gaining “traction.”

  • Flexibility. Bootstrappers have an opportunity to learn as they proceed and modify their approaches when necessary. Once you’ve raised money by convincing investors that “Plan A” will work, it can be difficult and time consuming to get those investors to embrace “Plan B”. Typically, bootstrapped businesses boast more flexibility and can change directions more quickly.

  • Last but not least perk, that is especially important for our team, is that you can keep focusing on being cool rather then just being profitable.

Jason Nazar, CEO of DocStoc says:

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 a solution for all startups. It all depends on a number of factors including the nature of products or services, capital intensity of a business, chances of low-cost guerrilla-marketing techniques being suitable in the industry context, etc.

Besides, no one is saying that receiving VC is an easy thing. They say that only 5% of startups get VC investments. In any case, it cannot be your priority action plan.

Alternative Funding Options

  • Crowd-funding: this method is becoming more and more popular. It is to some degree promoted by the JOBS Act. In case of success, you will have a crowd of ready-to-buy or ready-to-invest enthusiasts, but definitely not every project clicks. There are special crowd-funding tools such as Kickstarter. I think this option is very promising because it does not require any big amount of time/costs involved. Why not try?

  • Moonlighting: the point is in staying in other job while devoting remaining time and efforts to the idea of your own business. Thus you will minimize your financial risks though it could be hard to be torn between 2 things.

  • Cash prizes: try to participate in various startup events where there is a chance to win money. Read about Techcrunch Disrupt.

  • Small business grants: this source of financing often gets overlooked, but it deserves to be under focus these days due to many government initiatives on alternative energy and technology.

An excellent article on this topic is here.

Why to Seek External Financing

Here’s a great article on the topic in Forbes.

I can single out the following points as important advantages:

Marketing budget: Indeed, I often hear about a certain threshold of popularity and audience scale a product can reach organically without marketing efforts. If you want to move further, you’ll probably need money to connect with more users and customers.

Smart money: In the best scenario, you will attract very smart and shrewd investors to your team who can give good advice and make decisions based on their experience and expertise. Having motivated, engaged, and expert partners on your team comes with benefits bigger than just a bank account. Surely, VC investors may also be wrong sometimes, but being interested in higher return on their money they will do their best to make things work.

Visibility: working with a big name can positively affect your startup reputation and will help you have larger media coverage.

What I’d Consider

  • First of all, I’d never waste my time trying to raise money unless I knew exactly what I need it for and truly believed it would make huge ROI for both me and investors.

  • I’d keep in mind that fund raising as well as managing investors sucks up an enormous amount of time I could spend on developing my business.

  • Lawyers are expensive, so if you’re raising a small round, a considerable portion of it might be dedicated to legal fees.

  • Once you’ve 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 won’t simply be able to get more.

And of course, check some examples of cool companies with no VC:

As I’ve said before that’s just what we think, so feel free to ban it or embrace it. I’d really appreciate if you share where you stand on the subject. Looking forward to your thoughts!