How startups can benefit from bootstrapping
4 Compelling Reasons to Bootstrap Your Company Instead of Raising Venture Capital
These days, raising venture capital is a glamorized accomplishment. Rounds are highly-publicized achievements, particularly among early-stage startups, and have most certainly become a badge of honor among founders and VCs, as they compete to source the best deals. But not too long ago, deal sizes were far smaller; rounds in the hundreds of millions of dollars were virtually unheard of. Instead of focusing on fundraising, companies focused on growth. It’s safe to say that a lot has changed.
Founders are almost pressured into raising venture, just short of implying that startups that are not venture-backed are doomed to fail. But despite the popularity of the venture model, it simply isn’t a one-size-fits-all for startups. There are still tons of benefits to bootstrapping, and it would be a big mistake not to consider them. I know this from personal experience, as well as chatting with three other founders who bootstrapped their companies to success and came up with what I believe to be the four most compelling reasons to bootstrap your company in 2019 and beyond.
1. Bootstrapping could compel you to run leaner.
I started The Rising with $500 of my own money but was quickly concerned about the capital I’d end up needing to successfully scale the publication. Naturally, I started looking for funding sources, including grants and venture capital firms that invested in other media companies, but those efforts came up short.
Without any previously successful exits, I didn’t have millions sitting in my account to bankroll the company’s expenses, but based on previous experience, I had confidence that an investment in content would eventually yield returns. But with that said, I wanted to be extra careful when I hired writers to contribute to our site because I was paying them out of my own pocket.
Whenever we got applications from writers, I would carefully vet them to ensure they would bring immediate value to our content strategy. And because I was bootstrapping, I had zero budget for anything that wouldn’t bring value and revenue to the business right away. You might argue that this scarcity mindset is a detriment to growth, but I would say it was the single biggest asset to our growth.
2. You don’t give up valuable early-stage equity.
Though there is an argument that early-stage capital could be the fuel that helps a startup get off the ground, it isn’t without its downsides. Take, for example, YCombinator (YC), one of the most prolific pre-seed stage funds that invests $120,000 in exchange for 7% of a startup. It has a ton of success stories, including Dropbox, Stripe, and Brex, but the question is: “Is early-stage funding like what YC offers even worth it anymore?”
To get some practical insights, I chatted with Johnathan Grzybowski, the founder and CMO of Penji, who bootstrapped the company to over seven figures in revenue. He told me: “Receiving early-stage investment is expensive in equity and can strip you of valuable lessons. Being a bootstrapped company, we value every dollar earned and every customer acquired.”
Of course, that’s not to say that being venture-backed is necessarily a bad thing; it’s just that if you can thrive without taking outside money, that should be an important consideration.
3. It gives you healthy pressure to reach profitability quickly.
While it would be a sweeping generalization to say that venture-backed founders are careless with their money, founders who run companies with their own money psychologically feel a greater obligation to manage it well. After all, every company expense is their own expense. And so, there’s quite a bit of pressure to reach profitability quickly — a point where founders can fund the company with revenues instead of watching their bank accounts sink in real-time.
I discussed this idea with entrepreneur Brian D. Evans, who bootstrapped BDE Ventures to be one of the fastest-growing companies in America. He told me: “Bootstrapping makes you realize that it all comes down to you and you alone. You don’t have tons of money to help you along and you have to learn the skills, make connections, keep at it, and do the hard work to make it work.”
And without that working capital starting out, a company is forced to make money or go broke. Bootstrapped companies don’t have the luxury to burn billions like WeWork or Uber — it’s either profit or die.
4. It makes you think about your customers all the time.
With especially large quantities of working capital from investors, it is often easy to lose sight of satisfying users and customers. On the other hand, if you bootstrap, there isn’t a financial cushion to bail you out. More simply, if the users hate your product, you’re going to fail fast and be out of a lot of your own money.
Samuel Hofer, the Founder of Silky Games, experienced this first-hand as he built games on Roblox for the last six years. He told me: “Understanding my users and how they interact with my game is a fundamental step in my design process. Ultimately, doing so increased my game’s retention rates and led my user base to surge from thousands to millions.”
When you prioritize user experience, your feedback loop is much shorter and you can iterate faster. These small tweaks are what can allow you to deliver on your users’ needs effectively and monetize more efficiently.