March 25, 2019
Bootstrap or Venture Capital? Pros and Cons to Consider
Whenever I am introduced to someone who calls themselves an entrepreneur, they get a cold, dead stare as my response. (You know who you are…) As someone who has devoted most of their career to working in startups, I’ve never heard a successful founder call themselves one, even when others would describe them as a serial entrepreneur. Many people aspire to be one, but whenever I ask them why, I typically get an answer having to do with money, and not on solving a user problem or changing the world. If all you want is to get rich, invest in a franchise where someone else has already done the heavy lifting and done that for you. You’re not an entrepreneur.
I don’t have as much respect for founders who immediately go for VC funding as I do for those who have bootstrapped their way to success, but both avenues are useful for certain ideas. Especially for first-time founders with a great idea and no experience, it may prove better to involve venture capitalists from the start where their experience and networks can be a great adjunct to, or even more important than, the investment itself. But when someone wants to give you a few million and tells you to “focus on the eyeballs and worry about the money later”, we need to talk. Now, before you sign away everything you will be spending the next few years of your life building.
The majority of startups have no investment other than the owner’s bank account and his/her friends and family. There is absolutely no reason to get external investment unless you don’t have this kind of cash laying around (and even if you do). There are ways to start a business while working full time for someone else, especially with the technology available today.
Bootstrapping your own business gives you absolute power over your business. You can ask for advice, but ultimately you and you alone make the final decisions over where you take your company. Once you take investment, you chip away at not only your percentage of ownership, but also control of that vision. Your investors may pressure you to take the company in a different direction than you see, or may push for quick expansion you’re not ready for, drastically increasing your burn rate to a point that you’re forced to seek additional funding, further eroding your stake and influence in your own business. Now, they may be right. That change in strategy may be good for the business in the long term, but it may no longer be what you love.
I have worked at a LOT of startups. I love them. I love the energy, the joy of building something, the flexibility, the agility of startups. By far the most challenging, but also the most rewarding was working for bootstrapped startups. These are my reasons:
1. You need to exercise financial discipline from day one. Your staff need to get paid, so revenue is priority one. Cash flow concerns need to be addressed. It requires you to solve the monetization issue before you move forward. Not everyone gets to be Twitter and even Twitter acknowledges this issue.
2. When you have no money, you need to be more creative. This goes for your marketing, staffing, office space, etc. You won’t see Aeron chairs in these offices. You’re lucky if you have a real desk. You may also be cleaning the offices yourself and taking out the trash as well. Your marketing budget needs to be carefully managed. It’s a lot easier with today’s technology to compete against large multinationals than ever before with a small budget. You still have to create ways to get noticed amidst all the static.
3. You quickly learn to be an autodidact. Because you don’t have the specialist staff to handle all aspects of your company, you end up wearing many hats. Some of these may be experiences that can take you in a different direction in your personal career path.
4. You learn patience and flexibility. Organic growth takes time. There are certainly ways to improve your growth rates, through media relations, social media, industry influencers, etc., but it can be very frustrating. What worked last month to bump up traffic or revenues doesn’t work this month. There is always the law of diminishing returns. Learning how to resist temptation to achieve short term gains is a valuable skill as an entrepreneur. Flexibility is a great skill to hone, especially if you need to pivot to a different strategy.
That said, other entrepreneurs feel safe and protected using other people’s money. They don’t care about losing control or having a smaller stake as they feel that there’s going to be plenty of cash on the back end for everyone to share. They like being able to call up their investors for advice. It really depends on your personality type and whether you feel confident enough in your ability to go it on your own.
Either way, make a decision about what would work best for you, plan, and then jump in with both feet. It’s a rush. 🙂