People love to talk about bootsrapped startups. How they succeeded ‘despite the odds’ by bootstrapping, how they ‘rejected traditional forms of capital’, or simply that they didn’t need any money, so why take on investors?
At least 50% of the time, it was totally the wrong decision for them and the business.
To start, let’s define what I mean by a bootstrapped startup. Bootstrapping is when a startup is funded exclusively through the founder(s) own lines of credit, whether that is savings, credit cards, reverse mortgages or otherwise. There are no angel investors or venture capital firms.
Some would argue that most businesses start that way, and they’re right: outside the startup microcosm, most businesses work this way. You don’t often see coffee shops or wine bars with venture capital investors. So to narrow the scope again, we’ll talk about bootstrapping startups: that is companies that are high growth (expectation) and high risk.
I’ve had a few conversations lately about when it’s a good decision to raise money and when it isn’t. This is pretty much what I normally discuss with people when it comes up.
Note: ‘you’ here refers royally to ‘the founding team’/’people working on the business’. I am yet to write a post about the pros and cons of being a sole founder, but it’s on the list.
Context: why I have an opinion here
I run Schedugram, which was launched just on 4 years ago now. It is a bootstrapped startup, having initially been funded out of my ‘spare’ time to write v1 (supported by a consulting company I was running, which paid the bills), and subsequently self-funded by its own revenue.
I’ve also spent a lot of time working with businesses that have received external capital, as an investor, advisor or employee. That ranges from big ASX-listed companies through to ones post seed or series A funding (up to $2-3m size funding rounds).
Schedugram never raised capital (I get surprised looks sometimes when pointing that out). That’s the first disclaimer. The second is that I am an investor in startups (so obviously want to get ‘into’ the good deals!), and am working on raising capital for a venture capital fund Galileo Ventures (which will have a similar bias toward wanting to get into good deals!).
Caveat: not all businesses can be bootstrapped
If you’re building rockets or self-driving cars, you’re going to struggle to fund it yourself. Some businesses are simply very capital intensive, and you probably don’t have that much capital lying around.
The most common types of businesses (in tech startups) you see bootstrapped are niche B2B software tools that do one thing and one thing very well (like Schedugram!). Less commonly you see B2C tools/platforms, because they usually have a longer customer payoff. There are of course exceptions, but usually the bootstrapped company is focussed on a niche that a large(ish) number of customers want or need (think ‘invoicing for the car body respray industry’ etc).
I’ll assume for the purposes of this post that you have worked out that it’s possible for you to bootstrap your company.
The role of capital and investors
The role of raising money for the business (and the investors who put money in, particularly institutional venture capital) is to accelerate your path to either failure or success.
It’s not to buy you all this time to work out what to do, or wait around until lightning strikes and suddenly everything works well.
The role of a good investor is to challenge you and push you along the journey faster than you would otherwise walk (I’ll come back to this later).
The advantages of bootstrapping
Here’s my list of the advantages you see when bootstrapping a company.
- You get to make decisions independentlyFor better or worse, you get to make your own decisions. You’ll always own all of the shares, so nobody else will make decisions for you.
- Nobody expects ‘venture scale’ returns One of the things with venture capital is that you need to make big returns (a few in your portfolio have to do 10X-1,000X your initial investment) for your fund to succeed/return money to investors. If you don’t have this money, nobody expects you to do some crazy valuation billion dollar exit. That’s not to say that you can’t see those kinds of exits, but simply that nobody expects them of you. If you choose to exit in a trade sale for $20-30m per founder and live a comfortable life from the investment dividends, you can.
- You’re forced to become profitable, quicklyVenture investors typically worry less about profitability and more about growth metrics, and assume that profit will come later1With the caveat that unit economics do need to work, or have a path to work – ie you aren’t paying $1 to get $0.60 in lifetime value).. When you are bootstrapping on your own money, you want to become profitable quickly, as you’re otherwise burning a hole in your own pocket. This is both a good and bad thing.
- You keep a close eye on the core metricsWhen it’s a business funded out of your own money, you usually keep a close eye on your core metrics, like “are we making money or losing money” or “are we adding more customers than we lose each month”. Of course, you shouldn’t ignore these regardless of how you’re funded, but because you don’t have ‘someone else paying the bills’, it’s important that you can still pay your own bills from your own revenue/profit.
- Investors/VCs don’t need to say yesI’ll be brutally honest and say that 90+% of the time I read someone writing about how they are proud to be bootstrapped, it’s because they wouldn’t (or couldn’t) raise the money otherwise. VCs won’t fund every idea they see, for all kinds of reasons.
Why I bootstrapped Schedugram
This is kind of a blog post all in itself. Long story short, I never thought it would be around very long (thought it’d be 6 months, it’s now 4 years) and that it would be way too risky for anyone to invest. If you’d asked me at the start how much revenue I’d think it could make, I would’ve probably said that optimistically it might turn over $1m a year in ARR. We’re doing many multiples of that now.
I could manage to afford to (just) as it was kind of my “side job” for the first couple of years. Ironically, I still often treat it that way, despite it doing very well as a business (it comfortably pays the bills).
For example, for the reasons above, every single customer has to be unit economic positive (ie profitable) quickly – within 1-2 months at most. That’s why we aren’t freemium and only have a short (7 day) free trial – the business or our other customers don’t have to subsidise the costs of free customers or long trials. Despite us having many customers who have been around for 3-4 years, I can’t afford to pay 6 months of (potential) revenue to acquire a customer, even if I know that they will bring more in over time.
The disadvantages of bootstrapping
What are the disadvantages? I also asked (in)famous bootstrapper-digital-nomad-type Pieter Levels this question, and he answered similarly.
- You have no money at the start‘No shit’ you might say, but having no money will dictate certain decisions for you. For example, our v1 was absolute garbage – it barely worked, was horrible spaghetti code (I’m a very bad software engineer, being self taught at best), and was held together with sticky tape and string. We pasted together all kinds of tools rather than putting decent systems in place that would scale as we grew (e.g. CRM or marketing tooling), because those costs “weren’t worth it”.
- You’re always understaffedBecause you have no money, you’re always understaffed. At the start, you answer every single damn support question, do all the marketing, all of the engineering, all of the finance, everything. This becomes a habit that is hard to break out of later on when you can afford to hire people, because you’re so used to being understaffed. That means you absorb change very poorly (staff members leaving for whatever reason, spikes in support volume due to seasonality or core problems).
On a personal level, I was still on-call for devops 24×7 until May this year (3.5 years in). The business was well and truly profitable by then, and I was no longer needing to wake up every hour all night (the first 1.5 years) to fix problems. I still had to wake up every now and then though. Thankfully I finally bit the bullet in May and brought on someone to look after monitoring 9pm-9am, and I still look after the ‘day shift’. Like I said, hard to break the habit.
- You always assume failure is around the cornerWhen you’re bootstrapped, you usually have no idea how the business is performing compared to your peers. Nobody seems to honestly talk about their business’ performance, so you often have no points of comparison2Taking venture capital won’t give you visibility into other portfolio companies’ balance sheets obviously, but it does mean that someone who has visibility into a number of similar-staged startups can see how you compare.. You assume you’re doing crap all the time. Sometimes you are! Other times you’re actually doing insanely well – better than the businesses who just closed a $3m round of funding you jealously read about.
It wasn’t until I was investing in startups and working within a few well-funded ones that I have really started to appreciate how lucky I am to have gotten a business to the stage mine is at. Imposter syndrome is always hanging around, so you assume that something bad is always around the corner.
- You become consumed by workWhen you’re on call 24/7, chronically understaffed, and ‘living the dream’, you are consumed by work. That was me for about 2 years, and my personal and professional life absolutely suffered as a result of it. Being able to (and encouraged to) hire faster makes it easier to have some semblance of work/life balance. Don’t think that it means you’ll leave the office at 5pm to have a life though! Startups are hard work and being a founder is a shit job, no matter how they are funded.
- You can’t front-run CACWhen you’re undercapitalised (bootstrapped), it’s hard to front-run CAC [customer acquisition cost]. This means you have to grow linearly, making sure that as other customers are profitable, you can plow those profits back into acquiring new customers. You can’t lose money for a year or two (or 10!) in order to grow as fast as possible, and then see profits later on. If you are in the kind of business that has first mover advantages (ie if people choose a solution, they stick with it for a long time and are hard to ‘churn’ onto another provider) or network effects, bootstrapping is a bad idea.
- The risk is all yoursWhile I don’t always agree with it, some people will talk about investment money as being a validation of the business model and a way of reducing the risk to you as a founder. With external capital, you can make sure the bills get paid, at least for a while. When you’re bootstrapped, you carry all the risk (sometimes even more if you have debt piled into the business), and startups are risky beings.
- You get none of the value add of investors and advisorsThis is probably the biggest of the lot. If you assume that your investors are dumb money, just giving you cash in exchange for a monthly report, then you are going to have a hard time. A good investor (particularly VC firm, but angels apply here too!) can add value to your business well beyond the capital they hand over.
When you’re bootstrapped, you don’t have any cheerleaders telling you that you’re doing a good job when you need encouragement (conversely, you don’t have anyone telling you that you’re doing a bad job, although usually that’s inherently obvious).
What I missed out on
I can admit in hindsight that I didn’t get any of the advice I should have gotten when building my startup. Any at all. I assumed that of course I knew it all, and nobody else would understand my precious baby. I was of course totally wrong and stupid to think as such.
Nobody pushed or challenged me – my challenges were putting out fires, not working out the right growth channels and ensuring that I wasn’t undercharging customers. I had no cheerleaders – one of the reasons that I never really gave it the attention it deserved. I figured for a long time that I was doing okay but not that well, only to later discover how rare it was to get to our revenue stage, let alone with a strong profit margin, high customer NPS and primarily organic growth channels.
Nobody told me when I was making dumb decisions that were inherently obvious to anyone who has ‘been there before’, so I made the bad decisions and had to handle the consequences.
It’s also insanely lonely when you’re bootstrapping: it feels like it’s you against the world. This is compounded when you’re a sole founder, but I’ve met other founders in similar situations who would agree.
Should you take the money, or bootstrap?
So time for the meaty question. What should you do?
The answer will of course depend on your situation. Personally, with hindsight, I can see that if we could have raised venture money early on3That is a definite assumption – people are surprised now that I never took any external capital, but while they might think they might write the cheque looking back from the present, that doesn’t mean they would have in the past…, we would probably be at the stage we are now (revenue etc wise, 4 years in), 2 years earlier. Which means we’d be orders of magnitude larger now. We would also have avoided a lot of painful mistakes, although of course we’d have made others.
Some big questions to ask yourself:
- If I had more money, would I be able to be successful faster? [if yes, raise $]
- Would I take on the advice and perspective of investors? [if no, bootstrap or you will have a very bad time, but also think about your answer as you’re probably doing yourself and the business a disservice]
- What are the skills our core team is missing? Are there investors who could help with acquiring those skills? [if yes, raise from people with those skills]
- How do we expect the business to grow? Will it grow slowly or quickly, and which way do we want it to grow? [if grow quickly, raise $]
- What do we want the business to become – do we want to gun for a venture-scale return, or are we happy with a small tech business that pays our bills? [if you want to go big, raise $]
There are other advantages to having some capital under your belt – for example, you can make strategic acquisitions of other products and cross-sell into your existing customer base. They’re typically more ‘later-stage’ problems though!
Ultimately, there isn’t a right or wrong answer. People will keep walking both paths. But make sure you think it through as a founding team, and make a clear decision as to the paths you want to follow and why. Otherwise you’ll regret it down the track.
|With the caveat that unit economics do need to work, or have a path to work – ie you aren’t paying $1 to get $0.60 in lifetime value).
|Taking venture capital won’t give you visibility into other portfolio companies’ balance sheets obviously, but it does mean that someone who has visibility into a number of similar-staged startups can see how you compare.
|That is a definite assumption – people are surprised now that I never took any external capital, but while they might think they might write the cheque looking back from the present, that doesn’t mean they would have in the past…