Startups are certainly in vogue. It seems like everyone you speak to today is looking to start a company or knows someone who does.
Along with the explosion in the number of startups has come a corresponding increase in the accelerator programs, angel investors and size of funds raised by VC’s that back them.
This often perpetuates the myth that the only way to build a startup is to take on huge amounts of external funding and sprint towards a brick wall that is only 18 – 24 months away, while hoping you attract more capital before you get there.
5 Reasons for Bootstrapping Your Startup
While I certainly believe that external funding is a valuable resource to be able to tap as a startup founder, it has to occur at the appropriate time.
Unfortunately, for some, raising an angel or seed round is seen as a requirement. Perhaps even a goal that needs to be achieved before you can move on to actually building the company.
I disagree. I believe it’s better to bootstrap your startup’s initial success before raising any money and that’s what I am currently doing with my startup Task Pigeon, a web application that allows you to create, assign and manage the tasks you and your team work on each day.
Here’s the top five reasons why all startups should consider bootstrapping (at least in their early days):
1. When it’s your money you can’t help but care
Have you ever been to a party when there was an open bar?
If you looked around you would see a large number of people in the room taking advantage of the situation. They drink top shelf liquor and order way more than they normally would.
Why? Because they are not picking up the tab and it’s easy to spend someone else’s money.
The same holds true if you raise external funding. Despite what you may say or think to yourself. If you are trying to make a judgement call on investing $10,000 into an advertising campaign it’s easier to pull the trigger when you’re not footing the bill.
If on the other hand, you choose to bootstrap, perhaps you test your marketing assumption with two or three smaller campaigns first. You learn from your findings, and then commit the rest of the capital, thus making a better long term decision.
Bootstrapping essentially instils a sense of discipline that is hard to replicate when you are working with someone else’s money.
2. You know what it means to be scrappy
There’s a reason why Y-Combinator has a preference for startup teams of two to three members, that have technical talent in house.
It lets you be scrappy. If things aren’t working out and you know how to code, you can change the direction of the product. If you don’t have a lot of cash the product can still move forward even if you don’t have funding.
While I don’t necessarily agree with needing to be a technical founder to launch a startup (I’m not one myself) I believe in the underlying principle of being scrappy.
If we extend this concept to bootstrapping your startup you will learn to do more, with less.This in itself is a valuable skill to possess.
If you eventually go on to raise a seed round but then get stuck in a Series A crunch, or funding dries up, at least you know you have the experience to make things work. Plus, your investors should take confidence in your ability to keep pushing ahead on limited resources.
3. Eventually, it’s easier to bring on board investors
Assuming your company grows you can often find yourself in a position where it’s actually easier to raise external funding.
Not only do you have a track record of success that you can point to, but chances are you are break-even (if not profitable). This essentially gives you options and means that you can wait until you find the right investor for you and your company.
You are not “forced” to take money if you don’t have to, and this puts you in a much stronger negotiating position. Perhaps, you eventually decide that not to take funding at all.
4. Fundraising takes time
Fundraising is a time-consuming process, even if you are a seasoned entrepreneur.
Every hour that you have to spend working on the fundraising process is an hour that you can’t spend on improving your product.
And in the very earliest days of your startup’s life improving the product, ironing out bugs, on-boarding customers and actually selling your product or service is critically important.
Perhaps you have a team or two or three founders and one person runs the fundraising process. But even in that situation, you are working on 50 to 66% capacity at best.
5. It can be financially rewarding
While the bringing on external investment can help a startup grow faster (and potentially larger) you are going to end up owning a smaller portion of the pie.
Worse than that, you may be pushed by investors to take on more risk than you initially planned or want to do. VC’s need big returns to make their fund work, so doubling or tripling their money means little.
What VC’s really need is something to 10 or 100x and be a big enough exit to return the size of the fund.
Unfortunately, there are numerous cases where this go hard or go home mentality has destroyed businesses that otherwise would have continued to exist, albeit on a much smaller scale.
Sure, they may not have listed on the NASDAQ, but employing 10, 20 or 30 staff could still match the definition of success for you.
And while this may not be the goal you initially set when launching your startup, owning a company generating a couple of million dollars can still be hugely rewarding. Especially if you are the sole, or equal joint owner.
It’s also worth noting that there are a number of cases of startups that have achieved scale and remained bootstrapped.
Perhaps the most famous is Mailchimp, the email software provider that was on track to generate $400 million in 2016 and is still privately owned by its two co-founders.
Here’s a quick recap of the 5 reasons for bootstrapping your startup:
- When it’s your money you can’t help but care
- You know what it means to be scrappy
- Eventually, it’s easier to bring on board investors
- Fundraising takes time
- It can be financially rewarding