As an investor, you may find it odd that I encourage entrepreneurs to avoid outside investment as much as possible in favor of bootstrapping. If you’re not familiar, “bootstrapping” a company means starting with very little equity (usually eating away at the entrepreneurs savings), and then building revenue quickly. In the last few decades the paradigm has shifted away from bootstrapping to raising angel investment, private equity or VC. Today’s college grads often don’t know that you can bootstrap a company. In my humble opinion, there is nothing that can cure a company like revenue. Bootstrapped companies need to grow revenue to survive and grow. VC funded companies don’t. Which do you think is the healthier paradigm?
Bootstrapping is Real:
Bootstrapped companies are by definition companies that either die very rapidly or solve a real problem in exchange for cash. This means that they are set on the right trajectory from a very early stage. Most mom and pop shops are bootstrapped. That awesome deli down the street – that was bootstrapped. The local eclectic clothes shop a block down was bootstrapped. The bait and tackle shop by the river was bootstrapped. Each of these companies can be very successful and serve a set of customers very well.
Investment Means Fast Growth:
To grow your company rapidly, you may need more cash than you or your company’s revenue can afford. This is where investors come in. If you want to go national with a clothing shop, you’ll likely need an infusion of cash. If you can find an investor that wants to help, you may find that you own less of the company than you did. Of course, owning a smaller slice of a watermelon is better than the whole grape. But if you can bootstrap it, you may find that you own more of the watermelon.
So, What’s the Problem?
Investment means that you MUST grow rapidly. If you don’t grow quickly, the investor doesn’t get the returns they expect on the time scale they expect. This leads most investors to push their companies to grow as fast as possible. While growing quickly is one important factor, it isn’t everything. The faster you grow, the more destabilized your company will be. If you aren’t prepared to hold onto a liquid-fueled rocket, don’t accept outside investment. If you’re not okay with the concept that your rocket may run out of fuel (cash) or explode due to mechanical (tech) problems, don’t accept outside investment.
As I mentioned earlier, revenue cures nearly all startup ailments. If the stream of incoming money keeps rising, you can afford to keep paying your employees. Hell, you can hire better employees to help you hire better employees. If you increase revenue, you can reinvest that towards growth. If you increase revenue, you’ll find that investors come to you. If you increase revenue, you’ll see that you get better terms on those investment deals. Bootstrapped companies embrace the panacea from day one. The larger the early investment, the less aligned the startup is towards being self-sustaining.
While I encourage all entrepreneurs to consider bootstrapping, I would be remiss to not mention the danger of bootstrapping. Bootstrapping can leave you bankrupt. Bootstrapping can damage your relationships, particularly if you raise a friends and family round. Bootstrapping can break some entrepreneurs under a mountain of stress. Many entrepreneurs allow emotional attachment with their investment to get in the way of logical behavior. If you’re the type of person who pulls out of the stock market after a crash, don’t bootstrap. There are only so many times one can afford to bootstrap (particularly if you bootstrap with a loan). Running investment-backed companies means you may even save a little money.
Bootstrapping is not binary. Bootstrapping is relative. For me, a company is still bootstrapped if friends and family invest. A company is still bootstrapped if a loan keeps the lights on. I actually think a company is bootstrapped if the founders invest as much or more than the investors. The founder investment may take the form of uncompensated time, free office space, IP and any number of other contributions. A startup transitions from bootstrapped to investment driven growth when the investors put in more than the founders.
For those of you who know me, you may be scratching your heads. At Boulder BITS, it is my job to invest in about four startups per year from the earliest stages (identifying the problem) to later stages (through scaling). Isn’t this paradoxical? Of course it is! I’m just as human and complicated as the rest of you. But I work it into my paradigm as best as I can. I want each startup to treat my investment as if it were their own. I encourage the team to run as lean as they can. I encourage them to reach revenue quickly. I push them to NOT grow too quickly I’d prefer to have a valuable revenue-driven company in my portfolio than a failed unicorn.
Incentivize the Team:
Every dollar I spend to build the company is a dollar invested. This means the team’s equity gets diluted. I incentivize the team to spend as little as they can and get to revenue as quickly as possible. If you’ve read any of my previous blogs, you know that entrepreneurs are some of my favorite people. I want to make sure that the entrepreneurs get the fruit of their toils. I bring entrepreneurs onto my startups who want to retain equity and grow revenue quickly. If we aren’t aligned on that front, we don’t found the company.
- “Being forced to be as lean as possible is good discipline and a healthy thing. Like I mentioned earlier, whatever you have, you spend, so the more money you have available, the more you’ll find ways to potentially waste it.” -David Roth from Forbes on accepting initial investments.
- Before developing a funding roadmap, consider what type of startup you are building: High Growth, Bootstrap, or Lifestyle. This will help determine your funding needs, structure, and business/financial models. (Advantage West)
- Entrepreneurs should be selling as soon as humanly possible. “Most people wait way too long before they go try to sell what they have.” Stay away from these common excuses: “We’re still building it.,“We haven’t tested it.”, “It’s not going to ship until the end of the year.”(Erica Swallow via Forbes)
Author: Jesse Lawrence
Founder and CEO of Boulder Bits. Sci-fi lover, game theory strategist, and idea generator.