I’ve worked at several startups and each of them was sold with a profitable exit for the owners. All of these companies used bootstrapping to finance their way to success. I have to admit there were several times when we were on the verge of not making it. Worried that we wouldn’t make payroll that week. But in each case, we persevered and managed to make it to the next sale and survive and eventually thrive. Here’s a quick look at bootstrapping VS. Venture Capital.
Venture Capital has been a part of many of the huge success stories we’ve all heard about. WhatsApp, Snap, Google, and Twitter have all been VC funded. Some companies that have succeeded by bootstrapping include Dell Computers, Apple, and Hewlett-Packard to name just a few.
Wikipedia defines Venture Capital as a form of financing that is provided to high growth firms. It defines bootstrapping as methods used to minimize the amount of outside debt and equity financing needed from banks and investors.
Is Venture Capital even an option for your company? If your Total Addressable Market isn’t at least $1 Billion, then VC financing probably isn’t for you. VC’s look for companies that, if they hit, will make the fund a success. They bet on hundreds of firms hoping that at least one will hit that mark and the rest can fall by the wayside. The founders and employees of the ones that didn’t make it will be collateral damage. If your company has the opportunity to grow quickly and needs a huge influx of cash to fund it, then a VC may be an excellent choice. On the other hand, if your company can grow organically, albeit more slowly, then bootstrapping makes more sense.
The number of startups that fall into the first group is far smaller than the second group. These are often called lifestyle businesses. They provide a nice living for the founder and their employees, think of a family business. The founder can use the equity in the company to attract high-quality employees who don’t necessarily want the high-pressure that often comes with VC funding. In VC financed firms the desire is for fast growth over profitability. In a bootstrapped company profitability is key, that’s what finances growth.
Some advantages to bootstrapping your business include:
- The ability to maintain control of your company. You call the shots and don’t have an outsider deciding whether you should launch that new product or hire that new developer.
- You keep the equity in your company. This allows you to use it to reward great performance from your team or just keep more of the profit when it’s time to sell
- You don’t have to spend countless hours working on fundraising. It’s a full-time job and requires a unique skill set that most of us don’t have. So if you plan on using this option you may need to hire a counselor to assist you in the fundraising process.
A VC will want to get their money out of an investment in 5-10 years. You may want to own and run your company for a much longer period possibly passing it on to your children.
Another, closely related form of fundraising is a strategic investment. This is an investment by another company, possibly one you already do business with, into your company. Often a company will take an investment from one of its biggest customers. There are several advantages to this form of investment. It ensures that they will continue to do business with your company, and it provides that customer with additional input in the overall direction of your company to ensure that their needs are met. This can be a big win for both entities.
A Venture Capital investment may be the right vehicle for your business, but for most of us bootstrapping is a better option. If you would like to discuss bootstrapping VS. Venture Capital, book a no-obligation consultation here, and let’s chat.