There is a healthy debate in the startup community about whether to bootstrap your company or raise capital. For many, raising money is synonymous with starting a company. University entrepreneurship classes typically focus on writing business plans for investors. Accelerators often focus on creating the perfect slide deck for investors. Not surprisingly, many entrepreneurs spend more time on their pitch than their product.
Others, such as Bill Gates, Steve Jobs, Michael Dell and Richard Branson spent years bootstrapping in garages and dorm rooms before taking on investors.
So a better question is; When should you consider leveraging your company with outside capital? The answer may be never, here's why...
Most people want to start a company to have more freedom. Some want the freedom to tackle projects they feel passionate about. Some value the freedom of working in a small team with people they like. Others want freedom to spend more time with family.
Raising money has its benefits but comes with strings attached. Investors want a high rate of return and an clear exit strategy. Startups are forced to deliver extremely high growth rates. The founders typically work long hours and sacrifice their personal lives. That's called responsibility, not freedom and most people find it very stressful.
They hope the sacrifices will end in a huge payoff and financial freedom. "I want to make millions and retire by age 30." Unfortunately, this is a false god for many because a person who is wired to take a company public isn't usually very happy sitting on a beach.
Bootstrapping provides more freedom in several ways. You can stay true to your purpose without having to negotiate with investors. You can work with a small team that you pick. You can grow at a reasonable rate and and you have more time to learn from your mistakes. You choose how much you want to work and when. That is the type of freedom many people crave.
When you start a company, time is precious. You can spend it solving a problem, learning from customers, developing a product, recruiting, marketing or raising capital. If you focus on solving a problem and working with customers to make a great product, then recruiting will be easier and your customers will help with marketing.
If you choose to spend time raising capital, it will come at the expense of the other tasks. This may lead to an unclear product strategy which leverage will only amplify.
Don't you need capital to develop a product? It depends.
If you are developing software, you need time more than money. Sure, you can pay $250/hour for a Bay area developer or you could have it coded by interns from Novosibirsk. Interns may take longer, but the extra time can be spent collecting user feedback to understand your market.
If you want to build a solar power station, you will need more capital at some point. However, you can start by doing feasibility studies, land assessment, financial modeling and customer surveys. If you get everything right, Kickstarter may raise the money for you.
According to Bill Gates and Warren Buffet, success can be boiled down to one word, focus. The more you focus on developing a great product with the help of real customers, the higher your chances of success.
Fun is underrated. People say they like having fun but generally don't organize their lives accordingly. They make decisions to maximize income and figure they will buy their way to fun.
Many startup founders do the same thing. If they are super smart, hard working and choose the right space, they will find investors. But there is a catch. VCs invest in sectors with returns-to-scale, in which one company emerges as king of the hill. So you can be super-smart and work on New Year's Eve and still end up second. That's not fun. In fact, it leads to high levels of anxiety and depression amongst startup founders.
If you choose the right space and bootstrap, you will avoid a great deal of stress. You'll fly under the radar a lot longer. You can spend more time talking to customers and enjoying the company of your team. You will have more time for sleep and exercise. As the saying goes, Bootstrappers have more fun.
What gives us fulfillment in the workplace? Most people cite things like; working for a higher purpose, collaborating with teammates, learning new skills, recognition. Few people place cold hard cash at the top of the list.
Creating an Leveraged Growth Startup (LGS) can be detrimental to feelings of fulfillment for several reasons. Investors may put pressure on founders to compromise purpose for profits. Teams may grow to sizes that make them less effective. As a company grows, the scope of work of each contributor narrows so they learn less. In addition, authentic recognition is challenging when a founder has a hard time remembering everyone's name.
Bootstrapping allows startup founders to stay more focused on purpose. They may have to make compromises to pay the rent but at least they decide, not the Board.
Bootstappers have to wear multiple hats to survive. That can be challenging but they learn a broader set of skills and how they fit together in a startup. That's energizing.
Recognition in a small team is personal and heartfelt in a way that is difficult to replicate in a company with hundreds of employees.
Most importantly, small teams can do big things. The backrub algorithm developed by Larry Page and Sergiy Brin still powers a huge part of Google's revenue, something which armies of Google PhDs haven't been able to replicate.
Bootstrapping isn't for everybody. If you have high personal burn rate you may not be happy running a company frugally.
If you choose a space that favors a winner-take-all outcome, then raising capital is probably the best option.
Hopefully, you are sold on the idea of bootstrapping your startup. But you may be wondering, "How do I start a company with little or no capital?" Answer: very carefully... but that's a story for another day.
Advisor ☞ Renoun Skis
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April 16, 2015 Version 1.0