More on Bootstrapping
We’ve already shared our thoughts on what bootstrapping means, but when I read this piece on bootstrapping I couldn’t help but share since I think it’s pretty much on:
“When you decide to bootstrap, you commit to fund primary development and growth through internal cash flow from real-life customers. You — the founder — and a limited number of early employees may forgo paychecks for quite some time to make this work. But to keep that strategy to a minimum, it’s common for bootstrapping companies to turn to consulting engagements, non-recurring engineering contracts, value-added reseller agreements and projected supplier contracts. In short, “moonlighting.” These funds go toward initial growth and expansion until the company can stand on its own two feet.”
Well said. I would also add that, at least in our observation, a significant percentage (i think the majority) of companies that are funded by VCs today would be better off as bootstraps. There’s a paragraph at the end of the article describing how some companies can’t take the bootstrap path. This is true of course. But there should also be a paragraph describing the startups that shouldn’t take the VC path. I believe when a company that can bootstrap, takes VC, it can warp their values, and ultimately may lower their chances at success.
I think we’re in a world right now where bootstrapping is the exception (in our industry), and VC is the norm. I think that should be inverted.
Join the discussion 3 Comments
Tony Wright
November 22, 2008 at 5:12 pm
“I would also add that, at least in our observation, a significant percentage (i think the majority) of companies that are funded by VCs today would be better off as bootstraps.”
Why? Taking outside funding is just trading equity (usually 15-30%) for the ability to focus, getting a reliable paycheck, and be able to move at the velocity you want to move. Of course, I totally agree with you if taking funding results in the founders giving up control of the board. But for a company that gets funding when they have a bit of traction (increasingly the norm), they generally don’t have to settle for giving up control of their company.
As anti-VC folks often say– funding can also make you act like a freakin’ idiot (overspend, shoot too big too early, etc). But, as an exercise, let’s assume that you DON’T act like an idiot, don’t have an asshole for a VC, and don’t have to give up board control. What’s wrong with VC in that scenario?
(disclose: I have a funded company. I also ran a services company for 7 years and tried to “bootstrap” several products… But could never get the focus/momentum necessary to succeed with ’em)
Hillel
November 22, 2008 at 5:52 pm
Great question.
I should establish that I’m, neither “pro” nor “anti” vc. I think venture capital is a great tool for business where it makes sense. My main issue is that I believe, for the bulk of tech startups today that take it, it’s inappropriate.
It’s less about the control issues, and more about the expectations.
Taking VC money immediately puts the finish line that much further away. Now… you may agree that anything less than a 10x return (the typical VC goal) is a failure. And that’s great.
But what happens if you take VC, you shoot for that 10x return, and then find out there’s only a 3x return. Now you’re at the crossroads. The VC will push you to do all sorts of things to try and get to 10x. (As they should given their business model.) You may have concluded that not only will the business never produce 10x returns, but trying to morph it into a 10x business will kill your 3x creation. To the VC, 3x and a dead startup are essentially the same given the way they calculate their batting averages. At this point you have a problem.
And typically, your VC will be in a position to force your hand.
Tony Wright
December 2, 2008 at 8:52 am
(aside: you should really get disqus or some better commenting system for you blog– this was a fire-and-forget comment, but I would’ve like to have seen your reply! I only did because of Greg’s post at Xconomy)
“But what happens if you take VC, you shoot for that 10x return, and then find out there’s only a 3x return. Now you’re at the crossroads. The VC will push you to do all sorts of things to try and get to 10x”
This all depends on the VC. Keep in mind that the scarcest resource for a VC is their time and they are currently attending your boring board meetings every month. :-) They could be golfing.
In reality, there are a ton of 3x exits. Exactly how are they going to push you get to 10x? They can fire the CEO (if they have board control) or they can make suggestions and work together towards an agreed-upon goal. If YOU set the right expectations in the beginning and have a good rapport, I don’t think this is a HUGE danger.
Are they going to veto a 3x exit? Almost all VCs have the power to do so, but plenty happen. I think every exit opportunity is different… I doubt most VCs would veto a sale unless they saw that there was tremendous untapped growth opportunity left to be explored.
I do agree that VC is inappropriate for many/most startups that take it, FWIW.