The Mindset behind Bootstrapping a Startup
There are multiple Entrepreneurs who prefer to bootstrap their startups rather than raising capital from a VC, an Angel, Crowdfunding, or an Accelerator. There are startups that have been completely self-funded yet highly profitable right from the early stages.
ClickMob is a bootstrapped startup that has been profitable, since the third month of operations. The company has grown 900 percent in just two years. Forbes recently acknowledged ClickMob as one of America’s 30 Most Promising Companies
While raising capital can be remarkably helpful, it may also add an external pressure. Undoubtedly, VC funding helps startups scale rapidly, without worrying about the resources. Their idea gets validated from some of the most experienced mentors in the industry. On the darker side, not all great ideas may become successful.
70% of startup technology companies fail less than two years after first raising financing. usually around 20 months after first raising financing (with around $1.3M in total funding closed) — CBI Insights
There are a few reasons, why some Startups may prefer Bootstrapping over Fundraising:
1. Not all Startups may have success with Fundraising:
Though it is true that not all the great ideas may be successful, Your idea has to be appealing. Some of the most brilliant ideas are rejected by investors if they are not impressed by the overall presentation.
- Are the founders able to convince the VCs with their pitch?
- Is the value proposition impressive?
- Does the idea solve a problem in a 10X better way than the rest?
- Is the idea scalable and investable?
- Is the product a part of a saturated sector or is it amongst the most trending technologies?
In a nutshell, not all the startups may be able to make the investors believe in their idea or in them as a team. In such situations, some of the companies prefer bootstrapping instead of approaching new investors every day.
2. Full Control over the Business:
Whether it’s deciding the Equity Structure or selling Assets to liquidate cash, the founder has full control. A Founder’s Dream is only his and he builds his path.
If a founder borrows money from investors, they have a claim in the ownership, equity and all the important decisions.
With bootstrapping, the founder has control and autonomy in all the directions such as Goal Setting, Team Structure, Strategy Formation, etc)
3. Saves Time:
Fundraising, Preparing a Pitch Desk, and Pitching to the VC can be time-consuming. The process takes a lot of efforts and does not guarantee any return. Some founders would rather utilize that much time towards engaging their potential customers.
If it’s discovered, that there is no market need, the founders can take some quick actions. They don’t have to wait for the next meeting with the investors and follow their company guidelines.
If they bootstrap their startup, they don’t have to spend time creating reports for the investors or listening to their ideas.
4. Efficient Usage of Cash:
If A startup is controlled by the founders, there is a high probability that they will spend money wisely. Bootstrapped startups are more conservative and strategic on spending their cash. They tend to prioritize and obtain maximum benefits from their expenses.
In fact, the absence of external capital motivates startup owners to monetize their product faster. Since their own money is involved, the necessity forces them to invent, reinvent and innovate.
“Bootstrapping keeps you lean and focused, teaches you how to allocate resources creatively and prevents you from being wasteful or taking anything for granted. These are the skills and traits that make great entrepreneurs.” — Donna Fenn
On the other hand, VC backed Startups are comparatively quick to spend the raised capital. “ The question of how should you spend your money was a frequent conundrum and reason for failure cited by startups (29%)”.
5. There is No Pressure:
When investors give money, they expect at least 8–10X return and The Board of Directors requires regular status updates. They want the results ASAP, with zero tolerance for failures.
If Founders borrow capital from investors:
- The investors may pressurize the founders to take the quality to the next level or change the business model.
- If the investors are not getting the desired results, they may insist on selling the Startup.
- The founders may be pressurized to raise capital in later rounds after 9–12 months until they reach profitability.
- The company is expected to deliver fast or exit big.
- Everything has to be defined at the conceptual level to ensure if it’s still investable.
- The founders can be fired or replaced if they don’t deliver to the expectations of the Board of Directors.
With Bootstrapping, you can decide your plan of action without any external pressure. There is nobody better than you to address your company problems. If your product is not up to the mark, you won’t make money. Hence, You will be intrinsically motivated to perfect your product and acquire customers.
6. leveraging Personal Network:
One major advantage of bootstrapping a startup is the autonomy to make decisions. If the entrepreneurs are short on resources and would like to take help from their family members, they don’t have to wait for approvals. Eg: If they don’t have the money to hire a Sales Professional, their family member or friend may handle that function temporarily.
7. No need for People Pleasing:
If the founders have a great investor and have a good relationship with him, then they are lucky. Some investors may serve as collaborative partners, mentoring you to become successful. But, it may be a nightmare to deal with insensitive critics, who just want to bring others down. They will oppose your ideas, just for the sake of it.
With Bootstrapping there is no need to please someone to cooperate with your decisions. The founders don’t have to deal with a team of investors, guilting them for the consequences. The investor’s biases may not affect a startup’s destiny.
If the team is not performing, the entrepreneurs are not liable to keep up with the poor performers. With, quarterly performance reviews and a 4-year vesting schedule, they can retain the best talent.
8. A Sense of Accomplishment:
If an entrepreneur wants to keep his company for a lifetime and carry it forward to future generations, Bootstrapping is the way to go. The idea of looking at the venture and being proud of building it is significant for some founders.
9. Valuation and Ownership:
Whether It’s a sole entrepreneur or a team of co-founders, their share of equity is going to be much larger if they bootstrap. With fundraising, their ownership gets diluted after every round.
With bootstrapping, the founders’ share may be worth more than that of the funded startup. Even, if the company remains small or doesn’t generate as much revenue as the funded ones.
In the case of acquisition, the founders will earn a much higher profit, as they would have invested their own money. If they would have borrowed capital, most of the acquisition profit would have to be returned to the investors.
10. Starting the company, with a Day Job:
I have personally witnessed professionals, who have some great ideas and the funds required for a startup. However, they may not be willing to completely give up on their stable job, in the early stages. Eventually, they can quit their job, after achieving some successful milestones in the Startup.
People feel more secure if they continue to do their day jobs and simultaneously work towards their startup on weekends or evenings. With bootstrapping, they can progress at their own pace, as their schedule permits. They are not answerable to the Board of Directors.
To Conclude:
Whether its Bootstrapping or Fundraising, both the models have their pros and cons. It depends on the type of business model, the attributes of the entrepreneur and multiple other factors. There is no one size fits all model. Some of the most successful startups may have had great success with bootstrapping, while others may have failed miserably.
