Originally posted on GregHausheer.com
We are surrounded by funded startups that run our world. They live on our phones, our desktops, and everywhere in between. Some are no longer considered startups. Many are overfunded. Many don’t even make money. It’s actually the exception to be one that does. And when starting a company, it can seem like the only path to be successful is to first raise a ton money from VC’s, and then build a product. News of massive funding rounds and high valuations dominate the press, and box new founders into thinking that raising is the only way to start. But for my company, fundraising wasn’t in the plans when we started. Who would want to invest in a dev shop, anyway? And more importantly, we didn’t need funds to get started. Sure, it would have been nice to have extra cash on hand during the hard months. But there are options for that, like lines of credit and short term loans. Luckily, we never needed them.
Many founders never stop and question the traditional fundraising model, and ask if they really need cash to start their company. Others have wisely written about their observations, suggesting new founders reconsider their options. Like mine, some businesses don’t need funding to start because they bootstrapped and grew out of their profits. But some do, like many product focused companies where scaling and speed to market matter. Regardless of your path, there’s value in bootstrapping when starting. It’s more sustainable. It’s healthier for you and your team. You learn how to build something from nothing. You’ll likely be able to raise on better terms if you get traction. And, most importantly, you’ll attract a smatter, better team of investors. Smart and dumb money will chase you, and you’ll get to choose who joins for the ride.
In October of 2013, my co-founder Ben and I started Lightmatter, a New York-based software consultancy. Five years later, we’re 12+ people, growing steadily, and have found our inspiration bootstrapping from companies like Basecamp that focus on building a profitable, sustainable, and calm business and those who invest in them.
Don’t get me wrong — growing has been painfully slow at times. But looking back, bootstrapping has been the most rewarding experience even for a company like ours where it was the only option. Whether you bootstrap for the entirety of company’s future or up to a certain milestone is up to you, but here’s the case for bootstrapping, and why it’s the most valuable, underrated way to start your company.
It’s Your Future, Whether It’s Good Or Bad
It’s a common drum to beat that when you bootstrap, there’s no better feeling than knowing you’re in control of your future. But this is an allusion as there’s so much risk and luck involved in starting a business. You’re really only somewhat in control of your future. But when you bootstrap, at least you are in control of your reaction to that unpredictable future. Not a VC, board member, advisor, etc etc etc. You’re the only one who calls the shots. No permission is needed. The risks, and rewards, are yours.
It’s a scary thought taking on that much responsibility. But it excites a certain type of founder. There are no investors to answer to, no board members to appease, no control or voting power struggles outside of your relationship with your co-founders. It’s a wonderful feeling. It’s true that everybody has some boss though. While ours are not any board members or investors, we still have people to answer to: our team and our clients. I have to make sure our employees like working at our company and are motivated to stay. I have to make sure we’re doing quality work so our clients are happy. Even though there’s always some metaphorical boss, by not having investors, we can focus more time on the things that matter: our team and our clients. And as Jason and DHH write about, it doesn’t have to be crazy at work. There’s a more tangible and long-term return when you invest in your team and customers versus chasing investor attention, numbers, and unsustainable growth.
I’ve heard horror stories of VC’s abandoning founders when their companies are not quite “10x’ing” like another Unicorn in the portfolio. Just looking at fund mechanics, only 1 or 2 will make any fund “successful” by venture standards. Founders joke too that fundraising is a full time job. Hundreds of “no’s” and rejections, one or two “yes’s” and then you’re already starting to raise your next round.
If you’re deciding between bootstrapping or taking money — think about whether you want to spend the majority of your time answering to someone or investing time into someone and something.
Don’t get me wrong. Funding is right for many companies. VC’s and Angels are critical for the startup ecosystem. I’m even an angel investor too. But my argument is not that all fundraising and VC’s are bad, or that bootstrapping is a heroic undertaking and something to glorify. It’s just that before you get funding, if you need it, you should try bootstrapping. And if you do decide to bootstrap, here’s some advice I’ve found helpful.
Save Early, Save Often
If you’re bootstrapping a company, the single most important financial decision you can make is to save a regular amount of your monthly cash flow. Don’t be cheap about it either, like saving some single digit number like 5%. Depending on your expenses, I’d target somewhere between 15% to 25% of your profit each month. Why more than 5%? Because your biggest client or customer can pick up the phone and cancel for no reason. Because your best employee might quit. Because a competitor launched a better product. Because a client might not pay. There are an infinite number of reasons to worry.
When you raise money for your company, you’re buying a runway in exchange for equity. Sometimes it’s a few months, sometimes a year or two. You have goals that you sold investors on and targets to hit. But when you bootstrap your company, you’re building your own runway. And when that runway is in jeopardy, you’ll be thankful you “funded” yourself by saving. And trust me, it’s scary when it happens. We had times early on where we didn’t have our team’s salaries for the following week, but nudging clients about their invoices helped us bridge the gaps. When you’re bootstrapping, remember it’s your money on the line, not someone else’s.
Network More Than You Think Necessary
When you bootstrap a company, there’s no board of experienced mentors, prior founders, and investors who are financially and personally motivated to help see you succeed. You have to create that yourself. Investors and boards can get in the way if they’re too big, but they can be extremely helpful in crucial moments. When you bootstrap, it’s critical you assemble some circle of mentors to help you in tough times. Whether they actually join your board as a member, observer, or just act as a friend to the company is up to you. We’ve found creative ways to build a group of trusted folks who we can call on when things go wrong. It takes longer to do this than you think too. Be aggressive in your efforts to meet new folks and think creatively about ways you can involve them in your business if they bring value.
Think Twice About Spending Anything
Hired an employee too fast and fired too slow? Used the wrong bookkeeper and your Quickbooks are fucked up going 3 years back? Took out a lease on an office too early and didn’t rent month to month? When you bootstrap, every dollar wasted from a bad decision or accident is a dollar you could have saved or used to pay yourself. When you’re a startup that has raised and is “burning cash” on a “tight runway”, you’ve got pressure to get things right. But, fundamentally, it’s not your money you’re spending. It’s some limited partner’s cash they gave to some VC who gave it to you. When you bootstrap, a bad decision for your company can fuck up your personal life. I think experiencing this made me realize how true loss aversion really is. The lesson here is that when bootstrapping, for every decision you make you’ll feel the effects more, whether good or bad.
To Bootstrap Or Not?
So, what’s the point here? Is it that bootstrapping is hard? Yes. Is it that funding and VC’s are bad? No. It’s that when you’re starting a business, you’ll be better off bootstrapping before seeking funding if you need it. You’ll learn what it means to lose money. Your money. You’ll appreciate what sustainable, healthy growth looks like. You’ll be forced to spend within your means. You’ll build better relationships with investors if you do take funding because you’ll have something to show. And, if you really do think funding can accelerate your company, you’ll likely have better terms to raise on. And, who knows…you might realize you don’t even need it.