I’m a HUGE believer in running a profitable business from day 1, AND I fully support venture-backed businesses. There’s a beauty to having cash in the bank, and there’s also a dark side. It all depends on you and your goals.
If the term “bootstrapping” is new to you, it is a fancy term for not raising equity funding. Equity funding is when you exchange funds for a % ownership in your business. There isn’t a WRONG answer, but there are cautions to consider for whatever path you choose.
Before you decide if you’re going to walk in either direction, always understand the finances of running a business. No- I don’t mean build a five-year forecast and then decide the path. I mean, know what a P&L, Balance Sheet, Cash Flow statement is there to tell you; understand how to make money stretch as far as it can go; and how to make hard decisions. Be prepared to cut people and costs, not pay yourself if you don’t have to, and seriously think through what will cause you to run away. And finally, be prepared to test your risk tolerance.
And keep in mind- how you run your personal financial life will show up in your business. So be extra cautious of how to spend, budget, and manage your money before jumping right into a business.
Then make choices.
The term bootstrapping feels like such a buzzword now, that to be honest- I’m a bit sick of it. It’s like saying that I’m an “air breather,” as if no one else has ever breathed air before. Most businesses are actually “bootstrapped.” The less common path is to raise equity.
I’d argue that most never NEED to give away equity. I think we’ve created a world where it’s super fun to talk about raising money - but that should never be your goal. The goal should be to have a sustainable business that is making more than it spends. Sometimes you need to give away equity to get there, and sometimes you don't.
My Big 3 Reasons Why a Business Should Bootstrap:
It’s possible. Sometimes we think the primary way of doing things is somehow impossible, but truthfully- you CAN self-fund and run your own business without taking on debt and without taking on equity partners.
You retain all your ownership and control. Boards are great, AND they can also tank your business if you have the wrong people on them. Having other owners can distract from gaining revenue, focusing on clear revenue paths, and sometimes are just plain messy.
You’re more efficient with your money. You will never treat other people’s money the like treat your own. When you have lots of money in the bank to experiment and make mistakes - sometimes that leads to a lot of wasted money and even larger mistakes. Businesses that have to watch every dollar they spend tend to spend that money more wisely and end up with more sustainable growth over time.
My Big 3 Reasons Why a Business Should Seek Equity Funding:
You already know what works and what doesn’t and the $$ is to scale quickly. Once you get traction and you directly understand that $XX into marketing & sales = $XX in revenue, then you have a machine. Equity funding used to propel this machine into 5 to 10x at its current state is exactly what venture capital is for.
Your business requires large capital investment to create the product. I do believe that there are less and less reasons for this, but seeking $25-$50K from friends & family to get started on something because you have to have the cash to create the product is a reasonable way to get started. There is ALMOST NEVER a reason to sprint $250-$500k on product development before generating revenue. I’m sure someone is going to send me hate mail for that. Biotech might be one example, but there are SO many free or low-cost tools and developers doing free work that you should get some kind of revenue generation on a lot less.
You have friends and family willing to invest because they believe in you and the product. I know many people who have done this to get started, and it has worked very well. And of all the people I would want to benefit from my business- it would be friends and family.
Here are some of the considerations for bootstrapping & equity financing to be cautious of:
I’ll be honest here, after running my own business and supporting several venture-backed companies- I will choose self-funding 100% of the time. It really all comes down to your personal and business goals. I like having no co-founder, co-owner, or board - but I also have seen board members and advisors really fight for their portfolio companies and support founders - there’s no wrong way.
Here are a few things to consider when bootstrapping:
Growth will be slower
You may have varied personal pay
You won’t have extra funds to experiment with marketing, sales, or products
Here are a few things to consider when equity funding:
It can take a LONG time or not happen at all, even when you put in all the effort
You will dilute your ownership and can sometimes get kicked out of your own business
You will have to have a board - which can cause a lot of distractions (and can also be helpful!)
You can make both work VERY well. What causes failure is the same- spending more money than you have or are making in your business, not paying attention to every dollar coming in and going out, not understanding your KPIs, and making ego-based decisions because you see the money raised, invested and the size of your team as a metric for success. It doesn’t matter if you’ve raised $80M or $8K; it is equally possible to manage that money well and poorly.
No matter what path you choose - choose to be a profitable business.
