With as little as it costs to get a software startup off the ground these days, many entrepreneurs start off as what we call “bootstrappers” rather than fundraisers. There’s nothing wrong with that approach but staying in the bootstrapped mode for too long can carry some consequences. This article explores that further.
This article explores just one of the topics covered in Chapter 1 of my bestselling book “Startup Success – Funding the Early Stages”.
You can listen to this chapter now and if you’re interested in the book, you can find it on Amazon here.
What exactly is bootstrapping?
I don’t know what the dictionary says but, to me, bootstrapping is using existing or personally available resources to fund your venture. In other words, not raising money from third parties.
- Living off your savings account so you can work full-time on your startup venture is bootstrapping
- Borrowing against your 401K retirement account to pay your bills while working full-time on your startup venture is not usually recommended, but is bootstrapping
- Working on your startup venture during nights and weekends while maintaining another job to pay your bills is bootstrapping
- Selling your car, leasing out your garage apartment and auctioning off the valuable comic book collection you’ve been holding for 15 years is bootstrapping
- Secretly selling your spouse’s car and auctioning off their family heirloom paintings with sentimental value might cause a divorce, but is bootstrapping
- Convincing others to work on your venture for no cash compensation while combining with any of the above options is bad ass ninja bootstrapping
- Borrowing money or receiving an investment from your friend, family member, bank or angel investor is not bootstrapping
OK, you get the idea.
Benefits of bootstrapping
Many of the successful entrepreneurs that I respect the most are consummate and repeat bootstrappers. In fact, they take great pride in letting you know they’re a bootstrapper. If you look, you’ll find them in your own community.
Before we talk about how long to bootstrap, let’s review some of the biggest benefits of bootstrapping. Some of you will be able to skip the bootstrap phase altogether for one reason or another, and that’s great. But you’ll miss out on at least some of the benefits listed below.
- It forces finding and attracting other team members that have genuine passion for the problem being solved (versus those looking for a paycheck). They’re the only ones that will work for equity-only (no salary for a while).
- It causes hyper-focus on making rapid and sufficient progress to either be able to get funded and/or start bringing in revenue from product sales
- It forces a detailed understanding of exactly where every dollar is being spent and its specific value to the mission
- It fosters maximum creativity, flexibility and instincts for survival
- It avoids investors telling you what to do, giving you a hard time about the decisions you’re making, or asking for a bunch of tactical updates
- Future investor prospects will be impressed by your passion and personal commitment to the venture, as evidenced through your bootstrapping phase
- Better survival rate during market downturns (more on that later)
- It comes with no equity dilution – you and your co-founders get to divvy up 100% of the equity
There’s a reason that I put the dilution benefit last. Please don’t bootstrap just to avoid dilution. If your business venture is best developed and grown by taking on early investment, you will be more successful if you do so. One of my favorite sayings is “optimize for growth, not dilution”. You would much rather have a single digit equity stake in a venture that eventually exits for $1B than double-digit equity in a venture that crashes and burns or exits for $2M, $10M or even $50M.
How long should you bootstrap?
To answer this question, I’m going to set aside ventures that are intended to organically reach a cash flow positive or profitable position and become sustainable on their own. Instead, I want to talk about the more traditional tech startup scenario of pursuing multiple rounds of funding capital over time.
I usually recommend bootstrapping just long enough to gain sufficient evidence that your solution is Desirable, which means your target customer wants it bad enough that they’re willing to pay for it. It’s also beneficial if you’re able to prove that the product you’re building is Feasible, which means that it can be built and can deliver the intended benefit. That doesn’t necessarily mean you will end up a v1.0 product ready to launch after the bootstrapping phase but rather that you should have enough proof that there’s minimal “technical risk”.
For additional reference, the graphic above shows the stages of the new business viability lifecycle.
With both desirability and feasibility validated (or mostly validated), you still have a long way to go before you’ve grown a great company that’s both scalable and sustainable, but you are considerably less risky than before desirability and feasibility were validated. And that means you’re ready to pursue a pre-seed or seed round of funding. There are dozens of reasons why you still might not be successful getting funded but that’s a topic for a different article (in fact, see “Having Trouble Raising Money?” and “Using Verbal Commits to Secure Your First Investors“).
To help with ideas for validating desirability, do some research into Design Thinking and search for a free video module I produced for my Founders Academy series called “Developing Your Idea” (it’s usually posted on the Home page or Videos page of this site).
Market downturn readiness
Every startup that lasts five years or longer will experience at least one market downturn. Each downturn is different in a variety of ways, but they each bring some combination of fundraising difficulty and tightening customer/consumer budgets. Since fundraising and new customer revenue serve as varieties of important fuel for startups, their sudden absence or scarcity is concerning at the least, and catastrophic at the worst.
Bootstrapping startups are inherently resilient during downturns, because any needed adjustments are much less severe than those burning lots of cash as the downturn starts. Additionally, founders in growth mode but started their venture as boostrappers are the best at adjusting to market downturns. They are less likely to let pride get in their way of making painful adjustments to reduce their cash burn, which means they take action much quicker than non-bootstrappers. Any of us that have been through multiple such downturns know that speed of action can be the difference between survival and death.
Dangers of bootstrapping too long
From time to time I come across startups that have been in bootstrap mode for a seemingly long time. You might be thinking that with all of the bootstrapping benefits I listed further above, why not stay in this mode as long as possible? The most common issues with that approach are listed below:
- Slow progress for too long – While in bootstrap mode your financial resources are limited enough that your progress is also limited. If that goes on too long, you might be asked “How is it that you’ve been working on this for almost two years and only have ___ customers and ___ revenue?” Investors like to connect many dots but when they connect yours over a long period of time the slope of the curve isn’t very interesting.
- Mindset – The processes, culture and general mindset of bootstrappers is fairly different than those that are funded and swinging for the fence. Staying in the bootstrap mode too long can cause that mindset to sink in to the point that investors are forced to wonder if you’ll be able to shift multiple gears directly into a fence-swinging mentality after getting funded.
- Assumptions – Investors can easily assume your business venture either went through a significant pivot, multiple pivots, a co-founder breakup, unsuccessful prior fundraising attempts, etc. It’s even possible that some of these things are exactly true and caused the bootstrapping phase to last longer than intended. But investors will often pile on additional negative or skeptical assumptions versus whatever you choose to reveal. They might assume the market is too small or doesn’t sufficiently suffer from the stated problem. Or they might even assume you’re not the right team to grow a successful company.
Disclaimer: The concepts described in this article are for companies that plan to become venture-funded. Many startups don’t have the makings of a high-growth, venture-funded business but can still evolve into a great company. Additionally, there are other forms of financing than just equity investments from venture funds.
As hopefully you’ve concluded, bootstrapping during the early days, until you’ve mostly demonstrated desirability and feasibility for your business venture, can be a great thing. But too much of a great thing can turn into a bad thing.
Compare notes with your co-founders and trusted advisors to have a general strategy and plan for your bootstrap phase. And once you’re ready to take on seed investment, prepare for a change in mentality and get ready to go big.