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Forget Venture Capital: Bootstrap your Business

by Alex Lipton

Forget Venture Capital: Bootstrap your Business

Raising venture capital certainly seems like a sexy way to grow a startup — after all, they make movies about it.  But it also comes with strings attached (see here, here and here) which limit your ability to decide the pace, strategy and direction of your company’s growth (to say nothing of the fact that you’re giving up ownership of part of your business).

Depending on the type of business you’re looking to build and your personal goals, there’s a lot to be said for forgoing venture capital and growing your business the old fashioned way — bootstrapping.

What’s Bootstrapping?

Bootstrapping is just a word raising money on your own, typically through a combination of relying on personal finances and generating revenue early on by selling a product. Outside of the high-tech world and possibly a few other industries, bootstrapping is the way a majority of businesses get started — in fact, more than 90% of founders do not use equity financing.

Venture Capital Might Not Be Right for You

Venture capital firms do provide value to a subset of early-stage companies. These firms do more than just finance your idea; they also provide invaluable opportunities to learn from their experience, meet other founders in your industry and build credibility. From a purely economic standpoint, there are certain industries and business models where quickly capturing a large part of your market share is essential, and if you hold off on the investments required to achieve that kind of growth until you’re generating enough revenue to do it yourself, you’ll never get there. Facebook and Google are just two examples of companies that used venture capital financing to focus on the growth that allowed them to quickly dominate the markets they play in, after which they found ways to start making money off their massive user bases.

You should consider whether the business you hope to grow needs venture financing to become successful. If you are trying to start a business that has low upfront capital costs and a medium- to small-sized market, venture capital financing is almost certainly not for you. A venture capital investor may lead you into making decisions for your company that you would not otherwise make – such as blocking or forcing an early exit. And of course, choosing to finance your company through a venture capital firm would take away from your cut of the pie.

Advantages of Bootstrapping

  • You Control the Pace. When you decide to bootstrap, you will gain the ability to pace the growth of your company in order to maintain quality and control. Unlike venture capital financing, bootstrapping typically involves a commitment to steady, organic growth. Though this could result in lost market opportunities, many founders prefer this pace to the “hockey-stick” growth demanded by venture capital firms.
  • Customers Come First. Focusing on slow and steady growth also means that you can focus on what your customers want in order to deliver the best product possible. By listening to your customers and steadily growing your sales, you also receive instant validation for your idea; customer sales are a much better indicator of success than a round of venture financing. This is not to say that your venture capital investors don’t also care about what your customers want.
  • You Do More with Less. Bootstrapping also forces you to be creative with limited resources. Companies that receive a large round of venture financing do not need to be as frugal, which can result in spending money in all the wrong places. When you bootstrap, you simply don’t have the money to burn, so you have to learn how to run a lean company focused only on its core product. This lean focus can be a boon for entrepreneurial thinking. As the familiar proverb goes, “necessity is the mother of invention.”

The Downside of Bootstrapping

At the end of the day, your employees have mouths to feed and bills to pay. The business can’t keep putting its revenues back into the company without taking care of life’s basic necessities. You might also find that by choosing not to pursue venture financing, you’ve allowed competitors to grow and seize a market opportunity. Though you would still enjoy limited success in running your small business, you might wonder about what could have been had you accepted additional financing at the right moment.

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            Instead of immediately jumping on the venture capital bandwagon, take a moment to think about whether venture capital financing is right for you and your business. Although venture capital firms can help you grow very quickly, they also demand more from their founders. Bootstrapping allows founders to retain control – and a larger piece of the pie – while growing their company at a pace that feels right.

 

Alex Lipton is a Legal Researcher at Shake and a Mitchell Jacobson J.D. Scholar at NYU School of Law. He also serves as Vice President of Operations for the InSITE Fellowship. He writes about legal issues affecting early-stage companies. Find him on LinkedIn or on Google+.