I have been lucky enough to have started a number of companies over the last 15 years. 3 were bootstrapped using the founder's resources and 2 also accessed capital from professional investors. All have been successful although no single deal has delivered all the f***-you money I've needed. No complaints, plenty of emotional scars and happy memories, and anyway I still don't know what I would do if I really got f***-you money. Probably die of boredom. I digress, but you get the picture - I'm a typical serial entrepreneur with a poor work/life balance.
My current venture is now approaching its second anniversary as a bootstrapped start-up. We are also about to launch our first product and this is a massive milestone in the history of any venture.
Financial pressure is a constant reality checker as we turn our plans into actions and I have a few thoughts about the differences between bootstrapping and taking external financing. Perhaps this is interesting to others considering a start-up. Feel free to violently disagree as well.
I will use the terms external financing and venture capital (VC) interchangeably to mean taking money from any third party who is not family or a founder.
Speed To Market
Accepted wisdom is that the number one difference between bootstrapping and VC backing is an apparent no-brainer. More money means faster to market, right? Well I'm not so sure in our case.
My latest venture is software and 'making' software has never been easier. This is because of the state of the industry, the tools and talent available and the easy access to customers via digital channels like the internet.
To my mind, a specialist software product like ours is not suitable for a big development team. The skills we need are held by a few people: advanced statistics, natural language processing algorithm development and the like.
On the other hand, our current small team all have day jobs and - if we had the money - we would perhaps be working full-time on our venture.
So, on-balance, I believe that we could benefit by going full time and adding at most 4 more developers at this stage. Total money we could potentially use is about $1 - 2 million.
But that is not the whole picture and this leads me to my second point.
If we were to take a million or 2 of VC money, we would probably be selling 40% or more of the company. The VC would also demand effective control of all major company decisions and if anything bad happens, the founders will definitely be second in line after the VC.
My research into the local VC market in Sydney has also identified incubators that will take 40% in exchange for desk space and access to their network. No cash changes hands. I'd have to be pretty desperate or inexperienced to accept a deal like that. Good luck if the model works for them but deal me out.
Under either scenario, this means that this founder would lose majority control. I enjoy having majority control.
So my judgement is that the VC money is just too expensive at this stage (pre-launch).
The founders have agreed to re-visit this decision once we have traction in the market. The implicit hope is that customers = increased valuation from any VC. All founders are always hopeful of rapid valuation growth, even as they whittle their holdings into single figures. Yes, yes, I would also rather have 1% of Google than 100% of Six Degrees Of Data - but you get my point.
So far, we have kept ownership limited to the small team and this has benefits that are harder to quantify but just as valuable:
You can also think about the flip-side of stress: enjoyment. You can also call it satisfaction, quality of life, pleasure, etc.
I think that taking external capital means more stress and less enjoyment - at least for the period before you exit the company. Taking other peoples money is a serious step for me and one I don't take lightly. I feel obligated. Deeply. OPM will make me worry more than I currently do and again, on balance, I can do without this extra concern at this stage.
Also, although I don't think I'm a control freak, I know some others will disagree.
Bootstrapping sidesteps much of this as my partners and I are all investing sweat to earn equity and I don't mind backing this up with my own dollars that I can afford to invest. Sharing sweat is also an excellent team builder and I am positive that we are closer as a team than we would otherwise be.
I've never been in a venture where team cohesion has not been the most important factor. It's also the only thing that makes the group strong enough to resist the inevitable pressures that constantly threaten to blow the whole enterprise apart.
If we don't have a shared vision and a strong trust in each other at this stage - then the venture is already lost.
In a week or so I will conclude with my thoughts on bootstrapping versus external funding in terms of de-risking ventures, gaining market access and exit strategies.