Startup founders are facing new and challenging economic realities.
The ongoing impact of the pandemic, global supply chain issues, and rising inflation, have created challenging times for business owners and entrepreneurs.
If you’ve been sheltered from the impact of these factors so far, be aware that the macro and micro-economic headwinds are blowing your way.
Despite these challenges, early-stage startups are choosing to bootstrap rather than take investor funding. Bootstrapping — and growing organically — puts founders and startups in a stronger position, removing the pressure and expectations from outside investors.
In this article, we will take a closer look at the pros and cons of bootstrapping and why — even in this challenging economy — bootstrapping is a viable and powerful way forward for startups.
Bootstrapping vs. outside investment: Which Is better for your startup?
This is not an easy choice…
Going down the investment route means giving away equity in your business in exchange for working capital. It also means answering to investors or a board.
Investors are watchful shareholders in your startup business. This means that founders are accountable to a board of investors who have a vested interest in your ability to hit targets. In some cases, leadership or company failings lead to the removal of Founder-CEOs by a decision of the board.
Your startup’s sole aim is to scale and become profitable so that you can return an investor’s funds within a 5-7 year timeframe. Some startups will return investor funds sooner. The most widely accepted timescale for those that succeed is 5-7 years, and this is usually through an acquisition event, a share buyback, or an Initial Public Offering (IPO).
Without investment, startups grow organically, and usually at a slower pace. Organic growth occurs when a company reinvests its profits to continue expanding. You encounter less pressure in the absence of outside investors. What you lack is the financial backing to drive growth at the same pace.
Let’s dive into the key factors to explore when comparing bootstrapping with outside investment for your startup.
What is bootstrapping?
Bootstrapping is the traditional way to start and grow a business.
The term “bootstrapping” originated in the 18th century, meaning “to pull oneself up by one’s bootstraps.” This was difficult to do back then, especially if you didn’t have family money or a powerful, wealthy patron.
However, as the concept of the American Dream has shown, anyone can pull themselves up by their bootstraps. Numerous startup success stories show that it’s possible to turn a dream, determination, and hard work into a multi-million or billion-dollar business. You don’t always need investors or external funding to achieve this.
How do startups raise funding?
Since 2000, investor funds for startups have proliferated.
PitchBook data shows the significant impact the past decade has had on reshaping the investment landscape. Venture Capital (VC) and Private Equity (PE) firms raised and deployed hundreds of billions of dollars, funding hundreds of thousands of companies, and generating billions in exits.
In 2021 alone — a record-breaking year, despite the ongoing impact of the pandemic, recession, and inflation — $612 billion in Venture Capital (VC) funding was invested, an increase of 108% on 2020 figures.
Despite these enormous investments, and more competition among VC firms and angels to invest in startups, not every founder wants or needs investment. It’s worth mentioning that other funding routes exist for startups, including friends and family rounds, angel investors, and equity-based crowdfunding.
MailChimp, the email marketing and e-commerce giant, is another example of a successful bootstrapped business. Founded in 2001, Mailchimp bootstrapped to 9-figures in revenue until 2021, when the company was acquired by Intuit for $12 billion.
The MailChimp story is proof that numerous nine-figure funding rounds aren’t a necessity for achieving Unicorn status.
There are myriad examples of successful bootstrapped startups. Or startups that were bootstrapped until they achieved a sustainable level of profitability, such as Calendly and Buffer.
Why bootstrap a startup?
Raising investment takes time, effort, and hard work. Early-stage startup founders often wonder, “Do I have time for this?”
Many don’t. An investment raise can easily take 3-8 months.
On the flip side, you could be winning paying clients’ from day one, depending on your pricing, target customers, and the time it takes to convert leads (known as a sales cycle). Startup founders can hit $10k MRR or more in the same time that it takes to raise investment. This is a major reason for the popularity of bootstrapping.
Bootstrapping founders have more control over their startups than those who raise investment, albeit with fewer resources and support. Founders need to be aware that there are several upsides and downsides to bootstrapping vs raising investment funding.
Pros and cons of bootstrapping your startup
Pros of bootstrapping:
- Control. As a founder or team of co-founders, you have complete control over your business (100% ownership). You don’t need to dilute your ownership stake, and even if you’ve received money from friends and family, this often isn’t in exchange for equity.
- Set your own targets. Without outside investment, you are not answerable to shareholders. You have no board meetings and quarterly updates to worry about, and you can operate without aiming for the fixed — and often demanding — targets set by investors.
- No high-pressure growth targets. When you have investors — especially if you’ve raised an A or B round — the targets become increasingly demanding. For example, if your investors have contributed $10 million, they expect a 5-10X return in around 5 years. If part of your funding is debt-based, such as a convertible loan note, a startup must carry the interest until that note is converted into equity.
- Grow at your own pace. Growing organically means going at your own pace with the resources available to you. Hire when you need to, not when a funding round forces you to hire a whole team. Because investors expect high growth to generate a massive return on the capital invested, founders are obliged to scale up their sales and marketing functions. Those teams are required to hit demanding monthly, quarterly, and annual targets. You may also need to raise additional investment to scale further. This increases the pressure on you, while further diluting your equity stake in the business.
- Set your own direction. When you bootstrap, it’s easier to change direction. You might find you aren’t getting enough traction or revenue. You might find you are focusing on the wrong customers, markets, or segments. As a bootstrapped founder, you can make the tough decision to pivot towards more profitable revenue streams faster and more effectively.
Cons of bootstrapping:
- Less money and fewer resources (especially in the first few years). Whether you’ve built a product or service-based startup, every scrap of early-stage revenue needs to support your business. That includes you, your team, and reinvestment back into your business. This isn’t easy. Cash flow management is essential. Poor cash flow is responsible for 90% of business failures, according to the UK Office of National Statistics. Without investment, revenue is your only means of growth.
- Harder to scale and grow. Whether you raise $250,000 or $5 million, you need resources to scale and grow. Founders must hire teams, delegate, and create growth-focused processes and systems. If you’re a startup founder, accomplishing this on savings alone means that you are completely reliant on revenue and retained profits. Achieving growth at scale is more difficult.
- Tough to achieve 3-5X year-on-year (YoY) growth without a sales and marketing team. Organic growth means that your first hires in sales and marketing are crucial. The right people will make a substantial, positive difference. Unfortunately, the wrong hire can set a company back several quarters. High growth is tougher to achieve organically — without investment — so you need to prepare yourself for uncertainty and play the long game.
- Limited access to mentoring, support, and the networks that investors bring to the table. Investors come in all types. When you have supportive investors, they will assist your startup in numerous ways: with mentoring, networks, and partnerships. As a founder without investors, you won’t necessarily have the benefit of these networks unless you actively seek out the right connections.
Now that we’ve considered the pros and cons of bootstrapping, let’s dive into the alternative: seeking investment funding.
Pros and cons of investment funding for your startup
Until recently, it’s been a golden age for startup investing. Hundreds of billions of dollars in angel and VC funding have been raised and deployed in the last twenty years. Founders also make use of loans, grants, and crowdfunding to grow their businesses.
Global companies — such as Google, Amazon, Facebook, YouTube, Uber, and Airbnb, — have emerged from this buoyant investment landscape.
But there’s a downside. For every unicorn and multi-million-dollar startup success story, there are thousands of failures. Investment funding isn’t a silver bullet. It’s merely one option startup founders use to achieve their goals. As a founder, you need to weigh the merits carefully before choosing this route.
Pros of investment for startups:
- More money and resources. The major upside of any outside investment is the funding you receive to drive growth. Recruit the relevant teams. Build a better product. You have the chance to create a longer and more clearly defined roadmap, with the resources in place to support the growth trajectory you’ve set.
- Easier to scale. Outside investment presents founders with additional resources. You have the opportunity to aim for high-growth status (3-5X YoY) by recruiting sales and marketing teams to drive that growth forward.
- Access to mentoring and support. Investors often provide mentoring and support, and open doors to other investors, partners, and even high-value clients.
Cons of investment for startups:
- Investors demand high returns on the capital invested. Investors usually expect a 5-10X return within 5-7 years. Raising another funding round is not unusual, but this means that your company valuation at exit (assuming you get that far) needs to be high enough to generate a return for investors.
- Startups need to keep raising money to grow at the rate investors demand. Let’s assume that the amount of money you’re spending (your burn rate) is $150k a month; this gives you an 18-month runway (if you raise $2.7 million or more). Unless your monthly recurring revenue (MRR) is at least $250k MRR, you’ll need to seek additional funding to scale up.
- Diluted ownership. Investors receive shares and often board seats during each funding round (depending on the terms agreed during the investment process). Every round dilutes the equity and ownership stake you control. Although the exact amount depends on what’s on the term sheet, and the pre and post-money valuations given.
- As a founder, you answer to your investors. Quarterly or ad-hoc updates are expected, and board meetings are mandatory. Depending on the equity stake, and the control investors have over your startup, you could be at risk of removal if targets are not met.
As you’ve seen, there are pros and cons to securing outside investment.
Now let’s weigh up the arguments, and look at a few examples of startups that have bootstrapped their way to success.
Stories of bootstrapping vs. investment
James Routledge, the founder of Sanctus, shared a remarkable story about his journey in the startup world. He understands the impact (positive and negative) of taking investment as opposed to bootstrapping a business.
In 2012, Routledge founded a sports-based social network at university before dropping out and joining the ignite100 accelerator (now Ignite) in Newcastle, England. Unfortunately, his startup didn’t gain enough traction or find product-market fit, so it shut down within 3 years — despite taking 6-figures of investment. Later, James became a VC — before writing about mental health in the startup world — and founding Sanctus.
In a recent article, James wrote about the reasons founders are more hesitant to take investment funding:
“There are the onerous legal terms, high growth expectations, intense pressure at a board level, lots of financial insecurity and the constant need to perform at an exceptionally high level. Plus, you always need to be fundraising to continue to increase your valuation and have the funds to fuel further growth.”
There’s no way around the hard work required to build, launch, and scale a startup. The path forward is not a clear-cut choice. You might choose to bootstrap first and then accept funding on your own terms and from a position of strength; just like Buffer, Sanctus, and Calendly did.
Are there other examples of successful bootstrapped startups?
In a world where funding rounds and hiring sprees are touted and celebrated, we rarely hear about bootstrapping success stories.
As Jason Fried of Basecamp put it: “Look at what the top stories are, and they’re all about raising money, how many employees they have, and these are metrics that don’t matter. What matters is: Are you profitable? Are you building something great? Are you taking care of your people? Are you treating your customers well?”
Hubstaff, a time-tracking and employee project management software startup, has been a bootstrapped company from the start and has thrived without external funding. Dave Nevogt, Co-Founder and CMO of Hubstaff, explained why he and his partner bootstrapped and why, despite receiving numerous offers, they refused to take investment.
Key takeaways: Bootstrapping vs. Investment?
Despite the enormous amount of investor funding available, startup founders don’t need to pursue that option. Even if you choose to raise investment down the road, bootstrapping puts you in a much stronger position to raise funding on your terms.
Securing investment gives founders the immediate advantage of money to recruit teams and the support to accelerate growth. On the flip side, there is more pressure to succeed and you have less control over your business.
Bootstrapping means taking the longer and sometimes scarier route. You’ll experience many ups and downs before you reach a healthy and sustainable rate of recurring revenue. Bootstrapped founders may have budget and time restraints, but they enjoy the luxury of directing their future and that of their business.
As a founder, you need to pick the option that’s right for you and your startup. It’s worth weighing up the pros and cons to decide whether bootstrapping, instead of investment, is the best way forward.