Who needs investors! Why many startups should bootstrap instead
Updated: Dec 18, 2018
With 500 Startups Accelerator’s new class introduction video and its notorious chant, you can’t help but wonder if the current system for funding startups is really the best route to building lasting companies. Some even believe that the funding-centric mindset of startups in Silicon Valley is toxic.
I couldn’t agree more. Which is why, other than some modest help, we opted to not pursue investors for our company and go it alone instead. I’m convinced that for a lot of startups (though certainly not all) choosing to bootstrap instead of searching out VC money is the better strategy for a number of reasons.
A focus on pleasing customers, not investors
When you don’t have a lot of money, you’re forced to turn to the funding source that rarely tolerates mistakes: customers. Specifically, focusing on the product results in the creation of a “minimal viable product,” a pared-down, core offering that delivers a clear value to customers. And if all of your efforts are focused on designing a product that customers want, enjoy, or find useful, you’ve got a much better chance at success than someone who’s focused instead on convincing investors that the business will be viable one day.
Skeptical? Companies like SquareSpace, WuFoo, Braintree, Lynda.com, 37 Signals, Campaign Monitor, Github, and many more were able to become successful without relying on traditional rounds of funding. And we built our company, Bizness Apps, from the ground up, without any significant outside funding (and we not only turned out just fine, we’re also profitable).
Now, that’s not to say that a business can’t chase both customers and investors at the same time, as clearly many successful companies have done just that. But in our opinion, it can be harmful to worry about what investors think when you should be worried about customers, a much more sustainable and important funding source.
Limits set useful boundaries
Being broke is a wonderful system for cutting through the options and setting limits. It forces you to think creatively about how to get things done. So where many established or funded companies would tend to throw money at a problem and explore all the avenues possible, a bootstrapped company will have to find the best way, fast. This leads to a culture of problem solving that almost every successful company has, to some extent.
At Bizness Apps we learned this while working on our mobile food ordering system. We couldn’t afford to develop both a native and mobile web version at the time, and so we made the conscious decision to develop an HTML5 version initially that would work across all mobile devices. The decision saved months of time and thousands of dollars in development costs. Doing so not only got us to market faster and cheaper, but allowed us to get user feedback sooner and improve the product.
Urgency inspires efficiency
When you’ve got money in the bank and know the bills will be paid for months to come, it’s easy to spend late nights debating the company’s choice of colors for the logo while more important matters tend to get left for tomorrow. The bootstrapped company, on the other hand, is grinding it out to produce a product that sells. A lack of funding has a way of making prioritizing tasks easier. A core sense of urgency usually leads to the most critical tasks being handled first, while less important matters are saved for later (as they should be anyway). The result is that spending is more prudent, the product is designed in a focused manner, team members and resources are employed more wisely, and the business as a whole enjoys a great return on each dollar and hour spent.
Without a huge runway at Bizness Apps we went above and beyond for our first paying clients. Even though our service was “do-it-yourself,” we bent over backwards to help new customers set up their mobile apps for them – knowing that we wouldn’t have a second chance. The extra effort paid off. Not only did this help improve our product and convert users to paying customers faster, but we gained invaluable feedback along the way.
Enforcing discipline and accountability
There’s no room to be loose with resources, with design, or with responsibilities in a bootstrapped company. As a result, a culture of discipline in many areas of the business tends to arise organically (otherwise, the company falls apart pretty quickly). So deadlines can’t be allowed to slide far, if at all, and every member of the team is held accountable for delivering their share. It’s the discipline of a well-run acrobatic family: Everyone has a job to do, and a mark to hit at a particular time and place, or everything else comes crashing down.
In any industry, maximizing returns from time and money spent is often the most basic central goal. In a bootstrapped company, it’s woven into the fabric of the enterprise. At the end of the day, all entrepreneurs who hope to build something more than just a salable idea should ask themselves one fundamental question: Do I really need funding?