Bootstrapped Businesses Have a Far Higher Chance of Success
This article may seem ironic given that most of my other articles are about how to raise venture capital. But before starting down the path of a venture business, I urge startups to consider the alternative — bootstrapping.
I’ve built 4 startups. Two have been bootstrapped and made me rich. The other two went the traditional venture route and neither has been successful. While this is a small data set, I guarantee my own experience is not an anomaly.
A venture business is the only option for a product that will take tens of millions of dollars to build and a huge enough market to make the cost worthwhile. If your company gets to hundreds of millions in revenue and Facebook or Apple is desperate to acquire it, you can retire a billionaire.
But the VC path is a lottery. Despite the adoration given unicorns, only a few make it to the finish line, an infinitesimal fraction of the tens of thousands of companies starting down the path.
Despite what cynics say, the problem with venture capital is not the greed of venture capitalists but the nature of venture funding. Venture funding means growing as fast as possible and aiming for a quick acquisition. Since startup valuations are driven by revenues instead of profits, the only thing that matters is revenue growth.
This requires a constant stream of investment to keep growth turbocharged. The VCs are looking for the one big winner in their portfolio that will return 100x. Once it becomes clear that’s not you, investors will cut their losses. Which leaves your company dead. It’s not personal. That’s just how the system works. Go big or go home.
But there is another way.
Most founders don’t even realize there’s a good alternative and most dismiss it out of hand. Don’t. Bootstrapping may not seem as easy, and you’re unlikely to become a billionaire, but the odds of becoming a millionaire are orders of magnitude higher.
While a venture business focuses on revenue growth to reach a huge acquisition in five years, a bootstrap business strives to build a sustainable, profitable business.
Without the steroids of capital injections, a bootstrapped business will grow slower. It needs to be scrappy and live within its means.
But if you have a good product, even for a small niche market, the bootstrap business can make the founders millions.
However, once you take equity investment, there’s no getting off the venture path. So before signing your first SAFE, before even incorporating as a C-Corp (a bootstrap business should be an S-Corp or LLC), think through the business plan and consider whether bootstrapping is the way to go.
The Advantages of Bootstrapping
Why bootstrap your startup if returns are smaller than taking venture capital? Here are my 6 reasons:
- The economics of venture capital requires finding companies that will have a huge acquisition or IPO within 5–7 years. This is only possible if the company reaches at least $25 million in ARR and is in a space filled with giants that acquire startups at high multiples. The vast majority of startups don’t meet these criteria, no matter how hard they try to convince investors otherwise. Ditch the pitch with absurd metrics showing how you’ll reach $100M in 5 years and instead build a solid product for a profitable niche that really needs the product.
- You’re far, far more likely to be successful. It’s infinitely easier to build a solid $10M product for a niche audience than a $100M product for wide usage.
- You can build the business in the long-term interests of yourselves, your employees, and your customers instead of growth at all costs in a sprint to a quick exit.
- The business is yours. You make your own decisions instead of reporting to a board whose only concern is the exit.
- You generate profits to pay yourselves. A scrappy company generating $10M in revenue can earn $3M or $4M in profit. 2 or 3 founders can each take home $1M paychecks with enough left over for nice bonuses for the employees. Every year. Scale it to $20M and take home $3M per year.
- When you’re ready to move on, you can sell the business to a competitor or private equity. It may take longer and the price will be smaller, but you and your co-founders keep it all yourselves instead of getting the leftovers after the venture capitalists have taken their share.
Choosing Between Bootstrap and Venture Paths
If there’s no way to build the business without tens of millions of dollars in funding, then venture capital is the only option. But if you can get to market on a reasonable budget, before pitching to investors, consider whether bootstrapping might be a better alternative.
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