This guest post recently appeared on TechCrunch: Why Bootstrapping is Overrated. It’s thesis is that taking venture capital gives you many advantages besides the money. These advantages are:
- Access to professional advisors (your board of directors)
- Solid metrics (your company’s valuation) to measure progress
These three items are very important, but VC’s do not have a lock on these. There is nothing stopping a boot strapped company from having a board of directors or board of advisors. Just like the best VC backed companies, bootstrapped companies also build great boards. The difference, and advantage that bootstrap companies have, is that the boards are more heavily weighted to customers and business partner stakeholders, not investors and VCs. This gives much more customer focus instead of an investor focus for the company.
Metrics are important to measure progress, however I think company valuation is the WORST metric to use. Might as well measure progress based on head count or number of computer stations. Why? Unless you are a public company, valuation is impacted more by the existing share structure, dilution and previous valuations than the actual value of the company. At Distil Interactive we were negotiating and getting valuations of $5M and more without revenue and, in hindsight, any real progress. Bootstrapping strips away distracting metrics like valuation and focuses you on the only ones that count: how much money is coming in and how much money is going out.
Finally I believe that VC validation is a pale second to customer validation. VCs may be very smart people and it feels good when smart people also like your idea, but this does not validate your idea. In they end VCs are just people with an opinion and their opinion is no more correct than yours. For a startup, validation comes in only 1 form: customers buying your product. If you think validation can come from other segments, you are deluding yourself.
So there are my quick thoughts on why bootstrapping is NOT overrated. What advantages do you see for either model? Do you have experience you wish to share? Please leave a note in the comments!