Why Bootstrapping is NOT Overrated

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
  • Validation

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!

Advertisements
This entry was posted in Uncategorized. Bookmark the permalink.

2 Responses to Why Bootstrapping is NOT Overrated

  1. Ajay says:

    Great blog!

    Bootstrapping is a valid route – it’s a great way to avoid the distraction of raising funds. But it most easily supports models which encourage quick cashflow generation, which may not end up becoming the most disruptive businesses.

    Having VC funding allows you to run more experiments more quickly, attract staff + press. These are all things you can do via bootstrapping, but in general it takes more time. Further, some projects are more difficult to bootstrap (Eg, hardware).

    On a more macro view, the prevalence of investor money in the Bay Area is a big reason that many game changing companies come out that geography. The pain of fund raising is still there obviously, but it is probably a lot lower than trying to raise in Ottawa.

    • kentonwhite says:

      Yes! Fundraising is a necessary step for many companies. And having the capital lets your scale to bigger things than through boot strapping. Here in Ottawa I encounter many people who think fundraising is necessary for their startup without really looking into why they need funds. When we started Distil, we raised funds because, well that’s what you did. We didn’t really look at why we were raising money or other alternatives. Ottawa’s current start-up poster boy, Shopify, bootstrapped exclusively until they needed to scale. Shopify and Distil were founded roughly st the same time. Distil has been sold and Shopify is rocking the the hosted e-commerce space. I leave that as just another data point in the bootstrapping v fundraising argument.

      Kenton White

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s