18 May 2009

The Best Funding Strategy Of Them All: None

This blog is generally about all things early stage capital related, but here is a good list of the best strategy of them all: bootstrapping.


Bootstrapping is one of the mantras I repeatedly drive home to the startup companies I work with. It's one of the toughest things to do, but I truly believe it creates the best companies. Here's why:
  • It forces you to be lean and mean-- pinching pennies is a good habit to get into, regardless of whether we're in boom times or a recession.
  • It creates a revenue-driven mentality-- If customers--not investors-- are your primary source of funding, you begin to tune your 'opportunity radar' in the direction of where the dollars are (not the grandiose ambitions of where you want to take the company).
  • It keeps you focused-- I've been through two Silicon Valley booms now, and each one was accompanied by lavish launch parties, schwag, t-shirts, etc. thrown by newly funded startups. Sure, there can be some positive PR buzz when you throw a big bash, but it doesn't last long-- and it takes a serious amount of management's time and attention to do it well. I don't have the statistical models to prove it, but I would bet there is a strong correlation between the extravagance of the party and the rate of startup failure.
  • It gives you leverage when you do want to raise capital-- Just like a bank doesn't want to lend unless it knows you have the wherewithal to pay it back, investors tend to flock to companies that are seeing real revenue-producing customer traction. In other words, firms that don't necessarily even need their investment dollars. Concurrently, I am convinced that most VCs have a radar detector at the door than can sense when a startup is running on fumes. Even if they do still pursue the deal, they will have all the negotiating leverage when they know you are desparate.
  • It lets you chart your own destiny-- And of course, perhaps the top reason to bootstrap is that it lets you keep control of your business. When you sell equity to an investor-- even if they don't gain a majority share of the company-- they will almost always take at least two board seats. After a follow-on round or two of funding, you will effectively be an 'employee', not the top dog you were when you started the business in your garage.
Don't get me wrong-- most of the startup firms I work with are actively in the hunt for outside capital, and investors can and generally do bring a lot more to a deal than just a very large check...advice, contacts, recruitment help, etc. In an ideal scenario, raising money helps you grow faster than you'd be able to otherwise, and gain a marketshare position that would be impossible to achieve by growing organically.

But the company that bootstraps itself into a position of strength will nearly always retain the upper hand-- and be a better firm for it.

UPDATE: here is a new blog post from Greg Gianforte, CEO of RightNow Technologies, giving us "7 Reasons Not to Take VC Money"

No comments:

Post a Comment