10 Pros and Cons of Bootstrapping
“Free the founders.” I was scanning headlines the other day and one about a downturn in venture funding popped out. The quote was from a fledgling biotech investment firm with a novel approach to funding startups — more equity for founders. The idea being that if VC firms allow entrepreneurs a greater stake in their own company, they are all more likely to succeed. Anyone else see this as a little upside down?
Growth-at-any-cost was never a sustainable way to scale a business. There is a better way to build a high-growth software company.
The better way is obvious to me — self-funding and organic growth. But one other thing stood out to me in that article that gave me pause. An analyst noted that most folks under 40 have known no other reality than frothy funding, hype culture, and eye-popping valuations. Sure, people might know a small business owner who built on their own terms. But when it comes to high-growth technology companies, an entire generation of entrepreneurs see VC funding as the only path forward because it is all they have seen modeled.
This is one of the reasons why we launched the Bootstrap Movement earlier this year. I have experienced all sides of building a software business and am passionate about sharing the ways that bootstrapping can benefit companies and individuals. Aha! sailed past $100 million in annual recurring revenue in less than eight years with no outside funding — completely bootstrapped, remote, and profitable. We did it by following operating principles that we now share with anyone who dares to build differently.
I deeply believe that taking a long-range view is the best way to build a sustainable business. (You probably know this already.) So here are the pros and so-called cons of bootstrapping, as I see it:
Advantages of bootstrapping
Bootstrapping is more than how a business is funded. It is a mindset. Over time it becomes part of your company’s DNA — everyone in the organization operates with purpose and is dedicated to creating real value.
You are responsible: Bootstrappers answer only to your customers, colleagues, and community.
You pick your focus: The vision you set is the one that you work towards. That independence is not easily replaced.
You avoid waste: Resources are precious. Time, money, people — all are deserving of respect and consideration.
You have creative freedom: As opportunities emerge, you are able to take action and take advantage — without having to vet your choices with investors who have their own motivations.
You take a long-range view: Decisions are made based on what is most beneficial to reaching your goals versus what is easiest, cheapest, or trendiest.
Disadvantages of bootstrapping
Yes, I am pro-bootstrap. But I know it is not for everyone. Bootstrapping requires you to confront convention. You need to believe deeply in what you want to achieve, have laser focus, and show exceptional dedication.
You are responsible: Yes, this one is both a pro and a con. You are the one accountable for your successes and failures. It is a weighty privilege to be answerable.
You work hard: Bootstrappers give everything they have and more. And even then, you may not have very much to show for it financially. But there are other metrics of growth that can provide lots of lessons.
You may not earn money: This is a practical constraint. Be prepared not to take a paycheck for a while or to accumulate reasonable debt. Most startups should have at least a year or two of runway.
You need to seek advice: Venture firms often promise a network of advisors. Bootstrappers seek out advice and input from folks you trust. (The right cofounder is particularly helpful here.)
You need resilience: There will be hard challenges on your journey, no matter how you fund the business. But bootstrapping can be a bit more lonely. How you overcome and what you learn will strengthen you and the company.
Obviously there are certain industries and types of companies that need significant investment — infrastructure or research costs, for example. In those cases, self-funding might not be possible and the right investment partner can help hasten advances. That is why I always stress that bootstrapping is a mindset. You can adopt and operate from that mindset regardless of whether you raised money.
However, bootstrapping always keeps more options open, which is particularly helpful when you are building something new. And it can insulate you when markets change. When economic pressures squeeze, the truth becomes impossible to ignore. You cannot fake value.
Private company valuation is an ever-shifting mirage. A growth-at-any-cost approach that requires a bull market was bound to turn eventually. It always does.
Think about the majority of startups — the ones that sought out investment dollars and chased value over valuation. A few became lasting businesses (even if most still do not turn a profit). But we have and will continue to see the majority burn out, either in a fiery explosion or a slow smolder. Both endings hurt real people. And I cannot think of a greater con than that.