The normal startup process doesn’t go from idea to plan to funding by outside investors. Funding is the exception, not the rule. Most startups are bootstrapped. That means we start a business with what resources we have. We fund it from early sales, promises, savings, and maybe friends and family; not outside investors.
We all undervalue bootstrapping
In business schools, in popular blogs, in business publications, and in general discussion of starting a business, we undervalue bootstrapping. We teach starting a business as if every new business requires sophisticated venture capital. I understand how this can be educational. It means teaching business planning, which is the ultimate business teaching tool, and investment analysis, ROI, IRR etc. Still, of the five or six million new businesses launched in this country every year, only about 5,000 had VC (venture capital) money, and maybe 75,000 had angel investment. The rest were bootstrapped.
I think the investment option is overrated. It’s better to own your own than to land investment, at least if you can pull it off. As the old song says, “God bless the child that’s got its own.” The opportunity itself should determine whether investment is required. lf it takes more resources than the founders can muster, then it needs investment.
The cliché asks which is better, a piece of a watermelon or a whole grape. But what if that comparison is skewed wrong? Which would you rather have, a slice of an orange or a whole tangerine?
I have good associations with bootstrapping. I was on the board as Philippe Kahn took $20K from his father, plus one $90k bundling deal from a PC manufacturer, and levered up Borland International without outside investment until he didn’t need it. He did it with a great product, strong demand, smart management, and cash-only sales instead of the mainstream, working-capital-hungry channels. Borland went public less than three years after it started. Palo Alto Software grew slowly without outside capital. We had to slipstream a larger vendor whose advertising budget was 10x ours. We ended up with 70% share in our niche and owning the company outright.
The value of owning your own
Bootstrapping isn’t just about owning the whole pie. It’s also about the luxury of being able to experiment and, at times, making mistakes. Philippe was unconventional. Could he have had that freedom if he’d had conventional VC financing?
I spend a lot of time these days answering questions I get through email, often with posts on this blog. Way too often people asking me those questions assume that the normal startup process requires getting funding from outside investors. That’s not the real case. Develop your idea, do your plan, and don’t wait for funding. Get going.
The important exception
Some businesses require serious deficit spending to make an opportunity work. For example, the so-called critical mass businesses that need to acquire a large number of users before the product is viable, such as review sites and social sites. In these cases, the opportunity is big enough to offer a return to investors as well as founders. Even for these businesses, however, the founders are better off getting going and doing some of the work before they seek investors.
For more on this: 10 good reasons not to seek investors for your startup.