Why Our Conversations Around Startup Funding Are All Wrong

July 29, 2014

Every time you pick up a business magazine, look at the agenda for a lean startup meetup, or listen to an interview with an entrepreneur, you hear people talking about how to land funding for your startup, hailing companies that have managed to secure investment as the holy grail of success.

But bootstrapping? Building a company that pays for itself from the beginning? Figuring out how to keep costs low when you’re starting out? It’s barely part of the conversation, even though most budding companies would be better off taking that approach.

Why have we glamorized borrowing and spending rather than bootstrapping and going truly lean? A column by Thomas Goetz in May’s Inc. Magazine (can’t find the link) goes so far as to suggest it’s smart to max out your credit cards and go into debt for your startup. Other founders, too, tell tales of how they used all their savings and ended up living on a friend’s couch… before finally striking it big. (We almost never hear about the entrepreneurs who fail to strike gold after depleting their savings and spending every investment dollar.)

Why are we telling aspiring entrepreneurs that this is a good idea? Especially when many companies are just that at the beginning… an idea. In early stages and beyond, it’s far smarter to do everything in your power NOT to seek funding. And while you’ll likely need to put some money into your big idea, certainly don’t spend your entire safety net. Instead, invest grit and time and energy, and work your butt off to create a freedom fund, even if it means earning for a while through another job.

For some startups, funding might be necessary, like when you’re building a physical product or the success of your idea relies on scaling quickly. Some young companies look to investors for leadership and experience, too. But for most of us, the conversation should be around how to build an awesome company without taking funding, not how quickly you can convince investors to give you cash. (Click to tweet this.)

Funding for startups

The big thing you lose when you get funding from investors

Why do I advocate bootstrapping over seeking funding?

Because for all the things you gain when investors decide to back your company, here’s the big thing you lose: autonomy. That idea that’s been your baby from the beginning now belongs to someone else, too. And while they might not quite be willing to stay up all night feeding it, they’ll probably want to make sure you’re staying up all night working on it. They have a stake in your success. This not only means a loss of control; it also results in a wee bit (read: crushing pile) of pressure.

Bootstrappers only have to answer to themselves and their clients/customers/users, which means more freedom to create what really matters to you. Unfortunately, you’ll have to deal with some players in the entrepreneurship community who think you’re not the real deal because you’re not spending other people’s money. This school of thought is inaccurate: my company works with a number of startups, some funded and others bootstrapped, and the funded startups are no more of the real deal than the bootstrapped ones.

Here’s why: because they figure out how to make money, and they figure it out quickly. Isn’t that the goal of every company? Sure, some companies aim to make a difference in the world or look to scale without bringing in revenue initially so they can grow big enough to sell (and hopefully make a bigger profit). But a company isn’t really successful if it can’t figure out how to bring in cash — and bootstrapped companies that succeed figure out how to make that cash pretty early on.

To be fair, entrepreneurs who fall into one camp or another often have different goals. Founders of startups seeking funding are usually looking to build a business that turns into an empire, one that acquires other businesses or perhaps is acquired itself. Bootstrappers, however, are sometimes, though not always, lifestyle entrepreneurs.

I founded my content marketing business, for example, not because I wanted to create a company I could eventually sell (although I see now how that could be a possibility eventually), but because I wanted a business that would support my life. That doesn’t mean my team and I don’t work hard — but we believe you can work hard and do amazing work while prioritizing family, health and/or travel.

Which route is right for you?

These two groups — seeking funding verses bootstrapped — typically behave differently, with one plowing ahead, hiring and pushing itself to become a growth company (which has advantages and disadvantages), the other growing more conservatively depending on how quickly revenue is coming in (also for better or for worse). I’ve taken the second route, adding to my team — now 10 part-timers — as revenue increased.

Businesses like ours tend to hum quietly in the background, often earning hundreds of thousands of dollars of revenue a year or more (and creating jobs!) while startup entrepreneurs take the stage. But I wonder, which type of business has a higher rate of success? A bit of research led me to this article in The Wall Street Journal, which reads:

Overall, non-venture-backed companies fail more often than venture-backed companies in the first four years of existence, typically because they don’t have the capital to keep going if the business model doesn’t work, Harvard’s Mr. Ghosh says. Venture-backed companies tend to fail following their fourth years—after investors stop injecting more capital, he says.

Apparently, you’re more likely to succeed if you do get funding. But look who does better long term: those of us who bootstrap.

So stay lean, and chase investors only as a last resort. It’s a far cry from the get-funding-now mentality that’s so pervasive in today’s startup culture, but it might just make you more successful and happier in the long run.

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7 Replies to “Why Our Conversations Around Startup Funding Are All Wrong”

  • So true.

    It sounds great on paper to get a pile of cash. But that immediately (and inevitably) makes PROFIT the number one motivating factor, instead of the (wonderful) motivating factor we have on team Socialexis: enjoying helping our clients, and enjoying our life.

    I’ll take what’s behind door number 2, thank you.

  • Sylvia says:

    Excellent article! Bootstrap is what I advise wannabe’s who waste precious time chasing non existent grants and who don’t qualify for loans.
    Good old fashioned hard work, taking a second job and saving toward your dream is a foreign concept. Scale back your dream biz and start smaller. Be realistic. Don’t believe Angels and Venture Capitalists are going to hand you a wad of cash. They don’t fund the average Joe/Jane. It can be done, but you need to work for it!

  • Tim Huntley says:

    Alexis,

    While I was one of the ones who raised outside funding, and thankfully had great partners, I agree 100% with your post. Too often companies that raise money fail to learn what it means to operate a business, and lacking that skill, they ruin what might have been a successful company.

    Good Luck!

    …Tim

  • Anne says:

    Great article. As an artist entrepreneur, (arta-preneur?) the bootstrapping mode of operation is what we do. Most artists build their “professional life” slowly and don’t take on debt or investors. I’m glad that some folks in the small business start up world are realizing that big and fast isn’t always best for the long run.

  • Awesome article! I love the point you made about funded businesses that tend to fail after the up-front money dries up. In mine and my husband’s books, sacrificing and bootstrapping is the only way to go. Is it tough? You bet. But the tough survive the long haul. Plus, it’s just annoying having someone else own your business instead of you.

  • I do agree with what you said about losing autonomy when you have investors for your company. The way I see it, it seems a lot like having your mother breathing down your neck as you’re washing the dishes or something. It’s all sorts of uncomfortable, and really, you want to be comfortable if you want to create something great. I personally think that bootstrapping, although a lot scarier, reaps the bigger rewards in the long run- not just financially but in the level of accomplishment that you feel as well.

  • Again, love this article! I curated this for my own blog, and would sure appreciate a link back if you have a spare moment. Thanks so much!
    quityourjobandthrive.blogspot.com/2014/08/why-our-conversations-around-startup.html

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