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Summary:

Many of today’s startups are obsessed with figuring out the best way to score investors. But for many companies bootstrapping it might result in a better product and a healthier business in the long run.

startup investor
photo: docent/Shutterstock

With 500 Startups Accelerator’s new class introduction video and its notorious chant, you can’t help but wonder if the current system for funding startups is really the best route to building lasting companies. Some even believe that the funding-centric mindset of startups in Silicon Valley is toxic.

I couldn’t agree more. Which is why, other than some modest help, we opted to not pursue investors for our company and go it alone instead. I’m convinced that for a lot of startups (though certainly not all) choosing to bootstrap instead of  searching out VC money is the better strategy for a number of reasons.

A focus on pleasing customers, not investors

When you don’t have a lot of money, you’re forced to turn to the funding source that rarely tolerates mistakes: customers. Specifically, focusing on the product results in the creation of  a “minimal viable product,” a pared-down, core offering that delivers a clear value to customers. And if all of your efforts are focused on designing a product that customers want, enjoy, or find useful, you’ve got a much better chance at success than someone who’s focused instead on convincing investors that the business will be viable one day.

Skeptical? Companies like SquareSpace, WuFoo, Braintree, Lynda.com, 37 Signals, Campaign Monitor, Github, and many more were able to become successful without relying on traditional rounds of funding. And we built our company, Bizness Apps, from the ground up, without any significant outside funding (and we not only turned out just fine, we’re also profitable).

Now, that’s not to say that a business can’t chase both customers and investors at the same time, as clearly many successful companies have done just that. But in our opinion, it can be harmful to worry about what investors think when you should be worried about customers, a much more sustainable and important funding source.

Limits set useful boundaries

Being broke is a wonderful system for cutting through the options and setting limits. It forces you to think creatively about how to get things done. So where many established or funded companies would tend to throw money at a problem and explore all the avenues possible, a bootstrapped company will have to find the best way, fast. This leads to a culture of problem solving that almost every successful company has, to some extent.

At Bizness Apps we learned this while working on our mobile food ordering system. We couldn’t afford to develop both a native and mobile web version at the time, and so we made the conscious decision to develop an HTML5 version initially that would work across all mobile devices. The decision saved months of time and thousands of dollars in development costs. Doing so not only got us to market faster and cheaper, but allowed us to get user feedback sooner and improve the product.

Urgency inspires efficiency

When you’ve got money in the bank and know the bills will be paid for months to come, it’s easy to spend late nights debating the company’s choice of colors for the logo while more important matters tend to get left for tomorrow. The bootstrapped company, on the other hand, is grinding it out to produce a product that sells. A lack of funding has a way of making prioritizing tasks easier. A core sense of urgency usually leads to the most critical tasks being handled first, while less important matters are saved for later (as they should be anyway). The result is that spending is more prudent, the product is designed in a focused manner, team members and resources are employed more wisely, and the business as a whole enjoys a great return on each dollar and hour spent.

Without a huge runway at Bizness Apps we went above and beyond for our first paying clients. Even though our service was “do-it-yourself,” we bent over backwards to help new customers set up their mobile apps for them – knowing that we wouldn’t have a second chance. The extra effort  paid off. Not only did this help improve our product and convert users to paying customers faster, but we gained invaluable feedback along the way.

Enforcing discipline and accountability

There’s no room to be loose with resources, with design, or with responsibilities in a bootstrapped company. As a result, a culture of discipline in many areas of the business tends to arise organically (otherwise, the company falls apart pretty quickly). So deadlines can’t be allowed to slide far, if at all, and every member of the team is held accountable for delivering their share. It’s the discipline of a well-run acrobatic family: Everyone has a job to do, and a mark to hit at a particular time and place, or everything else comes crashing down.

In any industry, maximizing returns from time and money spent is often the most basic central goal. In a bootstrapped company, it’s woven into the fabric of the enterprise. At the end of the day, all entrepreneurs who hope to build something more than just a salable idea should ask themselves one fundamental question: Do I really need funding?

Andrew Gazdecki is the founder and CEO of Bizness Apps, a do-it-yourself mobile app and mobile website platform for small businesses, and Bizness CRM, a CRM for selling to small businesses. 

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Photo courtesy docent/Shutterstock.com.

  1. My response to this is “It depends.” There are powerful arguments on both sides of this topic. Some of the assumptions about VC’s in particular, made by Mr. Gazdecki are actually sweeping generalizations about all investors. That said, an argument supporting Mr. Gazdecki would be that there are simply too many startups, too many incubators, and there isn’t enough money in the World to fund them all.

    But the broad generalization against investors as a “character building” exercise is naive.

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    1. Hey David, thanks for the comment. I agree with you that sometimes raising venture capital makes a ton of sense. However, the purpose of my article was to simply shine light on the benefits of building a business without outside capital, not generalize investors.

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    2. Bizness Apps Saturday, May 25, 2013

      Hey David, thanks for the comment! To clarify, I think more startups should focus less on raising venture capital and more on their customers. Broad generalization of investors was not the purpose of this article.

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    3. Nelson Bostrom Monday, May 27, 2013

      Totally agree. This stance is based on a few examples, but not a lot of data.

      For a great read, check out the posting in SaaStr about eloqua, marketo and parrot as to the growth, funding and ownership of those entities.

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  2. mrblogdotorg Saturday, May 25, 2013

    I’m calling BS. I agree with some of the points about how too much “easy money” could theoretically reduce the “fire in the belly” mentality, but I’m so tired of this meme that it takes literally no money to balloon into the next big thing out of thin air. The companies held up as the models of this mythology all had some money, and most had significantly more money than the myth suggests, meaning upwards of a million dollars early in their life, and sometimes more (a LOT more in many cases). Even “bootstrap” still means some money from somewhere. Fund-raising is a very real and important skill of a founder and of a CEO – and if your leadership can’t do it, your chances for success are greatly reduced. One could argue that EarthLink got pretty far “without traditional rounds of funding” but that doesn’t mean they needed no money.

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    1. Hey mrblogdotorg, thanks for the comment! To clarify, I agree fundraising is an important skill of any CEO and makes sense for many startups, but also knowing when not to raise is equally as valuable. By focusing on your customers and reinvesting profits there’s no reason you cannot build an enduring company without large rounds of outside capital.

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    2. Great points and I agree — fundraising is a valuable skillset of a CEO and raising outside capital can help you accelerate your businesses growth. However, there are benefits to avoiding outside capital and by no means is it required or should be viewed as mandatory when building a business.

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    3. Bizness Apps Saturday, May 25, 2013

      Great points here and I agree with a few of them. Some would suggest that the #1 skill of an entrepreneur is raising capital, and I couldn’t disagree more. Now, don’t get me wrong – countless successful businesses were launched with the help of VC funding. But the main point of this article was to shine light on the benefits of avoiding fundraising. By focusing on paying customers, reinvesting profits, and keeping costs low you can build a sustainable business.

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  3. Steve Leenan Saturday, May 25, 2013

    Amazing article. I agree startups should avoid funding when possible and the competitive advantages built within a successful bootstrapped startup are always obvious. Their product absolutely nails the market need. Sometimes it does makes sense to raise funding though — depends on the business model. Cheers!

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  4. Anything which distracts you from customers is a bad thing. (Including not having enough money to hire developers, scale customer acquisition, and watching your lunch get eaten while you grow too slowly)

    There’s a worst case scenario in the bootstrapped option + funded option.

    Comparing the worst case scenario in one path vs the best case scenario in the other might make you feel better for your choice, but fails at making an intellectually honest evaluation.

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  5. Vinod Shintre Saturday, May 25, 2013

    well said & for sure it empowers an entrepreneur in many ways but again 1 has to be prepared for the long haul as investors can help shorten the journey with an exit , do it otherwise & might take longer but might be worth it. Thin line between company for sheer business or for sheer thrill. Best would for one to see win-win for all & assess the needs.

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  6. Good article, Andrew. My company, Wimoto, is currently crowdfunding our first production run rather than taking investment. Not only does crowdfunding provide some initial capital and help lessen the risk of the production cycle, but we also get invaluable feedback from a diverse range of people before we even ship a product.

    Our efforts are here, if anyone is interested:

    http://www.indiegogo.com/projects/motes-tiny-tough-sensors-to-keep-you-connected-with-your-world/x/2092996

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  7. These are good ideas to follow especially if you are in the process of developing the DNA of your company with a mindset of NOT going to sell it off for a good profit! If you are thinking of making it a good product oriented company, you are on the right path Andrew!

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  8. VC funding is about more than just the money, they provide direction and leadership, and a better understanding of the market. Their insight in the market and product development can safe a startup millions in preventing mistakes. VC funding also provide a start-up with some nice marketing and a cloud of validity that other start-ups struggle with.

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    1. Bizness Apps Monday, May 27, 2013

      Great points, I completely agree!

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  9. I think it all needs to be summarised as

    1. Bootstrapping is the way to go , but need capital too. VCs are an option to explore when one require that extra capital, but needs to be ready for the pitch.
    2. Need to have fire in the belly attitude and the priority to the solution to be given in the first place and then go to market. Branding and other related , but lesser important topic needs to be viewed only from a 35000 ft initially and then to break into details once a fine solution, product, segmentation and positioning is done properly.
    3.Deadlines are and should be considered the dead end and there shouldn’t be any negotiations and slippages. All the have one’s duties rightly and timely performed.

    But overall well written article.

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  10. Praveen Abraham Monday, May 27, 2013

    I think it all needs to be summarised as

    1. Bootstrapping is the way to go , but need capital too. VCs are an option to explore when one require that extra capital, but needs to be ready for the pitch.
    2. Need to have fire in the belly attitude and the priority to the solution to be given in the first place and then go to market. Branding and other related , but lesser important topic needs to be viewed only from a 35000 ft initially and then to break into details once a fine solution, product, segmentation and positioning is done properly.
    3.Deadlines are and should be considered the dead end and there shouldn’t be any negotiations and slippages. All the have one’s duties rightly and timely performed.

    But overall well written article.

    Share

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