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Oct 11

Should I Bootstrap or Raise Capital?

Posted by: Derek Keller        

Should I bootstrap or raise capital? Over the last four years at both Highway 12 Ventures and the University Venture Fund, this is an ongoing dilemma that I’ve seen nearly every startup face. Given how frequently the question surfaces, and the varying solutions, I thought it would be worthwhile to highlight a handful of real world examples that illustrate the advantages and disadvantages of the differing approaches.

There is no ideal company growth rate, each venture is unique

First, let me state the obvious: there is no universal answer. If you’re still incubating an idea or struggling to gain user growth, bootstrapping might be the healthiest solution—allowing you time to validate your product and business model before attempting to scale. I find the pros and cons of both old school bootstrapping and raising modest angel money to be strikingly similar. As such, I should clarify that I’m loosely using the term “bootstrapping” to not only encompass taking capital from friends and family, but to also include raising modest angel money (such that you retain 75% ownership or more let’s say). On the other hand, if you have a compelling idea that attacks a nascent and exploding market, venture dollars may give you the required edge to win. In an effort to be forthright, I must admit I’m a huge advocate for bootstrapping and ideally never raising outside capital unless you’ve truly reached the “add water and mix stage.”

Why Bootstrap?

Ron Gruner founded venture-backed Alliant Computer Systems in the 1980s with a focus on designing and manufacturing parallel computing systems. In Founders At Work (phenomenal read by the way), he mentions how highly he thought of his investors at Aliant, but that he found his mind slightly diverging from the investor syndicate regarding what the company’s future strategy should be. He later founded in 1992 which was one of the first solutions to allow public companies to electronically share data with shareholders. Although he was reluctant to go without the benefits of private equity, he decided to bootstrap for three specific reasons:

  1. Product Validation. Ron wanted to spend more time validating his product before really trying to scale. He figured gradual, organic growth would grant him the time required to rapidly iterate and arrive at a functioning product that didn’t just satisfy customers, but literally elated them.
  2. Control. Although Ron thought well of his past investors, he plainly mentions that he wanted to make sure and maintain complete control of the company’s strategic direction, and worried that without the right investor balance this might not be possible.
  3. Time Requirements. He also cited the significant time commitment required to raise capital, and in general having investors he occasionally felt he just wasn’t spending enough time with customers. In fact, he mentions that he literally wanted to spend 98% of his time with his customers. went on to realize a very healthy exit when they were acquired by NASDAQ in 2006. Interestingly, although they never raised venture capital, Ron mentions if he could go back he would strongly consider raising outside capital to really expedite their growth, but only after he had figured out the business model puzzle and customers had overwhelmingly validated the product’s value with their checkbooks.

To be sure, the above may not apply to every situation, but I think the points still hold some relevant insights.

Why Raise Venture Capital?

On the opposing spectrum, attacking a nascent and exploding market can be next to impossible without significant outside capital to fuel the required growth. I’ve interacted with numerous CEOs on both coasts that resoundingly praise their investor relationships as integral to their company’s success. Given how consistent each of their comments were, I’ll simply portray their recurring themes about what the right investor can add:

  1. Red Flag Awareness (and pattern matching). Regardless of industry, startups share similar critical decision points: which executive hire to make, how to attract additional capital, morphing a bleeding business model, etc. Assuming you’ve vetted that the given investor has significant experience, a good track record and references well, there is a good chance he’s previously encountered a problem similar to those your company might face. If not, he’ll almost certainly have access to other resources (investors or entrepreneurs) that have themselves faced such problems. In other words, just because an investor may not have previously blazed the exact same trail you’re trying to forge doesn’t necessarily mean he hasn’t faced the same crossroads on another trip through that same jungle.
  2. Talent Bin & Network. Although certainly not a failsafe, institutional investors typically have a very large network that often permits unique access to recruiting talent. They are also generally able to make valuable business introductions that can allow startups to circumvent the typical circus show required to get to a decision maker in a given organization.
  3. Ability to Scale (current and future). If the model has been validated on a small scale and the tinder ignited, outside capital can provide the much needed jet fuel to cause eruptive growth. In addition, if more gasoline is eventually needed, a fund’s relationships can facilitate expanding the investor syndicate.

I’ve glossed over both bootstrapping and raising capital, but wanted to try and create a level playing field by identifying a few of the many merits present in each approach. In either case, beware of one of the chief startup trouble spots we see: founding teams losing their “bootstrapper urgency,” particularly when the bank account is flush.


2 Responses to “Should I Bootstrap or Raise Capital?”

  1. avatar Tac Anderson says:

    Great post Derek. I think the two keys are control vs. scale. Do you want to stay independent or do you want to scale faster. Like you said, neither is wrong and both have their advantages, it just depends on what your end goals are.

    • Derek Keller says:

      Well put Tac, too much of either can derail a company and each venture’s solution is unique. In a few subsequent posts I’ll be covering a much more detailed list of the advantages, disadvantages and gotchas of both bootstrapping and raising capital.

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