There’s a growing divide in the startup world on the ethics of receiving funding. Many founders, especially in the bootstrapping community, saw the increasing number of struggling unicorns as a strong signal that the traditional venture capital model is broken.
In addition to unicorns, when you have cases like Motionloft or Clinkle, that raise millions of dollars only to spend a hundred thousand at Las Vegas night clubs or millions living in a San Francisco luxury tower posing with wads of cash in their hands, the enmity is not surprising. Even without an intention to misuse investor cash, with the average venture-backed startup failure rate hovering around 75%, its natural for people to ask whether VC funding is a big waste of money.
On the other hand, with VC confidence declining, there has been more buzz around bootstrapping (self-funding) startups. Founders often bootstrap because they have a viable way to profit from the beginning that offsets costs quickly, but there’s often an idealistic aspect that drives them, too. Some bootstrap because they became an entrepreneur to be their own boss in the first place, while others do so as a movement against the VC-capitalist system that wants you to ‘scale forever for scaling’s sake’. No need for an IPO; they just want to make a business that’s the right size for them.
As a former associate at a VC company and startup accelerator in Tokyo, and a current bootstrapping entrepreneur, I want to chime in about this topic.
I quit working at a VC firm two years ago to become an entrepreneur, and since then I’ve funded my entrepreneurial projects by creating multiple income streams: Airbnb hosting (currently 10 properties), DJing, app/web designing, and modeling.
These income streams gave me the privilege to have the time to bootstrap my projects. It’s worked out for me so far, but I would call it a privilege because there was definitely luck involved. If I had quit my job a few years earlier, when there was no Airbnb, I might not have been so lucky.
That’s why VC funding is so important.
Many talented people have the potential to give the world extraordinary products, but many of those products don’t have an immediately viable business model, or the founders aren’t lucky enough to secure a backup income stream to bootstrap their company. But that shouldn’t mean those products don’t get to exist.
If there’s a party that shares your vision, like angel investors or VCs that can help alleviate the financial barriers to making that product, then great! Effectively, investors are just part-time cofounders that contribute to the cause through money. It gives the founder a fighting chance to create and spread a product that improves the world.
You wouldn’t be sitting in an Uber today if they had bootstrapped their entire on-demand taxi operations. They simply wouldn’t have had the funds to come to your city as quickly as they did. Who knows how long SpaceX’s vertical landing would have taken if they had tried generating their research budget from quarterly profits. Hell, the only reason I can bootstrap right now is because Airbnb received massive venture capital funding to open shop in Japan.
Despite being the cheapest era ever to start your own business, there are still unavoidable costs that far exceed the funds that an individual has. There’s almost always one cofounder ready to risk it all, but the other cofounder has children to feed, or college debt to be paid, and can’t leave their job to join a startup without financial incentive. Not everyone gets the chance to bootstrap.
So sure, bootstrapping your company is definitely cooler. No boss, no pressure to feed the insatiable capitalist system, and complete internal ownership of shares. It’s sort of like being the kid that gets to drive to school by himself, while everyone else is getting dropped off by their moms: Their independence deserves acknowledgement, but you’re all just classmates in the end. Nobody should be regarded as sub par.
There is, however, a critical lesson that I believe VC-backed startups need to take from the bootstrap mindset: Using other people’s money is easy. Anyone can do it. But a lack of money puts a fire under your seat and will force you to innovate. If your engineer and designer can’t come on board without a salary that you can’t afford, then maybe it’s time you learned to code and design.
(Featured image source: http://negativespace.co/)
I'm on Twitter @shoinwolfe if you ever want to talk.