Since I didn’t have the money to do what I wanted to do, I had to make do. It was more difficult for sure, but it forced me to focus on what was the most important.
21 May, 2017FORBES.COM
In the tech world, entrepreneurs compete for venture capital money the way carrion birds compete for road kill.
But in my experience, being hungry keeps you sharp. And my advice to all those entrepreneurs who don’t get a bite of the VC pie, is: spend some time figuring out a revenue model instead of scrounging for investment. Here are five reasons I think bootstrapping is better (but not necessarily easier) than taking money from outside investors.
1. Taking VC can shift your focus away from your initial idea. When entrepreneurs start out, they typically have an idea they passionately believe in. They’ve either seen a problem that they believe that have a solution for, e.g. Apple AAPL +0.28%’s early computers which were an alternative to the typical complicated and expensive machines. Or they have a new and potentially disruptive idea, e.g. Apple, again, which turned the music industry literally upside down when it introduced the iPod/iTunes. At first glance, looking for investment seems like the easiest way to give wings to an idea. You have money to pay your bills -- rent, mortgage, salary (or salaries), health insurance, hardware and other necessities -- but the problem is that once you are beholden to investors, you’re subject to their whims. You’re no longer building what’s in your head. If you’re bootstrapped, you can follow your idea and build it in isolation.
2. Taking VC can dull your drive. Once you accept investment capital, you will start to worry about things that are not related to your product or idea. Suddenly you’re focused on setting up your office space, buying furniture and organizing catered lunches, attending board meetings and taking investor calls. It’s a distraction that often squishes the hacker mentality. Suddenly you have to behave like a grown-up, you can’t move as quickly and you start to worry about things that aren’t your products. If you have investment, you’re not going to run your business the way you would if every dime was coming from your own pocket. If you’re bootstrapped, you’re more focused on what matters: your product. From experience I know that you can turn out a really successful product that was built in cheap basement space, using old doors and sawhorses as desks.
3. VC can give you the chance to scale your staff more rapidly than is necessary. When you start out, you might be a team of one or three or five. Buf if you suddenly have a huge influx of cash, you might become a team of 50 -- because you can. Then suddenly you’re dealing with HR issues and trying to manage people who should be busy (because you’re paying them) but aren’t because there isn’t enough work to go around. If you wait to hire until you really need to (i.e., it’s too painful not to), you can be choosy and find the people who are the right fit for for culture and your idea. Two companies with founder/CEOs who I admire are 37 Signals and MailChimp. They both had really small staffs -- MailChimp had just three employees for seven years -- even though they had tens of thousands of customers. If you’re running a lean operation, you can be nimble and focus on issues as they arise.
4. Taking VC can be a long-term distraction. If you’re not beholden to investors, you will spend your days on development and production. With investors looking over your shoulder, you might find yourself doing due diligence, or listening to the board member who tells you to focus on enterprise. It can be a huge time suck. And distractions lead to delays. Think about trying to get a group of two or three people to choose a restaurant versus a group of ten. With two, the decision is easily made. With ten, there will inevitably be someone who doesn’t like pizza, someone who is a vegetarian, someone who wants to find a restaurant within walking distance, et. etc. If you have a team of two or three working on a product or project, you might need six months to finesse and release. With ten people looking over your shoulder, it could take two years.
5. As soon as you take VC, you are basically for sale. Investors don’t give away money to be nice or to give someone “a chance” (not often anyway). They do it because they want ten times, or more, their investment back. Sometimes that means they will do everything in their power to make the companies they invest in look attractive for acquisition. Their primary concern is to make your product look shiny, functionality be damned. Obviously this isn’t the best thing for you, your employees, your brand, or your users. Yes, there are situations where a startup has no choice but to take investment, largely because they have a product with no revenue model. The other important issue here is that many times, the money that a founder gets from an acquisition is the same (or less) that he or she would get from a sale. Anyone who’s studied up on the difference between how VCs and founders calculate valuation (or who’s familiar with the “option pool shuffle” knows what I’m talking about.
Ten years ago, when I started my first business, a graphic design company, I asked my dad to invest in my effort and he said, “No.” I needed six thousand dollarsfor a computer, a printer and three months’ rent. Since I didn’t have the money to do what I wanted to do, I had to make do. I used an old computer, borrowed a printer and worked out of my kitchen. It was more difficult for sure, but it forced me to focus on what was the most important. Ultimately I learned that good clients didn’t care where my office was. They cared that I was on time, on budget, and that I delivered a good product/service. And during those early days, I took on my first web design client because my rent was due. In order to do the job I had to teach myself some basic HTML over a weekend. If all my bills had been paid I might have said, “Sorry, I can’t do that.” But that job planted the seed of the successful tech startup I have today.