When to bootstrap and when to chase investment

18th April, 2017

Are startups too attached to the idea of bootstrapping for their own good?

There’s a growing debate within the startup community about the right time to stop bootstrapping your business.

The startup dream is to bootstrap your way to a billion-dollar company, giving away no equity in the early stages of the business to reap the biggest possible benefit.

However, technological disruption is making this increasingly difficult to achieve.

The CEO of Gruntify, Jamie Leach, told The Pulse that there is an increasing body of evidence that it was virtually impossible to bootstrap to the point of critical mass.

“Technology is getting faster and faster, and enabling people to take you out of the marketplace. It’s no longer about location, location, location,” said Leach.

Leach, an ex-commercial banker, has been studying the effects of bootstrapping for a PhD.

She said while bootstrapping was entirely appropriate for an early-stage company, many startups are addicted to it.

They try to bootstrap their way through the customer acquisition phase to avoid giving away equity in their business.

The game plan is generally to bring in venture capitalists or private equity when the company needs to put the foot down on the accelerator.

However, Leach said that the point where a startup should do that is drawing nearer and nearer.

“The moment you’re out there marketing your product, somebody’s going to be hunting you down,” she said.

“It’s a balancing act between trying to stay ahead of that curve, trying to keep that competitive advantage, and time being against you.”

As soon as a potential competitor gets wind of what you’re doing, they will seek to replicate your model and simply scale quicker than you do.

Technology has made this process much, much easier.

Not only does bootstrapping for longer than you need open you up to a hungry competitor, Leach said, but it’s also bad for your business.

She cited evidence from The Diana Project which  indicates that the longer a business bootstraps, the shorter lifespan it has.

“Not only do you grow at a slower pace,” Leach said, “but a startling piece of research says that the longer you bootstrap, the shorter the longevity of your business.

“People need to be mindful that bootstrapping can end up harming them if they do it for too long.”

Pride cometh before a fall

One of the myths in startup-land is that going it alone is a worthy pursuit.

“Making a success on your own is something that’s celebrated,” Leach said.

“Depending on the form of the bootstrapping, some people might celebrate being able to achieve things without having to give up any equity in the business.”

Aspiring startups see those in charge of unicorns talking fondly of their bootstrapping days, and it ends up being mythologised.

“I think there is a psychological reluctance to give up control,” said Leach.

“People are saying ‘well I want 100 percent of the billion-dollar company’ rather than having 20 percent and having $200 million.

“It’s a problem because people are confusing greed with commercial acumen.”

When to look to funding

She says giving away some equity in a business which ends up thriving is preferable to keeping all the equity in a business that goes nowhere.

The positives of seeking investment in the form of either private equity, angel investment or venture capital is that it often brings other things to the table aside from cold, hard cash.

“What people forget is that when people invest in your business they bring networks, they bring experience and they bring in a spot at the table. That can all be very positive if you bring the right investor into the business,” said Leach.

This is because they want to see a return on their investment, and they want to make sure they get it.

However, investment can also come with strings in the form of extra scrutiny and targets to be met.

Leach says the key is to keep enough equity to ultimately retain control of the business, but make sure you don’t miss the boat on the growth injection investment can represent.

“I think it’s great to try to do more with less initially and to try to bring customers on board,” she said.

“But where time is going to cost you is where pride needs to be taken out of the market and dollars sought to scale up and remain competitive.”