There has always been a debate in the startup world surrounding company funding – should founders bootstrap their company or raise venture capital? Both options have their advantages and drawbacks, but when it comes to a company’s success, which one comes out on top? I recently had a conversation with a friend who was a founder of a bootstrapped company, and it got me thinking. In this blog post, we’ll explore the differences between the two mentalities and which choice is best for your company.
Bootstrapping a company often means that the founder(s) use their own money or reinvested profits to grow their business. This mindset typically involves a profit-first approach, forcing the founder to understand their customers and deliver value right away. This tenacity and ingenuity can lead to a more innovative product than those that raise venture capital. For example, San Diego’s Profits for Purpose was a bootstrapped SaaS company that sold where all the founders made money. They created a unique product that engaged enterprises and employees to participate in non-profit service work to increase engagement and culture. But, bootstrapping can also be over-romanticized, and companies can quickly burn out.
On the other hand, venture capital backing can give a company the financial resources to grow rapidly, but at the expense of giving up part of their company to investors. These companies have a greater financial cushion to take risks and subsidize their customer contracts with investor dollars. For instance, PforP’s competitors raised venture capital and dropped their solution price by half. Being that all the platforms had similar functions, the competitor was able to take over the market quickly, and PforP began losing deals to these competitors.
PforP eventually made a strategic sale, resulting in a profitable outcome for all founders involved – a commendable achievement. However, they were compelled to sell due to their decision of not pursuing venture capital funding, which ultimately hindered their competitiveness. This goes to show that while bootstrapping has its merits, it may not always live up to its perceived benefits.
When building a business, one must consider the long-term growth potential of their company. With venture capital, founders can access funds to invest in future product development and scaling efforts. Additionally, as seen with PforP’s competitors, it also gives them the financial power to lower their prices and gain access to larger markets – something that bootstrapped companies may not have the resources for.
At the end of the day – just know that if there is money to be made with a product. You will get competition and price compression over time unless you keep innovating and providing value.
