Founders hear and can read a lot about bootstrapping their company versus raising investment. The fact is that most Founders bootstrap their company because they don’t have a choice.
There are strategic and operational differences in running a bootstrapped company versus venture backed. Most of the differences are driven by less capital to deploy, which makes sense, but some of the differences are also a result of a mindset and culture that goes beyond how much cash is in the bank.
Here are some strategic and operational differences I’ve identified over time between the two company funding approaches:
Team — Bootstrapped companies hire based on potential, and venture backed companies hire based on track record. Bootstrapped companies tend to hire team members who have the potential to become great at their craft and the role the company needs them to play to facilitate the company’s growth. Bootstrapped companies make a bet on new team member potential whereas venture backed companies add new team members who have been there and done it. Venture backed companies want to and need to scale quickly resulting in less time and patience for a new team to grow into their craft and role. Venture backed companies need immediate impact and contribution from new team members.
Sales vs. Marketing — Venture backed companies use a significant portion of the monies raised to accelerate the awareness of the company and its product. Ramping up marketing to acquire more customers and to do it more cost-effectively at a large scale is paramount to most venture backed companies. Bootstrapped companies rely more on selling than marketing. Bootstrapped companies are often much more targeted and niche than are venture backed companies. This drives why some of the companies are bootstrapped or venture backed. Venture investment doesn’t make sense for most companies that are going after a small market with a very niche product. The best and most successful bootstrapped companies get and stay very close to their customers because they know that their customer proximity and knowledge is their marketing strategy and spend. Bootstrapped companies know precisely who they are selling to, why, and what their value proposition is.
Expenses — Bootstrapped companies increase their investment and expenses in all areas of the company as the company’s customer count grows. Venture backed companies spend based on where they believe the company will be in 1–3 years. The financial books of a bootstrapped company typically look better to an accountant than those of venture backed companies because bootstrapped companies likely make a profit, even if small and have a balance sheet that is fairly normal. The traditional financial books of a venture backed company often look atrocious. Expenses at bootstrapped companies are managed and scrutinized with great detail and angst whereas venture backed companies spend to a future state that isn’t tomorrow or next week.
Speed — Speed is important in every startup. The pace at which a bootstrapped company can operate versus a venture backed company is probably the biggest negative to bootstrapping. Bootstrapped companies have to grow more methodically, and although being methodical does have advantages, it also means the company will evolve and grow slower than a venture backed company. Having less financial capacity means that bootstrapped companies can’t hire as quickly and as many team members, so the product evolves slower. Bootstrapped companies have to control their spend to be in alignment with what monies are being produced through operating and often have more monies to invest in the company as they sign new customers. Bootstrapped companies have to use growing more slowly than venture backed companies to their advantage by ensuring each major evolution of the product and company pushes the company to the next level of maturity and stability. Venture backed companies can regress and bounce back because they have the financial resources to weather these storms. Bootstrapped companies that regress too far and too many times likely won’t bounce back eventually, therefore they have to use their slower and more methodical growth to ensure they are growing in the right ways at the right times.
Less Noise — A huge positive for bootstrapped companies over venture backed companies is less noise. Bootstrapped companies tend to have significantly fewer people and voices in and around the company providing their opinion and advice. Many bootstrapped companies have a limited number of Founders, board members, and advisors. Often bootstrapped company boards are made up of just the Founder(s). Fewer people chiming in on the company decisions and helping to solve problems can be very useful by minimize distractions. Founders of venture backed companies can be torn in many directions just trying to manage all the people in and around the company. Bootstrapped companies are better able to put their energy and focus toward customers, the problem, and the product without having to worry about board, investor, and advisor dynamics. Managing fewer people and being able to focus on the core of the business is a major advantage for bootstrapped companies.
Confidence — Bootstrapped companies start out with less confidence than venture backed ones. Venture backed companies have the validation of getting investment, which proves that at least someone else gets and believes in what the company is doing. Bootstrapped companies early on only have their small team and the knowledge of the problem they are attempting to solve. Venture backed companies have a swagger and confidence about them, that in many cases, is over-inflated. Bootstrapped companies gain confidence little by little over time. Customer by customer a bootstrapped company starts to believe more in what they are doing and that it might actually work. Bootstrapped companies put their heads down and grind. Their confidence comes from knowing they can grind harder than their competitors and they have proven to themselves that they are willing to grind it out and play the long game. Bootstrapped Founders and companies earn every bit of progress and success they have, this gives them the confidence along the way to know they have the stamina and ability to keep doing it. Their validation comes not from getting investment but from the daily operation and evolution of the company. That is a powerful thing. No shortcuts for bootstrappers equals a humble, respectful confidence that is unmatched.
Many Hats — The Founders of bootstrapped companies wear many hats and learn every aspect of running a company. They don’t have a large enough team and often can’t or don’t want to spend money on people to do the day to day activities of running the company. As I write about in my book, The Founder’s Manual, bootstrapped Founders are often the first at most of the core roles inside a company, because there isn’t anyone else. Just because they are doing it first doesn’t mean they are great at it. Bootstrapped Founders learn the various roles of running a company to an adequate enough of a level to get by and for the company to sustain. They aren’t experts in any of it, but they learn and can do enough to get by. They get good at sales, marketing, accounting, human resources, and whatever else comes up. They figure it out, whereas venture backed companies hire experts into each of these areas to support the company’s fast pace and growth. There isn’t time for venture backed Founders to learn and to become adequate at the various operational areas inside a company. Bootstrapped Founders are doers and venture backed Founders are managers. Both can evolve to be great leaders from their staring places. Venture backed Founders can tell you how every aspect of the company runs. Bootstrapped Founders can do every aspect of the company and probably have on some level.
Is operating a bootstrapped company harder or worse than a venture backed one? In some ways yes and in some ways no. But mostly it’s just different. Bootstrapped Founders should not look at it as being at a disadvantage. They need to understand the differences and use them to their advantage.