By Eddie Lou, co-founder of CodaPet and OneGoal, venture partner at Mercury Fund, and an active angel investor.
getty
As an entrepreneur, one of the biggest decisions I have had to face when building capital is whether to raise venture capital or bootstrap. For many founders, the allure of raising VC seems obvious and offers many advantages.
I experienced this first-hand with my initial startup where I raised over $50 million in VC funding between 2012 and 2017. Prominent VCs from Silicon Valley, New York and Chicago became my equity partners and significant shareholders. This led to a “grow at all costs” mentality, where we tried various growth initiatives, developed multiple product lines and hired highly experienced executives.
Benefits Of Venture Capital
There were many benefits of raising venture capital that I considered at the time. Here are the big ones you likely are also considering:
• Access to capital: Raising venture capital provides access to millions of dollars of capital, enabling founders to fund growth initiatives, accelerate their growth trajectory and achieve goals faster.
• Strategic guidance: VC firms offer strategic guidance and support to founders, providing advice on product development, marketing strategies, hiring practices and more. Experienced VC investors have pattern recognition that can be invaluable to first-time founders navigating the challenges of scaling their businesses.
• Valuable networks: VC firms provide founders with access to valuable networks of industry experts, potential customers and other entrepreneurs. These networks can help founders build relationships, gain exposure for their companies and identify new opportunities for growth.
• Increased credibility: Raising venture capital can increase a company’s credibility, for it demonstrates that the business has been vetted and approved by professional investors who have confidence in the company’s potential.
• Faster growth: With access to more capital, startups tend to be able to grow faster than they would by bootstrapping. This can help companies achieve market dominance before competitors catch up.
Challenges To Venture Capital
While raising VC can be exhilarating for founders, it can also lead to significant challenges in scaling and achieving ultimate goals—the big outcome and freedom from the rat race that so many entrepreneurs seek. This risk/reward equation dramatically changes because, in my experience, VC firms require a 10-times multiple, which means building the business toward something like a $1 billion exit instead of a $250 million exit.
Instead of managing a lean, higher-performing team, the venture capital led me to grow my team from 50 employees to 220 employees in a year. It also led me to increase my burn rate from $250,000 a month to $1 million a month. Ultimately this goal of satisfying multiple masters and 100%-plus growth led me to hire a big-time technology executive as CEO.
While the new CEO was making decisions, my professional time freed up. Having been a VC for 10 years prior to my first startup, I began angel investing with my newfound time. Since stepping away from the CEO role, I have since invested in over 60 startups. This more recent journey has given me much more perspective on how many great founders have built companies to great outcomes through both raising venture capital and bootstrapping.
With some luck, I chose to invest in several exceptional founders that exited shortly after I invested. Two were bootstrapped, while two raised significant VC dollars before they were acquired.
Advantages Of Bootstrapping
Over the past year, I’ve been quietly working on my next startup. This time around, my co-founders and I have decided to bootstrap the business, meaning that we plan to grow with little or no external funding. Instead, we’ll be using personal savings, revenue generated from the business and scrappy resources to build our company.
Although it may seem daunting at times, there are several reasons why I’ve chosen to bootstrap my startup again and why you might consider it, too.
• Retain Autonomy. Bootstrapping a startup allows entrepreneurs to maintain complete control over their business decisions without having to answer to outside investors who may have a different agenda. By keeping their equity and decision-making power intact, founders have the freedom to chart their own course and pursue their vision on their own terms.
• Learn Essential Skills. Bootstrapping a startup forces entrepreneurs to learn key skills such as budgeting, digital marketing and product management, which are essential for building a successful business. These skills are learned through hands-on experience, enabling founders to be intimately involved in all aspects of the business and develop a deep understanding of what it takes to succeed.
• Foster Sustainable Growth. Without the pressure to achieve rapid growth at all costs, bootstrapped startups can prioritize profitability and sustainability over revenue growth. I think this approach encourages founders to build a solid foundation that can withstand economic downturns while still achieving steady growth over time.
• Encourage Creativity. Bootstrapped startups often operate with limited resources, which can encourage creativity and innovation. When entrepreneurs are forced to find creative solutions to problems and operate with a lean budget, they often come up with unique ideas and products that set them apart from competitors.
• Develop Strong Customer Relationships. Bootstrapped startups rely on customer feedback and word-of-mouth marketing to grow their business, which means they must focus on developing strong customer relationships and providing excellent customer service. By prioritizing the customer experience, founders can build a loyal customer base that can support the business over the long term.
• Have Flexibility In Your Exit Strategy. Bootstrapping allows founders to maintain flexibility in their exit strategy without being pressured to achieve a specific valuation or meet a specific return target. Without the pressure of investors to go public or be acquired by another company, founders can focus on building a successful business that aligns with their goals and values.
Both bootstrapping and VC funding offer unique advantages and drawbacks for starting and expanding a business. Ultimately, the success of a business depends on various factors, so each approach can be a viable option. This time around I’ve decided to bootstrap my startup; I hope my example can help highlight what will work best for you.
