In Defense of the Bootstrapped Company
— 3 ways money is actually making people a little dumber and how bootstrapping can be the solution.
A lot of money is getting thrown around the startup community these days with eager investors and passionate entrepreneurs ready to be the next big thing. While receiving funding is not bad in and of itself, it has become disproportionate and is cultivating foolish choices, failed businesses, and a lack of resources for smarter business leaders who could take investments farther with a stable foundation and sustainable growth.
Bootstrapping is the challenging, old-fashioned way of building a business and is quite possibly the only way some young entrepreneurs are going to learn how to be the leaders we need in our society.
As an entrepreneur, I've started a handful of companies without a loan, angel money or venture capital. As an active angel investor I’ve invested in a number of companies over the past few years through my role at New World Angels. With experience from both sides of the spectrum, I believe I have a unique perspective to offer.
I've seen a few significant problems that the glut of money being invested in startup companies has created. In this article I highlight 3 ways money is actually making people a little dumber and how bootstrapping can be the solution to that.
When a young company is handed a huge check and they no longer have the natural prioritization caused by limited resources, the company oftentimes has not had enough experience with failed ideas and experience with their customers to know what will work and what will not.
In business and in life, I’ve seen a lot of examples of money making people stupid. I’ve seen some pretty wasteful investments into products on a CEO’s whim after they get a few million dollar Series A. I’m also old enough to remember before the housing market fall out – I had a friend who quit being a chef and spent his first commission check on the first house he sold for a down payment on a 7 series BMW which was later returned.
When you have a limited budget (such as in bootstrapping), it forces you to prioritize the most important things and forces you to make better decisions about what you spend your time and budget on.
In the race to get funding, startup leaders anxiously try too many things too quickly – causing everyone to fail faster and practically vanish rather than take the time to grow a sustainable company.
While it’s true that taking risks and failing early to learn from mistakes is a mantra that many successful entrepreneurs would ascribe to, the startup culture’s obsession with getting funding causes everyone to be a little dumber, not wiser.
Bootstrapped companies must work hard, be extremely intentional with finances, and ensure their company grows at a reasonable pace.
There’s a media engine around companies being funded that creates an exposure for those companies that have taken money that isn’t available for the entrepreneurs taking their time to build a loyal following and grow organically. The daily email alerts letting the entire industry know when a company takes capital is a PR engine of its own and gives those companies exposure that they wouldn’t otherwise have.
This is beneficial to the exposure of a startup, but it can severely backfire by causing founders to lose perspective on reality, especially with actually making revenue.
Companies that bootstrap miss out on useful resources, but a level, disciplined leader can focus on learning his business, his customers, himself and his staff better than someone lost in the PR glory.
I still believe there are startups truly worthy of funding, or else I wouldn’t be an angel investor. But, I hope to influence entrepreneurs to shift from incautious fund seeking and spending to discerning business practices that provide our community a solid foundation for reliable innovations.
If you’re a startup or investor I’d love to hear your thoughts!