Playing the VC game versus bootstrapping

Having been involved in a few startups, I thought I would mention some things about playing the VC game and looking for external funding compared to going the full cup noodle route and bootstrapping a company. One of my mentors gave some good advice when I first started to explore the world of startups and business by saying that he was reluctant to get external funding if it could be avoided. This is, in my opinion how all startups should think. With external funding comes more responsibility and a level of reporting that you don’t have when bootstrapping.

Bootstrapping

The art of bootstrapping is something that you should definitely continue to do if you have funding, looking at everything and anything and having the goal of running things as efficiently as possible. Cutting back on all the things which most startups deem nice to have. There will rarely be a foosball or ping pong table in a bootstrapped office.

The idea of bootstrapping is to run things lean, pay for the things you need and to grow somewhat organically to a point where you break even and/or become even profitable. To run a bootstrapped company you will often need some savings. If you cannot fund it yourself as the founder then you are going to have a hard time of convincing others to work for free and share the big vision with you. If you start to see your business take off then you have two options, keep bootstrapping and invest the extra cash or use the validation to seek external funding.

The VC game

I call it the VC game as it is pretty much a game. It is a merry go round of making the right connections and impressing the right people. These people are the guys who can make or break a company, turn a vision into a billion dollar company and provide the capital to take your idea from an MVP to millions of customers. If you manage to get the meeting with them and convince them to make an investment, you have to do the term sheet and give up equity. This means you will own less of the company but a slice of a bigger pie is better than nothing right?

What you may also find is that investors in your company will also want to be kept up to date with what is going on. Their money is at stake so it is decent to give them an update at least once a month. Goes with the territory as they are now ‘part of the team’. Investors may also come with a different interest than you originally thought this is where due diligence on the side of the company is important.

If you, as a startup are too blind or too desperate to not ask an investor for an intro into a company he has invested in to ask them how they are then you may be in for a long nightmare. Saying that though, the majority of investors are decent people so whilst it is important to exercise care, being sensible will usually out something untoward happening.

Should I transition?

Chances are that if you have not had an exit at a startup and are fairly new in the community, you will have no choice than to start a company in the bootstrapped way. The way to impress investors is to show them traction. If you show them traction as a bootstrapped company then they will be smiling inside and wanting to get in on your company if you have a grand vision for how it scales. Without a vision, you may be able to serve one area very well but ultimately, these guys won’t get the return they are after so are less likely to invest.

You have to play it like they want. A business that makes a solid $100k a year may not be bad for you and sure, it would give you a decent life but it wouldn’t receive VC funding. The reason to transition would be if you can see a clear plan on how the cash can take you from where you are today to where you want to be. Dream big and have a bit of cash in your pocket and anything could happen. Dreaming probably isn’t enough though, when you go into meetings with investors they will want you to have mapped out a lot of where you are with spending the cash on what it will go on. ‘Hiring tech’ probably isn’t gonna get you the investment.

One last thing to note about funding. It is often a full time job until the round closes. You can lose a lot of time and efficiency in getting stuff done by chasing investors all over town so you need to make sure you know this before you get started.

Should raising be congratulated?

No. It is just the beginning, what I have said before is bootstrapping is the cup noodle route but that is how you need to carry on after raising. As an early stage CEO, you should be taking the bare minimum to survive and pour all your resources into making sure your vision gets executed to the level that you want. Bootstrapping methodology should not stop as soon as you get cash in. Use the cash and show some decent results. Running a startup is the marathon of marathons, pretty hardcore stuff and that is why failure is so high. What are your thoughts on bootstrapping?