Do You Know When To Bootstrap and When Not?
A couple of days ago a friend asked me whether I’m in favor of startups getting angel investment. He pointed out this post on this blog, which is me writing about five good reasons not to seek investment. My answer is that – like so much else in this field – it depends on the specific situation. A business that can grow organically and stay independent probably should; but there are also times and situations that call for ramping up a business as fast as possible, and that, in turn, means you need more money faster. So in those cases, forget bootstrapping. Consider these two alternative scenarios:
Pitch one: A group of young entrepreneurs pitching to a group of angel investors. Things look good. They’ve got some revenues, they’re watching costs, they’ve got good growth and with luck, hard work, and maybe some credit card borrowing, their steadily increasing sales will bring them to cash flow break-even in just another two or three months. I’m one of the investors, watching, and thinking to myself that in this case, these two don’t need investors. They could borrow bit, focus more, and make it by themselves.
Pitch two: A group of young entrepreneurs with an attractive idea and significant progress made towards a big market. What they’re suggesting seems like it’s bound to happen. The technology exists in its component pieces but hasn’t been put together yet in one bundled package. The value proposition is sound. But they’re really just starting. They make sense but they haven’t made headway yet.
My advice to the entrepreneurs in pitch one (and this is hypothetical, it’s happened several times) is to stop spending so much time pitching angel investors. Focus instead on making the cash flow break-even point and growing from there, spending your own money or available resources, growing the business, owning it, and keeping it for a long time. You’ll have the enormous satisfaction of having done it yourself and, after you make it, owning it all outright.
My advice to the entrepreneurs in the second pitch is to reach out for outside investors and go as fast as they can. They’re likely to have problems defending their new business from others with similar ideas, some of whom might be existing companies with more resources. Their opportunity depends on moving fast and establishing themselves in the market before the competition get there. They should expect competition, but they’ll be able to defend themselves better if they’re known as first movers.
In both cases this should be obvious, but especially in that first case, it isn’t. Too many startups get too much information about the supposedly standard case of getting outside investment and then launching, and not enough of them consider self funding or – better yet – financing via early sales. But there are no general rules. Ultimately, the opportunity should dictate the strategy.
All opinions expressed are those of the author, and do not necessarily represent those of Gust.
Written by Tim Berry
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