Outside capital: do or die?

A gigantic percentage of startup literature concerns how to raise capital.  But before you start on that PowerPoint, let’s ask this: do you really have to? Or is it still possible to bootstrap and build a company organically?

Strategically, the advantage outside capital provides is obvious: you can go faster.  And since speed of iteration is often the factor that separates success from failure, access to adequate cash is indeed often critical.  But that is certainly not always the case, because: sometimes you have other insulating factors that will fend off competition, and allow you to only go as fast as you can afford with internal resources.

Let’s start at one extreme end of the spectrum, with my favorite startup: XKCD. Randall Munroe has managed to slowly create a real enterprise out of a free webcomic.  Of course, his defense was pretty simple: no one else was Randall Munroe.  But this just illustrates the point that all sorts of businesses built on personal expertise – design skills, niche knowledge, industry relationships, etc. — can indeed thrive without VCs ruining the party.

Many other kinds of defenses also allow you to join the venture version of the “slow food” movement: robust intellectual property rights (say, obtained from a university partnership program), exclusive contracts with key suppliers or distributors, a prime physical location. The list goes on, of course, but the key issue is the same: will your core advantage survive even if competitors move faster?

By the way, there’s a very beautiful thing about organic growth, aside from the absence of dilution: it usually forces you to try to monetize early.  There’s no better test of how well your idea works, nor any better way of iterating it to real market demand, than to watch how the checks come in.  Ventures with easy access to cash have the often-fatal luxury of setting the wrong priorities.

On the flip side, there are certain businesses in which raising capital is indeed critical.  Get those pitchbooks ready if your idea is not genuinely defensible except by being the first kid in the pool and creating a network effect, or dominant brand, before others do.  Similarly, start calling VCs if your customer acquisition costs can only be recaptured over a substantial period of time.  And if your value proposition is built on providing a secure, dependable long term relationship for the customer… well, you’re going to need a nice looking balance sheet and big backers to convince the buyer that you’ll still be around in a couple of years.

So: think deeply about the nature of your competitive advantage, your basic revenue vs. expense model, and whether the perception of a well-funded venture is important or not.  Then you’ll know whether you can safely bypass outside funding.

All opinions expressed are those of the author,  and do not necessarily represent those of Gust.