Is Bootstrap Financing Enough, or is It Time for Outside Investors?

In the startup world, a bootstrapped company is one that gets by on its own resources (personal savings, small loans, and/or reinvested profits) without the help of outside investors.

There are advantages to doing things this way. This Harvard Business Review article lists several, and argues that every startup should bootstrap at first. Another piece, from Forbes, lists pros and cons. And there’s an interesting chart here that shows how much money some well-known firms started with. Dell, for example, was launched with only $1,000 of personal savings.

But at some point, every owner of a growing company starts to wonder whether they need an injection of outside cash to take things to the next level.

That’s where I’m at now.

In this blog, I’ll be looking at the issues I’m grappling with as I consider Knak’s financial future.

Two things to note:

1. I’ve never gone for outside financing before, so this is new to me. Other than $15,000 I borrowed from my consulting company, Knak so far has been 100 percent customer-funded, and we are very proud of that.
2. The issue is not hypothetical. I regularly get contacted by investors who want to talk. I wrestle with these questions all the time.

As I see it, bringing in outside financing will impact five aspects of the business: control, product, work environment, image and access to expertise.

1. Control

Will I still be able to call the shots?

That is probably the most fundamental question I grapple with as I consider outside investors.

Right now, I don’t report to anyone other than the employees, who currently all own equity in the company. I am my own boss, and there’s no bank or venture capitalist demanding an accounting of how things are going.

If we go for outside investors, I will be giving up some control.

I’m not sure I’m comfortable with that; I guess I fear we will be diverted from our mission, and forced to do things I’m not comfortable with.

Will we be pressured to grow more quickly than I’d like?

Outside investors are there to help you grow. But how fast?

We’ve built Knak so far without incurring any debt. We’re growing nicely, and I honestly don’t see how much faster we can grow without running into growing pains. After all, it takes time to onboard new people and let them learn the company culture.

So growing faster than I’m comfortable with makes me uneasy.

Will I be comfortable with a few years of losses?

I really believe that a business should make money right from the start. We certainly did.

But when you take money from investors, they may be OK with a few years of losses to fuel growth. In fact, they may encourage losses or a high cash burn.

I understand the merits of doing things that way, which is essentially paying now for growth and future profits. Nevertheless, it’s still a difficult concept for me to accept.

We’re still fine-tuning our product, making it better and more efficient. Until we get it right, I am pretty sure I won’t feel comfortable smashing my foot down on the gas pedal – especially if we’re not turning a profit for a while.

What will investors want in return?

Right now, the only money coming into the company comes from our customers. That means we are very motivated to do what our customers want. In fact, I report to our customers on our activities. But no one from outside is pressuring us to do anything different.

With investors, things would be different.

Other than customers the main outside sources of capital for startups are family and friends; venture capital, angel investors, bank loans and crowdfunding.

Family and friends may be willing to lend you the money ‘just because,’ but the reality is that anyone who invests in your firm wants something in return – be it control, interest, dividends or a cut of the profits.

As a result, they are likely to pressure you to increase your sales and your revenue.

That might not be a good thing: If you put all your resources in sales, you may not be able to invest as much in product development.

Which leads to my next questions….

2. Product

Will we lose control over our product?

As a bootstrapped company, we have a lean, efficient team, which translates into very competitive pricing. Because we don’t want to pay for staff to support our product, we’ve built it to be very self-service. Customers don’t need outside help to use our product. They can build marketing emails on their own, without having to send them in for coding.

If we suddenly get an infusion of cash, will we have to focus on revenues and sales to the detriment of our product? Will we have to pull resources away from developing it?

Will we be asked to develop fundamentally different products?

Will investors urge us to shift what we create? Will they ask us to do fundamentally different things?

That might be good, if the shift allows us better alignment with our market. It might not be so good if it pulls us away from what we like doing and into new areas we’re not comfortable with.

3. Work environment

What will it do to our culture?

We’ve built a great company. Everyone loves working here, and people seem happy in what they are doing.

Will bringing in outside investors change what we like about working here?

For example, I fear investors may pressure us to do some things quickly – too quickly, before the bugs have been ironed out. Right now we can do things at our own pace, and in a way we think is best.

Will we be under pressure to perform?

Perversely, I find there’s more pressure to perform when I haven’t got outside financing. Why? I guess I just like the challenge of trying to succeed without outside help.

But if we do have outside investors, they will have the leverage to pressure us to up our performance according to indicators that are important to them. I’m not sure I’m comfortable with that.

How will a cash infusion affect how we work??

When you’re bootstrapping, you make sure every penny goes to your most pressing issues

How would our work environment be changed if we had money for things lower down on our priority list?

Having, say, $10 million to spend whatever way we want is certainly appealing.

But how would we decide how to spend the money?

4. Image

Will outside financing boost our image?

It seems strange to me, but some people seem to think bootstrapped companies have limited staying power. And they think that if a venture capitalist has invested in a startup, that startup must be going places.

Maybe that’s because you hear a lot from companies that have attracted investment, and less about firms that have reached success on their own. (There are some exceptions: In our own city, Bootstrap Awards are given out each year to successful self-capitalized businesses.)

But the reality is that a VC-funded firm is no more inherently stable than a bootstrapped one. I would even argue that a bootstrapped firm is more likely to be stable because it’s focussing on its customers. It HAS to be profitable because it is not relying outside funds to keep going.

I think it’s too bad that the simple fact of attracting investors is perceived as a sign of success.

Will a slower rate of growth hurt our image?

As your sales rise, it gets harder every year to double your revenue. You need to try new things, and that’s harder to do without outside investment.

But maybe we’re OK with a lower level of growth. Do we really need to double our revenue every year? Does it really matter? Do we get to a point where we are just happy with what we’re doing? These are big questions, and questions that have to be asked – and eventually answered.

For example, if we collectively decide our goal is to sell the company, that will demand one approach, one focused on raising our equity. If we figure we’re in it for other reasons, then our entire approach will be different.

But the fact is, how fast we grow (or don’t grow) affects how we are seen.

5. Access to expertise

Are we missing out on critical guidance if we don’t get outside cash?

Outside investors offer not only money but expertise, plus access to their own networks. For a growing company, these things can be hugely important.

Not having outside investors, we’ve tried to tap into expertise beyond our firm by creating our own Board of Advisors. Would investors be more willing to help because they have a bigger stake? I don’t know. But I do know that our Board of Advisors is committed to helping us succeed, and they are using their formidable experience to that end.

Conclusion

I have the luxury right now of being able to consider Knak’s financing future at my own pace. Knak is doing well. It is not in a position of needing cash to survive; it’s more about how much (and how fast) we want to grow.

I do sometimes worry: Will a competitor with extra cash be able to outrun us?

But for now, I am confident in the solidity of our product, and I am pleased with our growth. We are doing well as a bootstrapped firm. I feel strongly that our success is due to the fact that we have always worked to please customers, not investors, and that has allowed us to stay true to our mission.

Stay tuned!