From 2010 to 2024 I started 2 companies – one was VC backed marketplace startup, which raised a seed round but ended up fading away after running out of money, and the other a bootstrapped B2B SaaS which I grew to 7 figures in ARR and an 8 figure exit without VC funding.
In this article I’ll share my viewpoint on the both venture capital funding and bootstrapping and how the two approaches vastly differ in company building and founder outcomes.
What is the difference between bootstrapping and VC funding?
Bootstrapping is the “traditional” way of building companies, by using the founders’ existing resources and non-dilutive capital to build the company. VC funding provides access to immediate capital in exchange for equity in the company.
The main difference appears to be that with VC funding you are sacrificing a certain amount of equity for the ability to move faster – while with bootstrapping you are retaining ownership at the expense of struggling more to get going. Or is it?
Why do most VC funded companies fail
Raising VC funding has a hidden catch – once you raise VC funding, your expenses will naturally increase to make use of the new funds, by hiring people and investing in marketing and product.
This puts the company on a timeline to running out of money (also called a runway) – typically 18-24 months for most funding rounds. During this time, the company must show enough traction to raise another, bigger round, or grow revenue to the extent it catches up to expenses.
I call this the death spiral, in which a company must meet very aggressive growth metrics for the next 24 months, only to have to repeat the same cycle again and again, until it IPOs, gets acquired or actually becomes a profitable company (very few do).
The reason most companies fail in to keep up with the VC timeline, is that in most cases it takes time to reach PMF (product-market-fit), and for companies that time is longer than the typical funding runway. And even after achieving PMF, it takes time to figure out a scalable growth engine, or even more common – you find out that the market is not VC scale.
For the VC model to work, every company it invests in needs to potentially return x10 on their investments. As a result founders optimize for that, and convince themselves and investors that theirs is a $1B market opportunity. In reality, most of those companies will never grow to that size.
In any other configuration, building a $50M or $100M company is a huge success, but for venture investments that typically is the valuation they set at the series A round, and it would be considered a failure if the company ends up only that big.
Is Bootstrapping Better Than VC Funding?
With bootstrapping you grow a company with your existing resources, and other non-VC funding options – this can include investments from friends & family, angel investing, accelerators, crowd funding, non-dilutive capital (revenue based loans), and service based work.
Growth with bootstrapping is initially much slower as a result, as you have to make do with limited resources. I worked a full time job for 3 years, while working on the product slowly over the weekends, to grow my company to the point where I could work on it full time.
If you do grit it through the slow grind to PMF, it becomes easier later. After taking 4 years to get to $150k in ARR, it took me 4 more years to reach $3M in ARR.
That’s not a growth trajectory that could have worked on a VC timeline, but the end result was excellent for me as a founder.
And when we ended up selling a majority stake of the company to private equity, having retained most of my equity (90% at the time of the sale), meant that a much smaller liquidity event was life changing.
When Should I Raise VC Capital?
There are some cases where raising funds makes sense, or perhaps is the only way –
- When you have basic PMF, and have found an acquisition channel that works – and you want to lean heavily into it.
- For capital intensive products, such as hardware products or products requiring extremely specialized technical expertise or expensive licensing.
- When you have longer sales cycles / payback periods, and need funding to bridge the gap until you get return on your spend (though there is non-dilutive capital for this as well).
- You’re in a massive market with entrenched players, and need funding to make inroads.
- Your product does not generate revenue until it has a massive captive audience (for example, social networks).
If you none of the above applies to your situation, you should seriously consider whether raising venture capital is actually a good idea.
Two Different Ways To Build A Tech Company
A few months ago, I got introduced to the founder of one of our competitors, and we had a good hour-long conversation.
Their company raised a VC round, and reached about twice our revenue in 70% of the time. However, their headcount is 10x ours (!) and thus nowhere near as profitable. Their sales operation was more refined, but their product suffered as a result, and they required much more handholding than us to onboard customers.
It’s anecdotal, but it still shows how different the paths companies take when they bootstrap vs. fundraising.
If you’re starting to see initial traction with a B2B SaaS product, and are still unsure on whether to bootstrap or raise VC money – drop me a line.
