If you’re a technology startup, the greatest trick investors ever pulled was convincing you don’t need their money. It’s been called many things, but the latest catch phrase is ‘bootstrapping’. The reality is it’s an innovation-crushing false prophet that could bring down an entire startup ecosystem if it plays out like its proponents think it should. Follow my logic here…
I’ll start by saying the days of a ‘deck-and-a-dream’ should never have happened anyway. Those who invested large sums of cash in ventures that had no serious technology development, beta customers or superstar management teams got exactly what they signed up for: a 1-in-20 shot a company would blow up big. Now that funding has locked-down, and the pendulum has swung so far the other way you’re in great shape if you can raise a Series B round at angel-type valuations. And good luck raising money of any flavor until you hit $500K in revenue. And there’s the rub.
If every new business has to sustain itself via bootstrapping, guess what: you end up with a slew of me-too businesses based on API mashups and then labeled a ‘cluster’. The hard dollars to go hire 2-3 engineers to create real IP simply don’t exist, which creates a whackload of two-person companies wrapped around technology that could be replicated by Google as an intern project the minute anyone proved some market viability. And by the way, 20 companies doing the same thing with less than 2% variation is not a cluster. It’s a weak attempt to squeeze the last bit of margin out of someone else’s success.
And think about who this draws into the entrepreneur pool. Clearly a 35-year-old with a boring ass corporate job but a world-changing idea isn’t going to walk away from a mortgage and their family responsibilities. But the chance of succeeding without a serious degree of business seasoning occurs about once a decade (and results in Mark Zuckerberg backing himself into something way bigger than himself).
So in essence you reduce the entrepreneur pool to those with the least to lose: 21-year-old college graduates, and those with their own monstrous exits behind them. You’ve got a better chance with the repeat entrepreneurs, but it’s still a bell curve. The big chunk in the middle has a much better chance of creating something worth $100M. It’s simple math baby.
And don’t underestimate how bootstrapping kills innovation. If you’ve got to firefight every minute to pay your cell phone bill, are you willing drop 45 days of coding because the market just shifted underneath you? How many startups killed dev projects and quick-pivoted the week after the iPad was announced? Or how many have jettisoned an inferior platform to double down on Ruby On Rails to power a scalable business? I tell you the answer: not enough.
And then there’s the case where a startup actually makes it through the gauntlet to that $1M revenue mark. They’re now a company of significance in their industry and the most likely scenario of their next money is a strategic investment – someone who truly understands their business and core value proposition. And more importantly, that money didn’t come from angels or VCs. So where are the economics of the ecosystem now? No investments = no exits = no returns = no more money to invest. So in effect, investors are creating their own demise by promoting bootstrapping. And thought leaders aren’t helping either. To paraphrase Tyler Durden: Bootstrapping is being used as the oxygen mask in a doomed jetliner – it simply makes people docile. They accept their fate.
Again, I’ll reiterate some of the general principles of bootstrapping should fall under the category of required business advice: build great stuff, get customers and grow at the pace of revenue. But don’t be among those who propagate the falsehood that every entrepreneur can be successful on less than $10,000 if they’re hungry enough. It’s a lie. If no one funds risk, there will be little to no risk in a startup community.
Bottom line, you can’t create a large, sustainable technology company without external funding. Think I’m wrong? Name me five bootstrapped companies of national significance in the last 15 years.