Bootstrapping Is A False Prophet

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.

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0 # Alan Taetle 2010-06-11 12:49
Excellent article Dave. The other issue with bootstrapping is that you can end up with a 'product' that is overly customized to your first paying client and does not work for a broader customer base. So it is a fine balance. It's great to get customer-funded development but it has its challenges.
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0 # GFRRTDEFF 2010-06-11 13:51
Great point Alan. The quality of what comes out the other end of a company is just as critical – and what drives serious valuation. Bootstrapping may work well for lifestyle-sized businesses, but it's tough to make a big run on the back of a $5,000 investment.
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0 # Edward OMeara 2010-06-11 14:07
Where was this advice when I needed it? What I remember from the presenters at our ATDC-Kaufmann FastTrac program - were folks like Marc, Glenn and Joan who told us: "Don't take their money!". And we were stoked to land some big customers quickly. But now I totally appreciate Alan's comment that those first paying customers create impossible to ignore requests that become your overly-sophisticated product before the market develops. I, for one, am looking for help if any Angels are interested in specializing with a "turn-around-the-bootstrapped" fund.
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0 # GFRRTDEFF 2010-06-11 14:30
If it was 2009, I was in the midst of bootstrapping our own startup – which is where much of this post came from. Taking investment dollars is always tricky, but I've come around to the more-is-more line of thinking: take money any time you can get it for decent terms (see Groupon or Foursquare as examples). Building a great product and company is both hard and expensive. Owning 25% of a $20M-dollar company is better than owning 90% of a $150K company.
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0 # Edward OMeara 2010-06-11 14:47
I recall the point being made was bootstrap so you could own 100% of a $150k company, or as big as you could get to, before taking investment capital - on your terms as @pfreet would say. Supporting Alan's point, the paying customer beta can quickly and unintentionally lead to unexpected challenges if the product isn't in balance with scaling a sales & marketing process.
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0 # GFRRTDEFF 2010-06-11 19:38
Managing through a company's first 5-10 customers with a product that scales relevantly to thousands more is one of the trickiest tasks a management team ever undertakes.
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0 # Feb0zdou1 2010-06-11 13:29
In Atlanta, startups wear "bootstrap-financed" like a badge of honor but I argue that unless you have a strong technologist co-founder and a really talented founding team generally, you simply must get funding to build a team to get serious traction. However, the angels and big VC firms here are looking for the huge deals of old and B2B plays. I know of no local angels here who invest in the consumer internet or real time data space other than a couple of really small investments made following Shotput Ventures.

Look how differently investing operates in the Valley (to which Atlanta has now lost at least 3 very promising entrepreneurs in the last 2 years). Look at super angels like Ron Conway of SV Angel LLC who has invested in 40-50 plays in the real time data space this year: These are relatively small deals, capital light -- but they do require some rounds of investment and are not bootstrapped.

It isn't just Atlanta. Boston and other cities outside of the Valley lose entrepreneurs for money, too. An example is WePay, whose founders are Boston College grads who didn't get into Tech Stars Boston but were accepted at Y Combinator last summer to test their beta product. After Demo Day, they recruited a couple more team members from the east coast and relocated to Palo Alto. They've recently raised a $1.65M round from August Capital, Ron Conway, Max Levchin (a founder of PayPal) and an A-list of other investors in their space.

Maybe a few startups survive bootstrapping and flourish, but most are just "strapped" and fold.
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0 # GFRRTDEFF 2010-06-11 15:22
I'd agree this is a problem in most startup towns. I see glimmers of hope in places like Boulder where super-angel Brad Feld emigrated. But by-and-large, if you're not physically close to investors in NY or SV, it's tough to convince them to take a chance on funding your venture. So you're blowing in the bootstrap wind...
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0 # Adam Wexler 2010-06-11 13:30
interesting writeup dave. i agree with you on most counts, esp where the risk-level is compromised & the pool of risk-takers is limited.

"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."
i think the word "every" completely changes the thought of that statement. certain companies (i.e. hardware) require capital up front. on the other hand, if you have a web service you can make a difference with less than 10k.

the startup community is growing rapidly in the college demographic, and once they experience the work culture, it'll be hard for them to stay put in the traditional setting even if that's where they go straight out of school.

btw, as someone who has learned how to bootstrap on a next-to-nothing budget, i have plenty to say on the topic from personal experience ;)

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0 # Feb0zdou1 2010-06-11 14:46
Adam, you have persistently worked on Rank 'Em and you sort of fall in the above mentioned category of recent college graduate (i.e. can live very frugally).
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0 # Adam Wexler 2010-06-11 15:04
i agree...yet, i'm close to three years removed from my degree so i've been getting by on the "tuna-fish diet" (i don't do ramen...) for a little while now.

also, bootstrapping in athens, ga is different than bootstrapping in atlanta, ga (and far less than the valley, etc). i've benefited from a number of resources at my disposal, as well as the very low cost of living
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0 # GFRRTDEFF 2010-06-11 15:03
So you're saying you wouldn't be further down the track with a $100K investment behind you? :-) I'd contend Rankem is in a hot enough space that your exit potential is directly tied to your product development capabilities – which is driven by cold hard cash. No?
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+1 # Adam Wexler 2010-06-11 19:04
our development would absolutely be accelerated with 100k behind us. yet, because we've bootstrapped, we've learned how to creatively "survive," and we're better off for that moving forward.

for example, i doubt the guys behind diaspora will ever learn how to be creative with financing & utilizing the resources available. they started with an IDEA & 200k!

"I'd contend Rankem is in a hot enough space that your exit potential is directly tied to your product development capabilities"
if you put us in austin, boulder, nyc or the valley, we would probably go that route. it's that sad reality that atlanta doesn't really have the "smart" money for a b2c startup like rank 'em. it's fine though...we'll keep trucking along like we've been doing. after this long on empty, we know the future looks pretty bright on something.
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0 # GFRRTDEFF 2010-06-11 19:49
Agreed on Diaspora. That whole episode reminds me I should actively create villains and then sell the world my super-powers as an antidote :-)

Hopefully the 'running on empty' mentality leads you to huge margins on the business once it hits – and keeps you away from Aeron chairs and $30/foot office space. I'd agree it's great discipline, but at what point does it limit the horizon?
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0 # Keith McGreggor 2010-06-11 13:53
Fortunately, the world is not an either-or place, and one startup's false prophet can be another's savior.

I suspect that your article will generate a lively debate here and on Twitter.

(I'd be remiss if I did not extend the invitation to you and all those souls interested to attend ATDC's weekly Bootstrapping Circle, to see what the conversation truly is like.

- Keith
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0 # GFRRTDEFF 2010-06-11 15:38
Agreed that how you fund your company is a spectrum issue for every entrepreneur. Some need big outside dollars, some need none.
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0 # Andy Salo 2010-06-11 15:10
Hi Dave,

I like the fact that you have a strong opinion - good post. However, I disagree with just about everything in it! :)

The idea that "bootstrapping kills innovation" is simply untrue. I can easily make the argument that only a bootstrapper truly has the ability to create real innovations because he/she is not controlled by an investor. Many entrepreneurs have said that once they took an investment, the fun stopped. That's because they are under the investor's thumb.

Additionally, bootstrapping is a great weed out for real entrepreneurs vs. "pretendpreneurs ". It's survival of the fittest. You have to scratch and claw until you get something out the door. Then take an investment once you have revenue, if you need it. It's then your choice. You are in a much more powerful position.

Thirdly, there are thousands of successful bootstrapped companies. Just last week, there was a writeup of Smiley Media here in Austin. Smiley Media was bootstrapped in 2001 and last year had $45M in revenue and was #168 on the Inc 500. Bootstrapping success happens all the time.
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0 # GFRRTDEFF 2010-06-11 16:34
I'd absolutely agree on bootstrapping being a weeding-out process but isn't that just a de-risked version of failing with money (and one that lets investors off-the-hook)? And by nature, doesn't that lower the business experience quotient of startup founders?

On innovation, the ideal scenario to me is an angel investor who lives and breathes your vision. You're correct in saying freedom empowers success, but lack of resources has the potential to suck out any benefit derived from that freedom. Knowing what you *should* be doing, and having the juice to go do it are two different things.

I will concede I'm seeing more and more service-type businesses (like interactive agencies) attempting to productize their customer offerings. My focus was more on the Foursquares and Groupons of the world. A new category of company is almost impossible to create on a $10,000 budget.

And I'm thinking more about this from a going-forward perspective. There certainly are lots of examples of 8-10 year old companies that have been scrappy enough to hang around while the tech industry came to them. Especially ones like Smiley Media who play in the internet advertising space...
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0 # Andy Salo 2010-06-11 17:36
Hi Dave,

Your argument seems to be wavering. You originally wanted to prove your point by asking for successful bootstrapped companies. Now that a few comments have named a whole bunch you are saying you are instead "thinking about it from a going-forward perspective". Here are two more examples - SolarWinds and Ipswitch. Both very successful bootstrapped companies - one now public, one still private.

What evidence are you using to support your statement "A new category of company is almost impossible to create on a $10,000 budget"?

And as far as de-risking for investors, absolutely! That's the point. Its good for the entrepreneur as they get more initial control over their destiny, and it's good for the investor as it's less of a risk (still really risky though).

Also, who says bootstrapping is limited to $10K? Who put that line in the sand?
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0 # GFRRTDEFF 2010-06-11 18:06
Andy: Here's the most insightful comment I've gotten today – from mindcrime on Hacker News:

I'ts hardly fair to ask to see 5 companies who have already grown from bootstrap stage to "national prominence" as a lot of the conditions that have helped create this "bootstrap friendly" environment are still fairly young. Open Source software, relatively inexpensive hosting / cloud computing, rapid development using "convention over configuration" frameworks, etc. are all part of the ecosystem that have led people to believe that you can build a technology company without outside funding. I'd argue that most everybody noticing the confluence of those forces, and starting to build a company, have not yet had time to grow their company to a large size and level of prominence.

SolarWinds is a great example of a company who killed it long enough to draw six-years-after-launch investments from Bain and Insight. That's the blueprint, but do you think there's enough open ice to skate toward in this decade? What worked in 2001 seems incrementally harder in 2011.

In my personal experience with bootstrapping, our plan is always to build a working product with ~75% of the desired functionality. And in today's elance-type, open source world, ~$10K can get something decent built in Joomla or Drupal. If you get toward the $50K mark in invested dollars you're likely talking outside investors. And no, an entrepreneur's time doesn't count :-)
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0 # Mike Schinkel 2010-06-11 23:32
Or with $5k, you can get something decent built in WordPress!

But I digress... ;-)
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0 # Shawn Carson 2010-06-11 15:27
I agree with the message and the sentiment. There is clearly a lack of risk tolerance among the "risk capital." But I would like to answer your question about nationally promineent companies who bootstrapped.
SAIC - one of the largest government contractors had a very successful IPO in the last three years. They bootstrapped.
Regal Entertainment Group - the largest cinema company in the US, started with one theater in rural Tennessee and grew with the 3 F's. Went public...twice
Clayton Homes - prominent manufacturer of manufactured housing. Recently acquired by Berkshire Hathoway
TeamHealth - Perhaps the most successful IPO of 2009
Bagwell Communications - grew from one man's idea and became Scripps Networks who launched HGTV and made Knoxville Tennessee the #4 Media Market in the country.
Pilot Travel Centers - $16 Billion and still a family owned LLC.

Granted these are not the new web oriented businesses and much of their growth to prominence was in the 90's but they funded their own early growth.

It's really tough out there right now but many of our companies are finding funding through SBIR's, partnerships, early customer-funded prototypes, etc. Whenever there is an economic crunch, risk capital goes away but out of those times comes some pretty interesting companies...
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0 # GFRRTDEFF 2010-06-11 15:49
Shawn: I'd agree lots of non-tech companies have been bootstrapped to the highest of highs. I've also heard RJ Reynolds and WalMart this morning. The only semi-valid example so far is MSFT, but my argument is that a licensing deal involving someone else's technology in order to power OEM deals is probably not something we're going to see repeated soon.
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0 # Paul Freet 2010-06-11 15:39
This is a well written post and it is always great to have this conversation.

If Atlanta was awash with investment dollars to be had, then you might have a stronger case. It's like telling single guys to only date supermodels. There simply aren't enough to go around. Are the few that exist interested in what you have to offer? Which is really only "potential"?

My first startup was TruSOLUTIONS in San Diego. We bootstrapped from nothing to $25M in sales in 4 years and sold the company. It was started with one customer who needed a custom product developed for them. They prepaid a bit, which helped. But we leveraged that first custom product into a line of Linux servers for the data center and grew like weeds. So, it can be done. You only need one customer, guile and smarts.
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0 # GFRRTDEFF 2010-06-11 16:49
I would contend if Atlanta was awash with investment dollars, bootstrapping wouldn't be half the topic it is. The right businesses would get funded, and the market would decide how smart their technology, products and management team were. And there would be ISS-type exits generated.

I don't doubt there are thousands of bootstrap success stories going back 10-15 years. I think the reality is there was more open ice to skate to – more developing industry segments and associated business problems to solve. As the technology industry matures, these slam dunks become harder and harder to find.
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0 # Lance Weatherby 2010-06-11 19:59
"So in essence you reduce the entrepreneur pool to those with the least to lose: 21-year-old college graduates."

While somewhat logical, this is not the proper conclusion. There are many, many examples of of mid-career or later entrepreneurs that were self-funded in the initial stages of their development. I could walk around the hall of ATDC and introduce you to a half dozen.
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0 # GFRRTDEFF 2010-06-11 20:35
How much of the mid-career entrepreneur is created by choice or by the job market being slaughtered in the last 12-14 months? And how many of those businesses were financed with HELOCs back when our houses were worth something (on paper at least)?

For me, Jay Forman at Toomah is the exact specimen we need to preserve: a founder with a solid idea and the ingenuity to get it to second base. He's pulling it off with a mortgage and small kids but I fear he's the exception. If someone can't pay themselves a pittance wage of $40K/year via a funding event, I don't think the big ideas rise to the surface.

Having spent many years at UPS, I could also show you lots of incredibly talented people who would kill in the startup space, but they simply can't endure a 66% pay cut. And given the ATDC is a Top 10 incubator in the country, I'd bet you've got some exceptions to the rule...
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0 # Mike Schinkel 2010-06-11 23:42

As a past advocate for bootstrapping I sadly have to agree, After running a bootstrapped business for 12 years I know all too painfully well that business decisions are made based on cash flow, not based on what makes the most sense for the business strategy.

In response to those who disagreed with you, I think your primary (unstated) point is related to innovative businesses, not replicative businesses. The companies Shawn Carson referenced were all primarily replicative, not primarily innovative. And yes @pfreet services firm can easily be bootstrapped (just look at all the profitable service firms in town sucking off the teets of the 13 local Fortune 500 companies) but few it any will every provide a 1000x or even a 100x return on investment.

And yes to others, outliers can be found in every case, but they are not the rule.


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0 # GFRRTDEFF 2010-06-12 02:58
Agree 100% on the ease of bootstrapping a services firm – mostly because I've done it 4 or 5 times in the last 20 years :-) I recall an old post of yours on that ASU thinking, and it's spot-on. There is a marked difference between creating something new versus replicating a company with 6.27% more efficiency in business processes. I see that as squeezing the last bits of margin out of someone else's innovation.
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0 # GFRRTDEFF 2010-06-12 03:37
After a great day of debate on bootstrapping, I contend more than ever that a vibrant investor pool must be in place to take big ideas to big exits. If you want to run a $150K lifestyle business with a 2% chance of ever hitting $3M in annual revenue, then bootstrapping can be a viable solution. Or if you're building a replicative services business, you shouldn't ever consider taking money.

But if you're trying to build a new-school product like Appcelerator or a community tool like Foursquare and you need to consider both technology development and launch marketing, then bootstrapping is a pipe dream. Even a consumer-facing subscription-based business model can be a bitch to wrangle. Good people cost money, growing business require capital and very few founders can go 18 months with zero salary.

To keep a startup ecosystem in correct balance, outside money needs to fund great ideas. And experienced business professionals need to be able to earn a minimal living while building the dream. Think about the difference between hiring an enterprise sales veteran with 15 years of selling experience or a 24-year-old who's been selling Yellow Pages ads for two years. That decision alone can greatly change the horizon of a startup.

The optimal solution is a mid- to deep-pocketed (and connected) angel who shares your passion and vision. If you can work through the first 12-18 months toward profitability, then further rounds can be considered against the backdrop of growth acceleration.
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0 # Feb0zdou1 2010-06-14 04:03
I wonder how many of the entrepreneurs mentioned above had considerable family money they "bootstrapped" from? I've lived in Buckhead a very long time and I know quite a few business owners who bootstrapped with a big advantage like a degree from Yale and daddy's money!

Maybe we need to clarify and say "bootstrapped" by entrepreneurs with no family wealth.
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0 # Josh Watts 2010-06-14 14:09
Bootstrapping with money borrowed from your middle-class parents: loser

Bootstrapping with money borrowed from your wealthy parents: financial genius
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0 # Marcel Crudele 2010-07-24 17:12
What a lively debate! Here are my thoughts...

The point about bootstrapping being most suitable to younger entrepreneurs is well taken. It's difficult for someone in their 30's to live on mac and cheese when there is a mortgage and possible family involved.

There are 3 pillars I use to calculate a baseline of success probability: 1) has the entrepreneur run a company before, 2) does the team have the skills to implement the idea, 3) do they have domain experience.

These are what I consider before even hearing the idea. Can an entrepreneur succeed without these? Very few do, but there are some. As a friend of mine once said, even a blind dog finds a bone once and in while. But the (real story) soon to be MBA graduates I met that wanted to create a certain site for doctors, but had no real world, technical or industry experience have a tough road ahead.

To quote another friend of mine - "those that fail don't write books." Again, there are always bootstrapping statistical exceptions which get publicity, but is the best course of action to take the path of .01% chance of success or 7% chance (it's still hard even with funding).

For full disclosure, I started a company off of credit card debt after the .com bust (because I couldn't find a job), my bootstrap diet was Campbell soup and Uncle Ben's Rice bowls, we were profitable from year 1 because we were scrappy, but we could have achieved even greater success if 1) we had some seed capital and 2) I had enough business experience to know what to do with the seed capital ;)

I think funding is great and would never bootstrap a company again - too much lost opportunity. Regarding the issue of the loss of creative control that is associated with funding - it depends on the funding. A Friends and Family round or Angel round with the right people can allow the entrepreneur to maintain control and have very valuable partners, either because they are smart money, have a great network, etc.

Regarding the local investment community, my experience has been that it is tough. Maybe it's the 2 boats and a Cadillac mentality, generally more conservative investment environment, a focus on domains other than the current company I am working on, lack of the right connections (huge issue), etc., but it's been difficult finding funding here or even setting up meetings with warm introductions. The mantra I have heard is that Atlanta investors are interested once you have at least $1 in revenue. I understand that - it's a much safer bet at that point (maybe 12% chance for success), but how does the entrepreneur that has the 3 pillars mentioned above and a mortgage get there without the funding of an idea?

We were lucky that our connections led us to friendly ears, but of the investors we have, not one is from Georgia. I'm wary of West Coast money because I think there can be a lack of focus on business fundamentals (I could be wrong), but I actually found that Texas is a great place to talk to Angels... maybe it's the oil and gas gambling mentality. I like the idea of investors from Georgia where I want to stay, but that hasn't happened.

SUMMARY (my opinion)
Bootstrapping is hard and limits ability to take advantage of opportunities.

The rare companies that do succeed through bootstrapping might have been more successful with funding. At the very least, there are failed bootstrapped companies that could have succeeding with funding.

Addendum to previous point, more money would have been lost by investors if their purse strings were looser because more weak ideas would have been funded ;)

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