“Back in my day, businesses didn’t raise money. They made money,” joked an uncharacteristically jovial Gary Vaynerchuk recently on SnapChat while using an old ‘granny’ filter.
But he and many other entrepreneurs are not joking when they speak about the disadvantages of too much fundraising.
The truth is, when you partner with an investor, you essentially give a piece of your business away to someone else. This is an important fact that many new entrepreneurs sometimes forget.
Of course, every entrepreneur will have to strike a balance between bootstrapping and fundraising, but there are inherent dangers in becoming overly reliant on startup capital.
My own experience attests to the benefits of bootstrapping one’s own company.
I started Cutler PR at the age of 22, in my bedroom, with only $200 in my pocket. I never took a loan or borrowed money and I certainly never raised VC funds.
Today, we are a booming agency with tremendous revenue growth and a strong reputation in the tech PR space.
While the hot topic of conversation these days is which startup raised the most and in which angel round, I didn’t achieve my success despite a lack of investors. Rather, I don’t think I could have made it to this point without bootstrapping.
Here are four reasons why I think bootstrapped businesses are at a tremendous advantage:
1. More focus on making money instead of spending it
Bootstrapped companies have no choice, but to adopt business models that will produce cash immediately. This forces leadership to focus on how to make money, rather than how to spend it -- which would not be the case if there was a safety net of loans or VC funding.
Bootstrappers greatly appreciate the money they fought so hard to earn and they are, therefore, much more inclined to spend every working hour figuring out how to make more of it, not spend it.
Bootstrapping also saves entrepreneurs the time they’d otherwise have to set aside for fundraising. Endless meetings with potential investors eat up valuable time that a CEO could have spent building the business organically.
2. Breeds 'scrappy' instincts
When a startup doesn’t have loans or VC money to lean on, it builds up a strong sense of scrappiness, which can benefit a company greatly in the long run. After surviving on lean budgets, scraping by year after year, an entrepreneur is more likely to develop a street-smart mindset about business and avoid reckless spending. This is especially important once the business grows and the stakes get higher.
3. Produces out-of-the-box thinking
When a startup lacks the funds to throw money at problems, it’s forced to deploy creative, cost-effective solutions. This trains an entrepreneur to become a better problem-solver.
When bootstrapping, there can be months when making payroll is a huge struggle and the threat of having to close up shop looms large. This kind of pressure forces an entrepreneur to come up with solutions that are out-of-the-box; these are also problems that the luxury of VC money would potentially save an entrepreneur from grappling with, but I personally found that the greatest ideas and light-bulb moments came to me during these times.
4. Teaches important life lessons
Bootstrapping means that there isn't usually a great cash reserve. This can lead to stressful, sometimes scary setbacks. But this is not all bad, because what I find is that these descents are always followed by eventual ascents.
Every time my company experienced a setback, it was soon followed by a quantum leap in growth. All those bumps along the way are more greatly felt when there is no VC money to cushion the blow.
But being on that kind of roller coaster imparts many lessons and makes one more resilient. Along the journey, a bootstrapping entrepreneur can learn how to bounce back quicker so that each descent is a little less scary than the one before.
In fact, it’s the ability to weather the storms and learn from them that ultimately breeds greatness. The strongest companies and entrepreneurs are the ones who faced some obstacles and adversity. This prepares them to handle inevitable challenges down the road.
As Donna Fenn has written, “Bootstrapping keeps you lean and focused, teaches you how to allocate resources creatively and prevents you from being wasteful or taking anything for granted. These are skills and traits that make great entrepreneurs.”
I couldn't agree more.
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