One of the myths I often hear as an advisor to many entrepreneurs is that their lifestyle would somehow be better if they could more easily find other people’s money to build their startup. They don’t realize that according to statistics, more than 90 percent of satisfied entrepreneurs use bootstrapping, since other people’s money always comes with negative strings attached.
For example, Bill Gates founded and grew Microsoft, and Michael Dell built a great technology company, both with no outside funding until they were successful enough to go public years later and sell shares to common stockholders. In fact, Michael Dell has recently taken his company private, in order to “unleash again the passion of our team members.”
Maintaining your team’s passion and freedom to focus on innovating for customers are just a few reasons to think hard before you seek money from crowdfunding, angel investors, venture capital organizations, or attempting to qualify for a public stock offering. Some of the specific challenges that always come with other people’s money include the following:
- You will lose sleep worrying about how to pay it back. Most entrepreneurs never forget for a moment that having investors means owing money, even if they can legally argue that equity is not debt. Many times friends and family have been broken up by failed investments. It usually pays to move a startup slower rather than risk valuable relationships.
- Investors want board seats and a vote on key decisions. Of course, this can be positive if you really need the help and experience in making key decisions. But, I suggest that a small advisory board with the right people could give better guidance (no near-term financial bias), and you can always choose to ignore it if your insights are strong.
- Pre-defined milestones and deadlines in an uncertain world. No entrepreneur enjoys the stress of committing to dates and results on an innovative and unpredictable journey to change the world. Yet every investor, including a rich uncle, will likely ask for specific progress evidence. Bootstrapping gives you the flexibility to explore creative alternatives.
- You left your corporate job to get away from budgets. When you spend other people’s money, they want to know how much and when. Startups don’t come with the discipline on payables and receivables that you left in corporate. Investors quickly learn the only control they really have is financial, so they will use it to apply any constraints.
- Pivots become a source of pain rather than positive learning. Every startup I know has had to pivot at least once, no matter how certain they were of their solution and market. Pivoting early brings satisfaction and saves money and time, except when you don’t pivot due to investor evidence required, and the pain of explaining your mistakes.
- Explaining actions to investors takes time you don’t have. Very few entrepreneurs I know have the patience and time to communicate to the satisfaction of all investors. It’s usually the small investors who want the most frequent updates, or phone calls before every direction change, and investor relations costs only go up as your business grows.
- Investors will become the toughest bosses you’ve ever had. It’s very common for founders who find venture capital fundin, to soon find out that a CEO who has “more experience” is replacing them. Other founders, even with experience, are forced out by disagreements over strategy or progress. You won’t be fired if you use your own money.
Of course, bootstrapping does imply living within your means, and it may require you to postpone your startup efforts while you build up an investment fund of your own. It may also mean finding alternatives to cash for attracting team members, or bartering services to expand your access to infrastructure or expertise. It also may just mean taking less money later.
On the other hand, avoiding outside funding means you can apply your passion and innovative solution without investor challenges, and remain in full control of your destiny. Isn’t this why you were attracted to the entrepreneur lifestyle in the first place?