Right, that is why you plan ahead and keep a buffer. You shut down when there is enough cash left to meet obligations, not after you've spent every last cent.
This is for externally funded startups, not bootstrapped. If it is bootstrapped, I think it is ok to dig deeper (but not actually committing major crimes or putting your health or safety St risk), but for a funded company, you should probably either wind things down in an orderly way, or at least fire everyone and pay all all salaries, pay vendors, and then switch back to bootstrap mode.
We're talking past each other, I think. I don't have any problem with bootstrapping (as my biography probably makes pretty clear) and understand that, under many business models, bootstrappers will go cash-flow negative early on. Not a problem.
At a funded startup, though, you've already committed to "We either grow big or fail ingloriously." If your personal paycheck is the difference between solvency and insolvency, you've already failed ingloriously. That's fine and expected, but don't put your family's financial situation at further risk by deferring the paycheck for the final few months.
I think that if you are bootstrapping cause you need to in order to pay the bills then that is totally fine. If you can work full-time on your startup and your are aren't - you should ask yourself why.
Shutting down without trying to spook their investors or current portfolio companies. Couching it as taking a break seems clever but I’m guessing any seasoned investors will read between the lines and see that this isn’t working.
The problem with thinking everyone else is wrong (ie how VCs operate) is that usually it turns out they are not. I’m guessing it wasn’t the story telling prowess of lack of deep connections (the common scapegoat for failing) but rather an unappealing offer for investors. Huge risks need huge returns. Bootstrapped companies may be slightly less risky but definitely less upside for investors. If there is no huge payday then investors know that capital will be used better elsewhere.
Im not hating on the thesis. Personally I like bootstrapped businesses much better but there is a reason they don’t attract investors.
I've worked at a startup that got a large infusion of capital. I hope never to work at such a place again. I would aim for organic growth over VC and plans that aim for high-octane supercharged expansion any day. I would bootstrap if necessary.
Very early on, you are right; it doesn't make sense to pay founders before you pay the bills and invest in your product/marketing. But when you maintain the bootstrap mentality beyond the very early days, and when you add people who aren't programmer types, you need to think about incentives rather than sacrifices. The fuel that keeps people going very early on is thinking about launch/release, but realistically very few things achieve overnight success. Organic growth can take a while, and my point was by giving people a fair, scalable taste of the profits (at a weekly interval, out of real profits) you can keep morale and creativity up.
I think funding and margins are the thing that are actually causal here: when you're swimming in funds, can afford to hire whoever you like to do whatever you like and you don't need to be turning a profit for at least 5 years, the organisation can be run very differently to one in which quarter to quarter cashflow really matters and there are margins to think about.
Funnily enough I work at a software company which is bootstrapped and where cashflow matters, I'd love to run things like a fully funded SV startup but I can't. We just can't afford it.
I worked at a company that was almost entirely bootstrapped, and honestly I think it was for the worse. When they had early momentum, they could have raised money but chose not to. It was an okay choice at the time, and the founders were rightfully proud of this -- that they'd grown as a profitable company on their own.
But when things got leaner, they didn't have a reserve of cash to use, nor did they have the accountability or advisory capacity of investors to help them out. And when things were lean, they didn't have the momentum to raise money any longer, just a 'lifestyle' business's revenue which isn't very exciting to VCs.
Just my personal, uninformed, opinion. And while it's clear to me that not raising money was a mistake, that's only with hindsight.
I assume there's going to be a pretty big difference between bootstrapped and funded startups. Efficiency is nice, but you need some runway too. Even if you move fast, your clients probably aren't and you need to last until the momentum gets going.
On the other hand, it's likely many are going too far, there's no point in being a zombie company for years. If you fail, better fail fast.
It depends on the startup. If I were starting a company that needs a critical mass to be profitable (eg a social network), and therefore needed more cash up front that could be produced without external funding, then no, I probably wouldn't try to boot strap.
In another example, my hypothetical startup might be able to reach profitability via bootstrapping, but wouldn't be able to grow organically fast enough to prevent competitors with deep pockets from beating you to market dominance. In such a case, taking external funding to scale quickly might be a wise move.
So yeah, I'd bootstrap if my startup lent itself to it, since having more equity is great. Ultimately, though, I'll do what the startup needs.
I think startups die because they are pressured to spend a dollar or more for every dollar that comes in.
Bootstrapped businesses are forced to retain cash for a rainy day. It is anti-fragile vs the fragile nature of a negative/break even cash flow business that depends on a steady stream of investors who introduce other investors who introduce other investors. It's built on ego and not on fundamentals and humans are fallible.
These days you can just get a loan from a bank if you have a high enough MRR to cover the interest rate. No equity, no control traded for a 3rd party who's sole interest is ROI.
I've personally seen bootstrapped businesses that had healthy MRRs rapidly transform into a race to zero or negative cashflow. When I questioned the robustness, I was told by a software engineer angrily I didn't know what I was talking about and that perhaps my economic degree wasn't any use lol. I don't think he's equity is worth anything now but the whole scenario reminded me of the Horse in Animal Farm.
The fake it till you get bought out by a giant is a lottery. Don't trade your life for one.
Having cofounded both bootstrapped and funded startups, I can say that in each case there was a deadline associated with success: for bootstrapped, we set hard targets in terms of maximum spending and time in order to test our hypothesis. This allowed us to fail fast in our own way and go back to a better paying day job.
For funded startups - at least with a healthy seed round, the investors expected us to burn fast and hard in order to prove our hypothesis or fail trying as quickly as possible, but they also expected us to not pay ourselves very much. As we found product-market fit and raised Series rounds, it was understood that we would pay ourselves competitive salaries.
Being stuck at the seed stage for 10 years is not healthy - neither in Europe, nor in Silicon Valley.
If you're bootstrapping, like we did, you absolutely have to take each step up as soon as you can, and push as hard as you can, as otherwise you'll find yourself in the time-trap described, where you bootstrap growth while neglecting organisational development.
We haven't cashed out for £800,000,000,000,000, but we've taken (small) investment after 6 years of growth and operation in order to open up opportunities (investor's customer base nom nom nom).
Ultimately, I think the main issue in startups is expectations. You probably won't make a billion dollars. You probably won't make a million. You probably won't even make $100k. But you might.
While I understand where you're coming from, and even feel emotionally invested in the idea of bootstrapping, objectively speaking, it's a bad decision to stay self-funded. It is, after all, a business, and if you can accelerate your business' growth 100x by taking on some very smart outside investors and hire very smart people, why wouldn't you?
>if your business can not be bootstrapped successfully, it's likely your business is going to never turn a profit. Funding is silly...
Well, this just isn't true at all. Many companies have very high costs up front due to the nature of their business. This is especially true in hardware startups, but can also be true in software startups.
Could be; but in my startup it was still "when we have money, we'll do X." It ended up being one of the big disagreements between me and my co-founder-- a lot of the compromises (on quality and process) that I was willing to make when we were bootstrapping were, in my mind, no longer serviceable once we took VC money. He still wanted to do everything quick and dirty, and incur all kinds of technical debt.
From where I sit, the message of the OP is still to the point-- do what you want to do, now. Don't live for the future.
Not only that, but the longer you can delay taking funding, the less of your business you'll have to give away.
I hate the thought that getting funded is like winning the lottery. Yes, it is absolutely necessary for some startups, but far too many seem to treat it as an end in itself (presumably there are bragging points associated with being able to say you've been funded to the tune of X million)
Bootstrapping encourages you to keep your costs tight, focus on profit and revenue, ship early, quickly and often, and build something people want.
The "bootstrap" part can include initial phases being funded by a day-job or consulting though. People don't always quit their jobs right at the beginning, but might if it starts taking off.
What does your company do, and why should anyone listen to you? I mean this genuinely. For all we know, you could be running a nearly defunct startup, giving advice that folks shouldn't take. Or, it could be the opposite. Anyways, as I allude to in a sibling comment, cost optimization is the wrong thing to look at when it comes to running a startup. The best way to cost optimize a startup is...to shut it down. If startups are by default hemorrhaging money either quickly or slowly, how do you make them justify the investment with an ROI?
Bootstrapping doesn't intrinsically have anything to do with this kind of strategy. If your idea doesn't have product-market fit, bootstrapping will just make its failure slower and less painful to the founder (assuming the founder continues being able to make money through independent income streams). But it also risks stretching out an idea that would have otherwise failed fast (maybe into a more productive pivot) into a zombie.
With all that said, I think that, for reasons DHH has elucidated and demonstrated far better than I, bootstrapping remains the better way to build businesses for the vast majority of people in the world. But even with that said, it doesn't take out the low success rate of starting a product driven company. Product building is capital-H Hard.
This is for externally funded startups, not bootstrapped. If it is bootstrapped, I think it is ok to dig deeper (but not actually committing major crimes or putting your health or safety St risk), but for a funded company, you should probably either wind things down in an orderly way, or at least fire everyone and pay all all salaries, pay vendors, and then switch back to bootstrap mode.
reply