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To Bootstrap Or Not?

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Bootstrapping is a tougher choice than ever for startups. Seed capital is so widely available that deals for the hottest companies can close in days, and many entrepreneurs never even consider bootstrapping their company — especially in the race to join the “Unicorn Club.”

On the other hand, some startups don’t have the luxury of securing investors to help launch their company, and others see enough value in going it alone they forgo outside funding.

In 2009, I left my job as a software engineer at Facebook and took a leap of faith to found Storm8 with a few friends. We scraped together our savings and funded the company ourselves. Over the following six years, we grew the company to more than 250 employees without raising any outside capital. Remaining bootstrapped hasn’t made our journey any easier, but the required differentiated approach itself has been incredibly rewarding and satisfying.

Bootstrapping: Is Your Company A Viable Candidate?

A startup generating decent cash flow with the founders’ initial funding suggests a level of capital efficiency that makes bootstrapping viable. Most transaction- and subscription-based mobile/Internet services startups, Storm8 included, fall into this category. For us, bootstrapping was the quickest way to get off the ground and attack the emerging mobile games opportunity.

Raising capital was an option, but we knew that every day spent on fundraising meant falling further behind the competition.

There are two core beliefs as a bootstrapped company that continue to drive our company culture: don’t just spend $1 million, invest $1 million; and empower employees by not setting a budget.

Don’t Spend, Invest

Both VC-backed and bootstrapped companies must tightly manage cash flow, particularly in the early days through the growth stage. But bootstrapped companies need to be even more financially prudent, as their thin profits are the only funds for growth. Compared to most VC-backed companies, a self-funded startup needs to be relentlessly frugal with its spend on things that don’t contribute to the bottom line (extravagant office space and decor), and must invest extra on the things that do contribute (employees).

My philosophy is: “Don’t spend $1 million, invest $1 million.” The distinction between spending and investing is crucial. It drives everyone to think about how their actions will benefit the company, which is the mechanism to turn spending into an investment. But this doesn’t mean that the bootstrapped company needs to micromanage every little penny spent. This brings me to my next point …

Empower Your Employees

Bootstrapping should automatically set the tone for everyone in the company to make decisions based on limited resources. This starts with the leadership team and should be continuously reinforced with all employees. At its best, the company will then have a culture of accountability rather than entitlement.

Over the years, many Storm8 hires have joined from larger companies. Whenever their first project is discussed, the inevitable first question is “What’s the budget?” My typical answer: “There is no budget. As long as you can justify the cost, then that’s your budget.” This sets a tone of accountability and a sense of empowerment for employees to fight for what they need. This positions a company to scale efficiently and rapidly respond to the inevitable issues that arise.

By combining the above with typical startup best practices (e.g., move fast, get customer feedback, test, iterate, etc.), you’ll hopefully be well on your way to jumpstarting a successful bootstrapped company.

To Remain Bootstrapped Or Not

Most successful self-funded companies will consider outside investors at some point. Reasons for raising capital as a scaled bootstrapped company typically revolve around accelerating growth and fighting off competitive threats. It provides market validation, sets valuation and could potentially even offer some liquidity to early employees.

Funding also can provide prestige, and potentially leads to that fancy office space, which can help with recruiting. These are all-powerful, legitimate motivators for taking funding, and points we seriously considered.

Before thinking about raising capital, make sure you have the bandwidth to not fall behind on execution.

However, we made a difficult decision to remain self-funded, despite the dizzying market dynamics and conventional wisdom that better-funded companies would win over time.

If you’ve scaled your bootstrapped company and are contemplating whether to pull the trigger on financing, here are some considerations.

Purpose For Capital

Raising money implicitly assumes that the business has some specific purpose for the newly raised capital. Storm8 was in a fortunate position of strong profitability, where capital was not the limiting factor in our growth. We ultimately came to the conclusion a few years back that there was no meaningful purpose for “excess” cash derived through a funding round.

That being said, as a founder and CEO of a company, you should be opportunistic about fundraising. The best deals often come when you least expect and are not even seeking the opportunity. And as a profitable, bootstrapped company, you then have the option to not settle for less.

Focus On Execution

Execution means everything in an uncertain market. Having control of our own destiny in a rapidly evolving market, particularly in the early days, was critical for quick decision making and focused execution. We set our own priorities, not only for what to do but also what not to do. Before thinking about raising capital, make sure you have the bandwidth to not fall behind on execution.

We saw it firsthand in our operating metrics when we contemplated raising outside funding years ago: Every single meeting meant time away from the product. Devoting time to investor discussions hurt our growth rate, and when we focused back on execution, we achieved explosive growth again.

Six years ago, I couldn’t have imagined how hard it would be to launch and grow Storm8. I certainly wouldn’t have predicted that we would successfully scale our business absent any outside capital. But now I can look back and see that being bootstrapped is a large part of our success story to date, and it helped us create a strong employee culture that continues to evolve and thrive in a massive yet turbulent market.

Yes, there is understandably more buzz around the “billion-dollar unicorns,” most of which started with outside funding. But let’s not forget some of the most successful bootstrapped unicorn companies — like Valve and Mojang. I am a true believer that the world is big enough that more unicorns can be bootstrapped entities.

Featured Image: Gonzalo Aragon/Shutterstock