The boom in venture capital fundraising that the technology startup market has enjoyed since the back half of 2020 has been eye-popping. Record sums have been disbursed around the world as more firms entered the fray to invest in startups, and the late-stage capital flowed like water.
But while the venture capital game seemed to turbocharge in recent quarters, there’s noise coming from the other side of the spectrum: bootstrapping.
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Mailchimp’s $12 billion exit to Intuit, announced mere weeks ago, helped set a high-water mark for bootstrapping, proving that it is possible to build large, valuable technology companies both without huge venture capital investment and in locations outside traditional startup hubs. Mailchimp, based in Atlanta, is just one of a host of startup companies building in the city, The Exchange recently reported.
Today’s startups have more fundraising options than ever, providing a number of pathways to scale. These include services like Pipe, which allows startups to sell future revenues in a competitive marketplace, and the myriad venture-debt players that TechCrunch has covered extensively.
For startups busy funding their growth with revenue, there’s even more good news. Earlier this year, Calendly, another Atlanta-based company, raised its first material external capital — at a valuation of just over $3 billion, showing that bootstrapping early doesn’t mean that equity capital sources are closed forever. A number of other companies have followed suit in recent months.
We’re curious if a changing capital landscape, and a startup market made more viable for bootstrapping thanks to business concepts like product-led growth, will shake up the demographics of startup founders, perhaps making their ranks a bit more diverse. Let’s talk about it.
Bootstrapping today
Go back in time to the dot-com boom, and it was normal for startups to spend early capital on physical hardware. Servers weren’t something you could just call up Amazon and rent by the minute, which meant buying your own and paying co-location fees. That took capital.
And, as has been discussed ad nauseam, it was harder to build digital companies a few decades back. There weren’t infinite APIs for companies to hook into to solve complex technical issues, and there were both fewer folks trained to build new tools and fewer potential customers.
In today’s startup market, much technical risk has been settled, often lowering building costs for startups at the same time. The well-worn riff that it’s easier than ever to start a company today could be wed to the concept that it’s perhaps cheaper, too. That should bode well for bootstrapping.
Other forces are at play. The concept of product-led growth could also provide a boost for startups. With product-led growth (PLG), startups depend on their product to drive customer acquisition, which can greatly lower marketing costs. Lower marketing costs, in turn, mean a smaller capital hunger while scaling — and a more salubrious climate for bootstrapping.
As Anna wrote in her Expensify EC-1, PLG has played a role in the successes of a number of companies, although many of the names we cited at the time had a history of at least some external funding during their corporate youth. The model has become more popular over time. “With Atlassian and SurveyMonkey, there were established businesses doing this, but it was very much the exception, not the rule,” OpenView partner Blake Bartlett told TechCrunch at the time. That’s perhaps no longer the case.
As with all startup trends, we’re looking in our rear-view mirrors to some degree. But the Mailchimp and Calendly stories are not unique. This year, Articulate raised $1.5 billion in July after nearly two decades of self-funding. And Octopus Deploy raised $172.5 million this April after bootstrapping for a decade. The two companies proved that bootstrapping is both possible and not terminal; startups that self-fund can later raise capital at lower effective prices — in both dollar and dilution-related terms — when they have reached scale.
Qualtrics did just that, to pick a notable example.
Venture capitalists are not shy about funding bootstrapped companies, implying a wide window for startups to split the difference — bootstrapping while young and raising capital later on. TechCrunch asked well-known investor Michele Romanow if she funds companies that have up to that point eschewed external capital.
“I think that’s the vast majority of our portfolio,” she said, adding that the somewhat “pejorative” use of the word bootstrap is “a little bit bizarre.” Why? Because while “bootstrapped” is often said with similar derision as the phrase “lifestyle business,” in Romanow’s view, building without external capital should be celebrated “a lot more.” (That venture capital is a lifestyle business is a matter for another time.)
For founders, the upsides to self-funding are obvious: more control and less dilution. For VCs, there are advantages in the form of potentially cleaner cap tables, fewer investor cooks in the startup kitchen and the chance to invest in a company that has already proven itself viable.
In the case of Calendly, product-led growth kept costs low. The company’s CEO, Tope Awotona, told TechCrunch during our Early Stage event earlier this year that after noting that his company’s product was viral from its early days, he managed to avoid certain expenses:
[S]elf-serve [is] incredibly capital-efficient, because you don’t need all of these sales people, and also the virality, instead of spending a bunch of dollars on advertising, you can really rely on the virality of the product and rely on the network of the users to really propagate and to enable distribution, just those are the two things that really allowed us to be successful.
Outlier successes are obvious in retrospect. So, what about bootstrapped startups that are crushing their markets today? They are harder to spot than venture-backed companies, nearly by definition. Startups that raise venture capital generate regular, media-friendly milestones for their businesses whenever they raise. That attracts press attention, which can boost market awareness.
But startups that don’t need — or perhaps simply do not want — to raise expensive equity capital while scaling have more tools within arm’s reach than ever before. Revenue-based financing is now an established concept. Some companies are taking it even further. Pipe has built a marketplace where companies can sell revenue — or perhaps we should describe it as a marketplace where revenue can be traded. A more active market for the buying and selling of revenue should help with price discovery, perhaps resulting in more attractive prices for founders and a more liquid market for their future receipts; the more capital that founders can access by selling top line instead of shares, the more viable bootstrapping may prove.
Per TechCrunch reporting, more than 8,000 companies have signed up to sell revenue on Pipe. Billions in revenue have traded on Pipe, implying that the company’s model has found scale on both the supply (startup) and demand (investor) sides of its market.
More financing options, more bootstrapped startups, we reckon. This prompted a question: Could bootstrapping reduce, over a long enough time horizon, some of the built-up pressure that unexited unicorns represent?
Unlocked advantages
Bootstrapping in 2021 is quite different from what it used to be – and more viable than ever. And while it is impressive to see bootstrapped companies go public, we are curious about another possibility: Could bootstrapped companies just stay private forever?
After all, not all successful startups are in a good position to IPO, and we are facing an IPO traffic jam that even SPACs are failing to solve. But funded unicorns can’t escape it: They need to provide liquidity to their investors, and it’s too late for them to pursue a different route. Their bootstrapped counterparts, in contrast, have options.
This makes bootstrapping an attractive alternative for founders who don’t want the pressure of having raised venture capital — or are simply unable to get that sort of funding in the first place. Sure, VC in the U.S. broke records this year, but it is still very, very far from being evenly distributed. Per Crunchbase data, U.S. startups with solely female founders raised just 2.2% of the country’s venture funding for the first eight months of the year.
Furthermore, according to Crunchbase, funding to Black founders in the first half of 2021 only accounted for 1.2% of the total, despite a “more than four-fold” year-on-year increase. Black women startup founders raised just 0.34% of the total in that same period. If you are in one of these blind spots, it is not hard to see why you may want to seriously consider bootstrapping.
Beyond being able to dodge pressure for liquidity, and perhaps allowing for a more diverse founder pool, startups can simply skip the expenses and headaches of going public.
While getting listed can bring rigor to a company by forcing more concrete accounting controls and more robust forecasting, it’s also costly and changes how a company operates. Alex discussed the matter with a CFO, a former CFO turned venture capitalist and a venture investor during Disrupt this week, where the costs were clearly detailed. But for bootstrapped companies, there’s no trigger or push to go public or sell a business. Control remains firmly in the hands of its builders, instead of its backers.
As a final note, bootstrapping doesn’t preclude a company from giving its employees equity. And in today’s climate, many employees may expect shares in the company they help build. Bootstrapping, in other words, is not a license to go full-Mailchimp and tell workers that you won’t sell the business, only to later take a check without letting the corporate staff buy into that very upside. You can share the pie, even if you aren’t inviting capital sources over for a slice.