Saturday, May 8, 2010

When Does It Make Sense To Bootstrap A Startup?

My answer over at Peerpong to the above question:

When you're young, dumb, and... just kidding. It depends on the industry, who your team is, and how quickly you need to scale due to competition in the market.

Age is also a driving factor along with your family network. When a person is in their twenties and not married, bootstrapping is much easier since you probably have lower rent costs, no mortgage and can eat ramen noodles all day. Then it depends on how much savings you have, how much your family network could support you during this stage, and how much credit card debt you're willing to take. I've gone through this with my first startup, and it was fun but stressful. Especially when my dad had the poker talk with me: "Bernard, business is like poker, you have to know when to fold. So when are you quitting this startup thing?"

Well, older entrepreneurs can bootstrap too if their spouse works or is a Google millionaire, but usually a household with kids does not want to see money going out towards risk investments. Which is why you see even successful entrepreneurs, who cashed out $10M+, still go back to the investor well because their wives clamped down on their bank accounts :)

Of course, bootstrapping is very difficult if you're in cleantech or biotech versus social gaming or social media, so these scenarios aren't relevant in these sectors since typically cash needs are $20M to $50M+ for just the product development.

There is also a point to which bootstrap can only take you so far, so if you're starting to get some attention I would recommend run with it and fundraise because most startups are beauty queens (or kings) only once. I've seen many startups pass on funding when they were hot only to go back to the well that became dry or VCs had a new flavor of the month.

But if you're building a social game and are a kickass game developer with a solid creative partner, bootstrap and hope that it goes viral so that you can get a higher valuation.

In the end, I would recommend bootstrapping if you can to increase your valuation, but also be aware of the point when it begins to be a drag on your product development and growth.

UPDATE: Since this post has been getting good traffic and some link love, I'll add more detail and a link to my rapid response I posted at PeerPong.

The other part of the "poker talk" with my dad is described in an older post here, "How Do You Know When to Fold Your Startup?... Facing Failure is a Hard Road"

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