Saturday, March 19, 2011

When Does It Make Sense to Bootstrap a Start-up?

(Just reposting my article over at InsideWork since I realized I don't have a copy over here :)

I previously described my first startup and bootstrapping experience in a prior post, which was exhilarating, frustrating, rewarding, and depressing all at the same time. Recently, I was posed a related question about “when does it make sense to bootstrap a startup?”

My answer would say that it depends on the industry, who is on your team, and how quickly you need to scale due to market conditions (e.g. competition, policy changes).

First, I would say where you are in life is the primary factor. Are you single versus married? Renting versus having a mortgage? No children versus one child and another on the way? 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. Next is probably how much savings you have, how much your family network could help you out, and how much credit card debt you’re willing to take. I remember being a fool, but a giddy fool, and signing up for dozens of credit cards with my co-founder, Jimmy. It was a fun but stressful time, especially when my dad had the “poker talk with me”.

“Bernard, business is like poker, you have to know when to fold…”

Older entrepreneurs can bootstrap too depending on the business and market, how much they are willing to eat into their nest egg, and if their spouse works. From my experience, usually a household with kids does not want to see money going out towards risk investments. Which is why you see even successful entrepreneurs, such as those who cashed out more than several million, still go back to the investor well because their wives clamped down on their bank accounts.

Your targeted industry matters too. Bootstrapping is very difficult if you’re in clean-tech or biotech versus social gaming or social media, so these scenarios aren’t relevant in these sectors since typically cash needs are $20 million, $50 million or greater for just the product development.

There is also a point to which bootstrap can only take you so far. If the competition is fierce and your competitors already have a good war chest or their product is slightly ahead of your features, then outside money makes sense.

If your company is starting to get interest from investors, I would recommend that you go with the momentum 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 venture capitalists had a new flavor of the month.

An ideal scenario to bootstrap is if you’re in your mid-twenties, a stud game developer, and creating a social game with a solid creative partner. Build it, launch it on Facebook, and hope that it goes viral so that you can make money, sell it, or get a higher valuation.

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

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