The Best Advice a VC Won’t Give You: Don’t Take Money

By Miles Clements

There is a gaping hole in Harvard Business School’s entrepreneurship curriculum: what about the case for bootstrapping?  We are taught to accept as fact that raising capital is a necessary stage in any venture’s growth cycle.  In TEM, the syllabus is even designed to offer at least one case study for each bucket of financing options: angel investment, venture capital, venture debt, strategic investment, etc. But where is the case study on a company that went from garage startup to $100 million in revenue before talking to outside investors?  If the concept sounds bizarre, it’s not because the examples don’t exist.  Bootstrapping, which involves building a product that customers pay for and scaling your company by reinvesting the cash it generates, is an underappreciated concept.  Bootstrapping likely receives less attention because 1) it is not taught as a viable strategy or emphasized in the academic world, 2) it is hard to do, so the good examples are rare, and, perhaps most importantly, 3) companies that bootstrap tend to fly under the radar: they don’t get hyped by their VC’s or pay for marketing and PR.  Yet some of the most remarkable businesses I have encountered pursued this path, and its benefits are worth understanding. 

Certainly, bootstrapping is not conducive to every business model.  Bootstrappers must develop a product inexpensively, and get customers to pay for it immediately.  And to be clear, bootstrapping is not the right strategy for many of the “unicorn” companies we have covered in LTV (CloudFlare, Facebook, Google, YouTube, etc.)  But for the vast majority of startup ventures, the benefits of bootstrapping go well beyond the more obvious reasons that we’ve discussed throughout TEM: control your own lifestyle, avoid having to answer to VCs, retain more equity, etc.   Importantly, there are three key benefits to consider:

1.    Focus on product: bootstrapped companies rely on a quality product that people want to pay for.  Their products do not benefit from fat marketing budgets and customers are almost entirely acquired virally (or very inexpensively).  Instilling this product discipline early shapes a company for the better as it scales.

2.    Forces lean practices:  bootstrapped companies necessarily develop religion around cash.  Unlike startups with fancy offices and gourmet chefs (but no business model to speak of), bootstrapped companies learn that success and comfort grow in lockstep with the company’s revenue line.  All incentives are thus aligned appropriately. 

3.    Culture, culture, culture:  This point is a bit more nuanced and harder to support empirically, but it is anecdotally true of every bootstrapped company I’ve encountered.  The cultures are strong, the employees are loyal, and the founders are loved.  People tend to join these companies out of passion for the product or mission, and out of faith that it will succeed.


To provide color, I offer a few examples (in full disclosure, I interned for one of the companies below and worked for the lead investor in each):

Atlassian is a provider of software development and collaboration tools, including JIRA (for project tracking) and Confluence (for team collaboration).  When Co-Founders and Co-CEOs Mike Cannon-Brookes and Scott Farquhar set out to build a new variety of software company from their Sydney dorm room, they knew all they had to finance it was $10,000 of credit card debt.  Their strategy was thus quite simple:

No $ for sales teamà Product must sell itselfà To ease demo/adoption,  must be low priceà To build big company with low-price product, must sell 000’s of copiesà To sell 000’s, must be global in reach.[i]  

Based in Sydney, the founders knew they had limited access to VC even if they wanted it.  Their mission, therefore, was to build an enterprise software company that used a consumer model: low-ticket, high velocity internet sales with an emphasis on cross-selling over the lifetime of a customer.  They rapidly attracted a paying customer base of more than 17,000 companies, hired a team of more than 400 employees across offices in Sydney and San Francisco, and fostered a unique company culture that focused first and foremost on product innovation.  By 2010, with more than $60 million in revenue and profit margins well north of 35%, the company opted to raise its first round of outside capital. 

lynda.com is a subscription-based online provider of software training videos.  In 1999 Lynda Weinman, a teacher at Art Center College of Design, began recording courses and offering them for free as a resource to her students.  Impressed by the videos’ popularity, she and her husband, Bruce Heavin, opened the site to the public for a monthly subscription of $25.  For the next decade the company grew quickly, reinvesting profits to expand its video library and constantly turning down offers from investors.  By summer 2012 lynda.com offered 78,000 video tutorials on 1,350 topics from over 250 authors.  Revenue eclipsed $100 million and the company was incredibly profitable.  And, importantly, because the business had grown up without a marketing budget, it still benefitted from overwhelmingly organic traffic and word-of-mouth referrals.  When Lynda and Bruce finally decided to accept outside capital, they were in an enviable position to do so: the company raised $103 million from Accel, marking the largest edtech financing in record.      

As an aspiring venture capitalist, I should probably find some better advice to offer.  But the trend in bootstrapping aligns with the trend in recent VC investing (among at least one subset of firms).  As starting a company becomes cheaper (thanks to virtualized infrastructure, free collaboration tools, etc.), it becomes marginally easier to bootstrap.  At the same time, we are seeing an unprecedented wave of massive series A financings of large, profitable established companies (see LightSpeed Retail, ServiceNow, Braintree, Qualtrics, Rovio, etc.)  To me this suggests that VC’s are able and eager to reward the hard work and discipline of entrepreneurs who choose to bootstrap.  And the companies themselves are more remarkable success stories than ever before.  While hard to do and not ideal for every company, bootstrapping remains the most underappreciated and underemphasized object in the entrepreneur’s toolkit.       



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