Opinions expressed by Entrepreneur contributors are their own.
With an eye-popping number of tech startups turning to VCs to fund their growth and an increasing flock of investors pouring limitless sums into startups, this might seem like the “right” way to build a business. Entrepreneurs, of course, commonly turn to venture capital funding from the get-go, convinced that it’s the only way to get off the ground quickly.
Bootstrapping, meanwhile, has suffered from somewhat of a stigma: There is a pervading thought that if a fledgling startup is profitable too soon (before getting an injection of venture capital funding), then it isn’t pushing itself enough. “Why didn’t they board the VC train and go farther and faster than they could have done with their own limited funds?” might be the resulting question.
However, while venture capital success stories of unicorn companies are often the ones that wind up on the front page, there are also incredible and successful enterprises that got their start with bootstrapping. And while crazy valuations and over-the-top fundraising rounds are in the spotlight a lot lately, there is enduring value in bootstrapping, which actually offers many advantages over VCs.
The danger of insane valuation
Unfortunately, the valuation a company is labeled with isn’t always based on solid data, such as revenue. Rivian, the up-and-coming electric automaker, is a prime example of inflated valuation. The company made history when, just days after its IPO in November of 2021, it topped $100 billion in valuation, its worth suddenly above mammoth automakers like GM and Ford. The crazy part is that Rivian has no material revenue to speak of at the moment, with valuation simply built on the belief that it was the next Tesla. Amazon even got on the bandwagon by pre-ordering 100,000 delivery vans from the electric automaker (still not delivered by the end of the third quarter). Investors who poured funding into Rivian did so on a leap of faith. They weighed in heavily with the expectation that the electric auto market would become more profitable than the gas-powered sector — that their present-day dollars would be worth a hundredfold later on. Those are high hopes; and if Rivian doesn’t deliver, it could sound the death knell for the fledgling company.
And therein lies one of the dangers of over-funding businesses that can’t always deliver: It puts massive pressure and high expectations on a startup to grow exponentially and quickly, or face the music.
Related: Fundraising Vs. Bootstrapping: How To Decide What You Need For Your Tech Startup
Not every success story started with an influx of investor cash. Including Craigslist and GitHub, there are many highly successful businesses that elected to forego investments — to get their start with one good idea and no initial outside funding.
When you think about email newsletters, one company comes to mind: Mailchimp. The Atlanta-based giant that now boasts almost $700 million in annual revenue also had humble beginnings. In 2000, co-founders Ben Chestnut and Dan Kurzius were laid off from their web design jobs and spent the next seven years painstakingly building this company part-time. By 2007, they were finally able to focus exclusively on Mailchimp, which has paid off massively; it is 100% founder-owned, enabling increased pocketing of hard-earned profits.
Brooklyn-based Tough Mudder co-founders Will Dean and Guy Livingston took a wild and risky idea, invested $10,000 each, and made that into a reality, too. The company is incredibly successful, hosting annual extreme endurance events around the world. While it was a huge risk to build without crowdfunding or venture capital, they managed to turn a dream into a lucrative success story, all while retaining control.
Related: 7 Ways to Bootstrap Your Business to Success
Why bootstrapping still matters
The above-mentioned companies’ successes underscore why bootstrapping is still a crucial decision. Just a few of its payoffs:
• Retaining control: A fool and his equity are soon parted. As a company grows, investors will often swoop in to offer funding and opportunities to sell. Entrepreneurs should think carefully about these options, time decisions properly and only accept money if they know exactly what they’ll do with it. Until then, keep your hand on the wheel and navigate the ups and downs from the driver’s seat.
• Enhanced creativity and confidence: Bootstrapping means you have to face challenges without the cushion of venture capital to catch you. It pushes people to think outside the box, find unique solutions and make important sacrifices, all of which develop entrepreneurial confidence. You spend less time worrying about letting down investors and more time focused on growth.
• Creating a tight-knit team: Working alongside people who have skin in the game and are deeply invested in making the business work creates connection and loyalty. Bonding over challenges and fun solutions makes for a staff full of energy and commitment.
• Resourcefulness and practiced intention: Building a company without venture capital keeps you on your toes. You stay resourceful, and think long and hard about decisions that affect business and growth. You hire thoughtfully, outsource strategically, and learn to do more with less.
Related: How to Make the Most of Fundraising In 2022
While venture capital is still a crucial option for entrepreneurs in need of significant funding to get started, bootstrapping is making a serious comeback. Thanks to new business concepts like product-led growth and lean startups, it’s increasingly possible to grow a business without fundraising (and giving away equity). It’s important, however, to consider the nature of the business, your funding needs and growth potential before deciding whether you have the ability to bootstrap or whether venture capital is the best strategy.