Should you Bootstrap or should you Startup?
After I graduated from university I was sure what I was going to become: a tech entrepreneur. I had spent the better part of two years learning to code in the evenings while finishing my business degree during the day. But once I started my company, I became confused.
I saw two types of tech companies out there. One prominent in media outlets like TechCrunch and Wired. I was starstruck by Juggernauts like AirBnB and Uber that seemed like the pinnacle of entrepreneurship.
In the Stockholm tech community I also found an ecosystem around unicorns: business angels, accelerators and VC funds. Here in Sweden, the stars to aim for were Spotify and Klarna.
The Mysterious Bootstrap Crowd
In my research I was a finding a second way. This path seemed less defined, the community much more scattered. I had read Tim Ferriss’ first book The 4-Hour Workweek and had been mesmerized by the real-world stories of entrepreneurs. Youngsters were earning six-figure incomes while traveling the world. Families living on a sailboat and managing their business from there. That sounded like the life I wanted to live.
This type of entrepreneur was different. They owned their business, as compared to startup founders that gave away large parts of equity quickly. The bootstrapped entrepreneurs I discovered online also seemed to have complete freedom over two valuable resources: space and time. While startup founders were grinding away day in and day out, those bootstrappers had found a way to integrate their business with the rest of their lives. People in the startup industry were dismissively talking about them as lifestyle entrepreneurs.
Bootstrappers often had more than one business. When you asked them what they do, they would give you a vague reply of working on a couple of projects. If you asked a startup founder what they do, they would recite a perfectly timed pitch of their startup that they spent hours refining in front of a mirror.
In fact, This Week in Startups host Jason Calacanis mentioned in his podcast that one of his favorite questions to ask aspiring startup founders is if they have any other business projects going on. If they share other ideas beyond the focus of their startup, he will not invest.
It was hard to find numbers on the success rates of businesses founded by bootstrappers compared to funded startups. But as every honest VC will tell you, most startups fail. It’s because the whole rationale of the venture capital industry is that one in ten will earn back the investment of all. You have to aim high. The price you pay is a low chance of success.
Bootstrappers often adopt proven business models that have a higher chance to succeed. As long as you can execute and have a differentiation in an existing market, your company has a good chance of succeeding. Since bootstrappers test many projects often at once, they increase their odds for good outcomes.
To be clear, the world is not black and white. There are many great companies that sit in between these two brackets. Your entrepreneurship might be a hybrid of the two paths. Just be aware of the tradeoffs.
Tobias Lütke, one of the founders and CEO of Shopify had to face that choice in the early days of Shopify. He wanted to start an e-commerce shop for snowboards and, at that time, there was no easy software available. He and his founders decided to build it themselves. Tobi resisted funding even as their service was getting great feedback by customers. Eventually, he realized that the company he started had a larger purpose — to empower other merchants to sell online. Thanks to funding he scaled Shopify to a hugely popular platform that powers more than 1 million ecommerce stores worldwide today.1
How to decide between startup and bootstrap
Whether you have started a company or not, how should you decide in which direction to go? It comes down to your priorities and objectives. When you reflect on why you want to become an entrepreneur, your reasons will probably fall into one these three categories: purpose, wealth and freedom.
The purpose of your company
Do you have a deeper underlying purpose for wanting to become an entrepreneur? If not, that’s fine. Don’t forget that many founders that we today think of as visionary did not start that way. Elon Musk’s first companies were a city guide software for publishers and a Fintech startup. He was not exactly solving the world’s biggest problems like he does today with companies like SpaceX, Tesla and Neurolink.
If you already have a clear purpose in mind that will drive you, that’s fantastic. It is probably the best motivator to keep going when things get tough. Think through your company’s roadmap and try to identify whether you really need outside funding. Don’t conclude too early that the only way to fulfill your company’s purpose is to raise money.
Take curing cancer as an example. You might conclude that curing people of cancer requires drugs that cost tens of millions of dollars to develop. However, some recent research into cancer suggest it might be a metabolic disease. Therapeutical treatments that are being tested include the ketogenic diet and hyperbolic oxygen therapy, two cost-effective treatments that do not require expensive laboratories or decades of research.
If you are still convinced that your purpose as an entrepreneur needs funding, go for it. Investors will love your obsession with solving a big problem and you will have the fuel to keep going.
Earning money is one of the key objectives of a company. But is it also an objective for you? Do you want to reinvest profits into the company or do you want to take out cash as soon as possible? When you have outside investors, this decision might not be up to you. Venture-backed startups can pay the founder out before an acquisition or IPO. But that generally happens when the company has come a long way and is close to an exit event.
You should assume that during the first 5 – 10 years of a startup you will be financially worse off than with a career as an employee or bootstrapper. It takes time to build a billion dollar company and that is what your investors will expect. Most founders can sympathize with the notion that things take longer time than they thought they would.
You need to define for yourself what enough wealth is for you. Are we talking tens of thousands in the bank, or are we talking billions? There are not many billionaires in the world that have bootstrapped their way to that money. But do you really want that much money? It comes with a lot of responsibility and attention attached to it that is not for everyone.
One of the most important aspects people wanting to be self-employed raise is freedom. The common assumption of an entrepreneur is that you won’t have to answer to a boss anymore or serve at beck and call.
I hate to break it to you, but you will always serve someone. If it is not your boss, it will be your investors, employees or, most importantly, your customers. You will find your new role more fulfilling as you are forced to provide real value. As an employee, you might have to work on tasks that have no clear benefit in the real world. Not so as an entrepreneur. You either provide value that people are willing to pay for or you can close shop.
As a bootstrapper, especially as a one-person company, you can focus on your customers. Startup founders will sometimes complain that half of their time is spent sending reports to the board and investors. But many are also grateful for the guidance and accountability outside investors provide.
More so than freedom from superiors, you might yearn for freedom of time and space. You might dream about taking two hours off during lunch to get some sun or working from home and spending more time with your family. You might also just want to build your culture and tribe around you in a more traditional office.
There is nothing wrong with either of these. Just keep in mind that when you take in investors, your options might be much more limited on how to allocate time and space. If you produce outcomes, they will be happy either way. An investor’s incentive is that you work hard on your company to make it as big as you can. This might not be your incentive. Keep that in mind.
Which way should you go first?
Deciding which entrepreneur you want to be is not easy. It will also change over time. If you’re unsure which path to go, my advice would be to start off with a bootstrapped business. Use a simple business model and try to get to revenues as quickly as possible. The joy of serving customers will keep you going and inspire you to new ventures.
Startups are a big commitment. Depending on the market you are going for, you should plan for 5-10 years of hard work. If you already founded a company before, funded or not, you will be faster. There are many mistakes you will avoid after you made them the first time.
If you decide to go for your moonshot, go all in. But keep the attitude of a bootstrapper. Instead of being swayed by what other startups offer or how they operate, contemplate on what your company will need to succeed.
I can’t wait to see what you are building next.
If you want to get started in either direction I will share some resources below I found personally helpful. Any of these are insightful no matter what company you want to build.
- Masters of Scale Podcast Reid Hoffman, known as a member of the PayPal mafia and found of LinkedIn, interviews high profile tech entrepreneurs. Each episode is based on one of Reid’s startup theories. It’s a great listen.
- Zero to One from Peter Thiel, who was also part of the PayPal mafia. This book is a great reference to get in the mindset of thinking big. He also dispels some common myths like the one about the first mover advantage that you might trip over when getting started.
- The 4-Hour Workweek by Tim Ferriss. First, don’t dismiss this book because of the sensational title or bad reviews online. The book has very little to do with working four hours per week, but more so with freeing up time and space to do the things that you want to do. That might be starting more businesses or spending more time with family and friends. I find that there are quite some reviews online that simply dismiss this way of living to justify their own current life. One critique is valid: the book is outdated and that is why I also recommend the following.
- How to Be a Capitalist Without Any Capital by Nathan Latka. I hate to recommend this book. Seriously. The title is horrible. The cover shows a sleazy suit posing like the biggest douchebag on earth. The writing from Nathan is cocky and you can tell that he did not think hard enough about how to structure this book. But it’s worth it for the concrete examples and tips in the book. He shares very openly how he starts, invests in and acquires businesses and his mindset is the right one for a bootstrapper. If you can tolerate the fluff and borderline immoral tactics you will find some nuggets there.
- Indiehackers Forum is a great resource for anything bootstrap. You can read great articles from other bootstrapped founders there and join the discussions. The people there are helpful and considerate.