I love architecture. Part of the reason why I worked in rentals/real estate for a while was so that I could look at photos of beautiful apartments and houses all day while pretending to do work. I’m kidding about the pretending to do work part (mostly).
Houses mystify and excite me. My wife and I are thinking about building a house in the next couple of years, yet we have absolutely no idea where to start. Do we find an architect first? Should we buy land now or later? What about plumbing and electricity – how do we know how to set that up if we’re not in a development? We know where we want to end up – with a beautiful mid-century modern home in a beautiful setting – but how do we get there?
Bootstrapping a business is the same way.
You hear about companies raising ten million dollars to build a better widget or to “disrupt” an industry (which let’s be honest, rarely happens). The founders of venture-backed companies are building skyscrapers. They’re borrowing money to build something huge that they hope will turn a profit someday (though maybe not for them, though almost definitely for their investors). They’re throwing up the building and then trying to put people inside.
A bootstrapped business is a very different animal. When you’re building a bootstrapped business like I and many of the people I know now, you make different decisions. The money you are playing with is yours, not someone else’s. If you don’t make revenue, you can’t pay the bills. If an early hire (if you hire at all) isn’t working out and driving the value you need them to, you have to let them go ASAP otherwise your business will likely literally go out of business.
Let’s talk about some lessons I am learning building a bootstrapped business.
Keep a close eye on your cash on hand
This is real business and the way it has been done forever. I’d bet that if you go anywhere in the world other than the major metros (and I fully recognize that I’ve lived in major US metros for 6 years) that business owners think that the Silicon Valley companies operating at a huge loss are crazy. I’d agree.
Cash flow is the frame of your house. You can’t build a business without it.
As a bootstrapped entrepreneur, I have to keep a close eye on my cash flow and know where every dollar is going. I need to know my runway, where I can cut costs, and also how much I have so that I know what I can invest in.
This is one of my least favorite parts of being an entrepreneur, because I actually hate dealing with money (though am working on being better at that). Being bootstrapped means you must know your revenue model (or at least one that you can later change) from the beginning. However, if you are running a bootstrapped business then your cash flow is all you have. You don’t have any VC daddy money to pay your payroll. If you don’t make the cash, you don’t pay the bills.
So, know your cash flow and cash on hand all the time.
Find the metric that drives your business
Every business has one metric that drives growth. This will be different for every business, and I’m not so concerned about what the metric is that you pick. What’s important is that you pick one and then measure against it.
This one metric is your true north. It’s what you optimize all of your efforts towards and what you watch incessantly. It’s the square footage of your house.
The great thing about having a metric is that it’s easy to measure and then know if you are measuring the right one. The first metric I used for Credo ended up not being the correct one, so I’ve made an educated decision about what the new one should be and am building towards that. Had I not been optimizing for the one metric that I thought I needed to move, I would not have known soon enough that I was heading in the wrong direction and needed to change course.
It’s ok to do side work when bootstrapped
I recognize that many of the people reading this probably work at marketing agencies. I spent a few years working at agencies and also spent a few years in house building and leading marketing teams.
A venture backed business, like a skyscraper, is funded to get big fast. Therefore, many VCs and angel investors will ask the founders to not do any side work. A bootstrapped business on the other hand can only grow as fast as you can make money or extend your runway.
Many boostrappers also do side gigs while getting their business off the ground. Personally, I am doing some marketing consulting and also taking on a few coaching clients where we talk about their challenges as a freelancer or agency owner working with clients. Others depending on their talents will do things like build websites for clients, maybe even have a full time or part time job. I know a number of agency owners, like Ross Hudgens of Siege Media, who did their own side work for a while as their agency revenues grew.
I also know some marketing agencies and agency owners who have their own side projects, under the umbrella of their agency or as a separate legal entity, to keep them fresh and innovating. Maybe they’re an organic search agency but now needing to learn how to do paid social so they launch a website that they can use to only drive traffic through social media. I’m a big believer that every person should have a side project, whether that is a personal blog or consulting clients, because it keeps them fresh and gives them another creative outlet.
The real estate correlary is akin to building a small house to live in while you are building your larger permanent home. You’ll learn some new skills by building a small place that will help you with your big house, and you’ll also have a place to live (think: financial runway as a bootstrapper) that may even become your full time place.
Building a bootstrapped company is hard and stressful. But, it also has its unique brilliances such as being your own boss and owning 100% of your company and knowing that everything done is attributable to your effort. That’s both a blessing and curse and you need to know when to hire out, such as I do with backend web development. Play to your strengths and hire out when you can.
I’d love to hear your perspectives on bootstrapping vs VC. Which have you done or would you do, and why?
One thought on “Bootstrapped vs VC – Building Houses Before Skyscrapers”
I enjoyed reading your article as I struggle with this decision myself. On the one hand, bootstrapping allows you to do the work of experimenting to find the best product/market fit, without too many chefs in the kitchen.
On the other hand, the daily stretch of my time and resources is a massive challenge that is definitely a cause of slow growth.
I also tend to think that ‘smart money’ investors are likely to provide strong advice and support because they have a greater vested interest in the outcome that other mentors and colleagues who are my support network.
I’d love to hire some great talent, but find it hard to cross the chasm of regular income to allow me to do it.
I’ve managed to keep myself 100% focused on the business – a good strategy for keeping me from falling back on a Plan B.
It’s likely investors will only want to come onboard once I don’t need it. For now, I’m trying to raise an angel round of investment so I can grow more quickly and try and establish a strong market position for townhall.
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