Should Startups Bootstrap or Raise Capital in 2022?
Should you bootstrap or raise capital? Should you try to build your startup through revenue alone? Or will you have better odds of succeeding at scale if you focus on securing investor money? This can be a divisive question in the startup world. And it’s becoming even more relevant now that the market seems to be slowing down. So are you better off building your startup to bootstrap or raise capital?
Even if you’re seeking investors, you should build your startup with a bootstrapping mindset. A clear plan for reaching profitability will help you make better use of any VC cash. The question isn’t whether your startup should bootstrap or raise capital – it’s how you’ll deploy whatever resources you acquire.
In recent years, investors have made it shockingly easy for startups with shaky fundamentals to get major funding. But there are good reasons to think the flow of easy money won’t last much longer. A bootstrapping approach may be essential in helping your startup succeed in the long run. Keep reading to find out why.
The Great Bootstrapping Debate
Should startups bootstrap or raise capital? It seems like a simple question. But you don’t have to dig deep into the startup community to find people arguing passionately on both sides.
The pro-fundraising crowd will point out that investor money offers a huge competitive advantage. It’s pretty hard to go head-to-head against a company whose pockets are 10 times deeper than yours. Meanwhile, die-hard bootstrappers argue that chasing VC dollars distracts people from the fundamentals.
We wind up seeing a lot of both perspectives at Launchpeer. Many of our clients are first-time founders who see raising capital as their best shot at building their businesses. But our numbers-focused approach is heavily inspired by the bootstrapping world.
So do we think it’s a waste of time to pursue investors? Not at all. In fact, helping clients land funding is one of our most sought-after services. However, we always advise new founders to think like bootstrappers.
The Bootstrapping Mindset
What does it mean to think like a bootstrapper? At its core, it means building your startup with the goal of making it pay for itself.
That doesn’t mean your business needs to be self-sustaining right out of the gate. That’s not a realistic goal for most entrepreneurs. But you should have a clear idea of how you’re going to become profitable.
That starts with the numbers. Pay close attention to how much it costs you to grow. Then use that information to figure out what you need to charge in order to turn a profit. You can boil this approach down to two numbers:
- Customer acquisition cost. This is how much you spend to land each conversion. Figure out what your sales team costs you each month and divide that by how many clients they sign up. Or divide your total ad spend by your sales numbers. The result is your CAC.
- Customer lifetime value. Your CLV is how much each person spends on your product during their entire time as your customer. If you have a subscription service that costs $10 per month, and the average user deletes it after 6 months, you have a CLV of $60.
These aren’t the only numbers that matter, of course. But the tradeoff between CAC and CLV is at the heart of the bootstrapping approach. If your customers bring in more than you spend to acquire them, you have a path to a self-sustaining business.
The Incentives of Investment
It might seem obvious that you should try to have more revenue than expenses. Why are we calling this the “bootstrapping mindset” and not the “Business 101 mindset”?
The reality is that many people in the startup world treat profitability as an afterthought. They aim to capture as much investor attention and money as possible, funneling it into building a huge user base. The idea is that once a startup has a huge slice of the market, it can cut costs, raise prices, or do whatever else it takes to shift into profit-making mode.
It’s not a completely crazy theory, and you can point to some extremely successful examples. Hint: one of them rhymes with “Blamazon”.
But even from the start, “Bleff Blezos” had a clear idea of how his company would one day be profitable. Too many founders these days don’t. They figure that with enough investment runway, they’ll have plenty of time to come up with a plan.
Unfortunately, many investors have rewarded this sloppy thinking with huge piles of cash. The results were predictable: tons of high-profile flops. Many promising startups burned through hundreds of millions in capital, attempted half-baked pivots to profitability, and promptly crashed and burned.
The Fundraising Feeding Frenzy May Be Ending
The past few years have seen lots of companies with shaky fundamentals get funded. Blazing-hot markets drove huge Series A rounds for companies with no real plans for turning a profit.
However, we’re seeing signs that the venture capital market is cooling off. As it does, investors are going to get more conservative. In that kind of environment, a business with strong fundamentals is a much more attractive investment than one with only a vague plan for growth.
This is where the bootstrap mindset gives you an edge. Do you know how your business can make a profit with the budget you have now? If so, you know how you can use VC money to make way more profit. You can explain exactly why investors should expect to see a return if they back you.
Let’s imagine two founders with two different social media apps. One of them walks into the pitch meeting with some exciting growth figures, showing that their platform is acquiring hundreds of new users each week. They think they can grow ten times as fast with $500k to put toward marketing. But they have no revenue, and no plan to earn any revenue.
The other founder has hard data showing that it costs them about $10 to flip each free user to a premium subscription. Customers stay with the paid plan for an average of 5 months, spending $25 total in the process. With half a million to invest in sales and marketing, they expect to reach a million users and a 15% profit margin in 6 months.
Which company would you fund?
How to Decide if You Should Bootstrap or Raise Capital
“For a startup to be successful, it needs to catch the attention of investors and prove its worth.” Some numbers that they found most interesting.
Okay, so you’re building your company using a bootstrapping approach. But how do you know if you should go after investors? That will depend a lot on how fast you’re looking to grow and how much you value independence. Our advice is to go ahead and raise money – as long as you’re doing it for the right reasons.
Venture capital can be a great tool to help you scale up faster or get to profitability sooner. It might even be a necessary part of your strategy. Maybe you have a solid plan for making money that includes some high initial costs. Or maybe you need economies of scale to get your costs below your income. In that case, you should absolutely fundraise.
But don’t seek out investors just because it’s what you’re “supposed to do” as an entrepreneur. Or because you want someone else to pay your bills while you come up with a real business model.
The Bottom Line
Whether you plan on bootstrapping or raising capital, set up your startup like a bootstrapper. Then you can decide if it makes sense to fundraise. If you do land some investment cash, you can use it to fuel the money-making machine you’ve built. If not, you have a backup plan. Either way, a focus on the fundamentals will serve you well