The Founders’ Dilemma: to Bootstrap or to Seek External Funding

It seems that everyone by now, including non-techies, knows this secret of launching a web or mobile startup: it has become more affordable than ever before.

What this excitement masks is the fact that in order to take the business to the next level (read: scale it to millions of dollars in annual revenue) still requires a huge effort that necessitates the injection of cash that venture capitalists are willing to provide if the market, in their sole estimation, has the potential to scale to more than $100 million in annual revenue.

I am not going to get into the fight between those who insist that bootstrapping is the way to go and those who have a firm belief that in order to be successful (read: to crush the competition and to gain a sizable market share) one has no choice but to seek external funding at the early stages of the startup life cycle. Both camps have valid points, and they have living examples they can point to.

What I think gets lost in this heated debate is the fact that what should decide the outcome in favor of one option or the other is the objectives and tolerance levels of the founders themselves. It’s only through answering this question that the choice becomes obvious.

For instance, if the purpose behind launching a web/mobile startup is to create independent jobs for the founders—and may be create jobs for few other employees—then bootstrapping is the way to go. In this case, the founders must go after a niche market and be the best at what they do.

On the other hand, if the objective is to tackle a much bigger problem (read: become the next Facebook or disrupt a complete industry) then the founders have no choice but to seek angel seed funding, and eventually go after follow-up financing from VCs.

It should be emphasized that the founders in this case must be willing to sacrifice control, at least partly, that inevitably comes with the injection of cash (VCs are not charities as far as I know). On the other hand, what the founders must realize, and accept, is that VCs do not only bring cash to the table; they also bring a whole network of valuable contacts and leads—at least the good VCs do—which in most cases are far more important than the cash they inject into the startup. In a nutshell, the baby becomes theirs as well to that point that they feel they have the obligation to nourish and grow.

To help founders decide which route to take I list below four questions they must answer (before even writing any code):

1. What is it that we want out of this? Do we want to become the next Larry Page or Mark Zuckerberg, acquiring fame and wealth in the process? Or do we simply want to make enough money and to have independence in order to live a “comfortable” lifestyle?

2. What problem are we trying to solve? Is the problem real or imagined? Have we talked to enough potential customers? How big is the market? Is it a niche market (leaving the excitement aside will help answer this question) which we can go after with modest resources? Or is it a big untapped market with little or no competition that requires the financial support of deep pockets in order to capture

If there is a real problem, for which we have a real solution, what is the perceived value of our solution? And is the customer willing to pay us money for it immediately upon launch? Or will we have to wait many years before generating any income?

3. What do we see ourselves doing in five years from now? In 10 years from now? Do we want to exit through selling or through an IPO? Or do we want to do this for the rest of our lives because we feel so passionate about it to the point that we can’t imagine ourselves doing other things in life?

4. Do we have the patience, the energy and the time to deal with investors and to answer their never-ending questions and concerns? How much tolerance do we have for “external” interference? Will we be willing to step down from our executive role if the board asks us to? Are we willing to be scrutinized by the media and by the public?

There is no shame attached to choosing one option or the other. What’s important is to discover and know one’s self before launching a startup. Once on the high speed train it might be hard, if not impossible, to reverse the direction. Therefore, finding out who you are early on will save you time and headache.

And it is my hope that answering the above questions will help your train move in the right direction.

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