🤺 Fundraising vs bootstrapping: the battle of the century

Aaaaah, the joy of building a company.

But who pays for all of this?

‘But Leticia, if fundraising is such a painful process, why do founders decide to go down this path instead of bootstrapping?’. I quite often hear this question from my circle of friends.

Very valid question. I’ve been working for over a decade with fundraising, so it’s quite easy for me to see the benefits of this route.

According to this classic article by Paul Graham, bootstrapped companies will eventually die during the process of ramping up sales to a breakeven level, as no business can create instant customers.

Well, Paul G. is a well-known personality in the venture capital market (he’s one of the founders of Y Combinator), so it’s not surprising to have him defending a position towards fundraising.

Let’s take a neutral approach and compare VC fundraising versus bootstrapping side by side.

Fundaising Cons:

  1. It can be close to a trap. The business model of VCs is built on top of founders’ dilution, which means you will always need to be fundraising to continue to increase your valuation.

  2. A lot of pressure: high growth expectations, intense pressure at a board level, lots of financial insecurity, and the constant need to perform at an exceptionally high level.

  3. Onerous legal terms, bureaucracy, and governance frameworks. For bootstrappers, this could seem unjustifiable for businesses that are not even profitable yet.

Fundraising Pros:

  1. Aligned interests on your growth: On the other hand, scaling is VCs expertise. They will give you as much support as you need, as they are as incentivized to see you grow as you are.

  2. Support, support, support: You can count on investor support at the board level, the ability to invest with deep pockets, the capability to hire exceptional talent, and the ever-expanding support network.

  3. Even emotional support: If you are able to get advice, even emotional support from your board members to go through all this turbulence, just go for it.

Bootstrapping Cons:

  1. One person journey. If you don’t have co-founders, it can be quite lonely and you find yourself with a lot of questions and few sources for answers.

  2. Steady growth: with so many more resource constraints, investing in growth becomes a much harder task. Salaries are lower and your access to talent may not be as good.

  3. Short-term goals: It can become easier to become focused on making the next pay-run rather than disrupting your industry.

Bootstrapping Pros:

  1. Deep understanding of the product: on the bright side, there’s an intimate connection between the founder, customer, and product. Founders are deeply involved in the business and build almost everything themselves.

  2. Ruthless focus on prioritization: given the financial constraints, you will always dedicate your time to creating the most value possible, which can breed excellent product decisions, efficiency, and healthy profit margins from day one.

In my humble opinion, the decision of which path to follow boils down to three factors: the personal choice of the founder(s), the product, and market needs. Each aspect can be assessed with the following questions:

  • Do you want to build a hypergrowth company with or do you want to build something smaller? (For some people going through the fundraising route means becoming an employee of VCs. That is partially true in a few contexts.)

  • What stage of life are you now? Do you have a family you need to support? What are your time constraints to be dedicated to the business?

  • What does the market want? How big is this market? Is there an actual solution that can be solved by your company at scale? And most important of all: are people willing to actually pay for it?

Like with everything in business, there’s no right answer. There is, though, the right answer for you and for your business. You just need to use the right framework to find more clarity.

🎧 Audiobooks recommendations

Last week I didn’t listen to any podcasts. So the recommendation this week will be for the audiobooks I listened to.

▶️ 12 Rules for Life: An Antidote for Chaos, by Dr. Jordan Peterson: I don’t consider you as a friend in case you don’t know that I take this book as my bible. The title of the book couldn’t be more appropriate. I first read the book in 2019 and every now and then I get back to specific chapters to refresh my understanding. Last week I re-listened to ‘Chapter 10: Be precise on your speech’. That says it all. Do yourself a favor and get more clarity in life by reading this book.

▶️ When: The Scientific Secrets for Perfect Timing, by Danel Pink: This book covers studies and research that support timing for decisions, for negotiations, and asks. Very tactical and interesting framework with some ideas to apply for those working with project management and/or negotiations. Easy read and quite practical insights.

This is Open Books - a weekly newsletter carefully curated by me, Leticia Souza. Every week I’ll be compiling relevant topics around finance and financial strategy - from choosing your first accounting system to how to successfully close a fundraising round to your business.

In a world full of noise, I aim to bring clarity and direction to your finance processes so you can manage your business in peace. If you find the content useful, do your friends a favor, and please share this newsletter with them.

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See you all next week 👋🏼