Bootstrapping vs. getting an investment. Which way should you go?

Interview
The barriers of entry to the startup world are lowering – technology keeps getting more accessible, cheaper, and more powerful. Problems that used to require an entire team of engineers can now be solved with the right app, plugin, or template. No wonder there are so many people building and shipping product after product relying only on their own capital, skills, and network. Yes, I'm talking about bootstrapping – and although this might sound odd coming from an investor, sometimes bootstrapping is a much better way to go than landing a multimillion-dollar investment. Why? And in which direction should you steer your project? Although there's no universally agreed upon answer, we believe you might be able to take something from the experience with both routes from CEO UP21 Víte Šubert.

Bootstrapping has been around longer than you might think

Those of you who are familiar with the term "bootstrapping" might picture it as something reserved for freelance digital product developers sitting at a coworking space in Chiang Mai, working on an app targeted at an ultra-niche customer segment. And you might just be right. A bootstrapper typically doesn't need to spend money on running an office or investing in any extremely costly hardware. I'm not saying their business is easy, but the truth is that a few thousand dollars in MRR (Monthly Recurring Revenue) will probably keep them in the black.

That said, it might surprise you how many globally renowned brands were or still are bootstrapped. For example, GoPro was funded solely by its founder for 10 years before taking a 200-million-dollar investment from Foxconn. The popular Tough Mudder race has been profitable since its first year, and to this day the organizers haven't brought in any investors. Even MailChimp was bootstrapped for a good amount of time, and – although in a different era – so was Dell. Michael Dell founded the company with a thousand dollars borrowed from his family.

Vítek Šubert, Co-founder & CEO of UP21 incubator

Hardware vs. Software

One thing is clear to me. When you're working on something that requires significant hardware investments – be it a game-changing blood pressure monitoring device, a coffee grinder connected with a mobile app or a hydrogen-powered spaceship – and you haven't yet been financially successful in exiting some of your past businesses, it will be extremely hard to fund everything by yourself.

Even seemingly “bulletproof” financial and time estimates are still just estimates, and you never know the true cost and timeframe needed to make your product until you've actually made it. Take Tesla and their constant production delays, for example. The question isn't whether complications will arise, but rather whether they will come when you can still do something about them or when it's already too late.

My suggestion to first-time founders is to not even think about bootstrapping your business unless you have a) a digital product and b) plenty of time.

Should you bootstrap, or approach an angel investor?

Landing an angel investment in an early-stage startup definitely sounds appealing. Who wouldn't want to focus on developing their product while someone else takes the financial risk?

But if you have the money to fund the project by yourself, this should always be your first choice. Angel investments are typically investments in you as a founder, not necessarily in your current startup or product. From the investor's point of view, they carry the biggest risk – and this is always reflected in the share of the company that you'll have to give up in return. All this might take place before you even dive into building your actual product, and the large portion of equity you exchange for the investment might complicate your future funding rounds.

On top of that – and this is my first-hand experience with investing in startups – the fact that you're willing to risk your own money shows just how much you believe in your idea, and it puts you in a better position for a pre-seed investment round or a Series A. 

Let's keep in mind, though, that even the shiny examples of the successfully bootstrapped companies mentioned above are the minority, and they're best taken as inspiration, not verification that anyone can do it. Their stories are often crafted by PR departments only after the companies have “made it” – which doesn't necessarily mean they're not true, just that they shouldn't serve as justification to take your family's entire savings account and go all-in on your startup idea.

A startup is a race against time

Even in situations when bootstrapping is the best way to launch a company, the time needed to develop a viable product might bring you to your knees. As you and your team, however small at this point, inevitably lose the initial spark and just want to be done with it already, it becomes harder and harder to find the motivation to keep going. Also, the longer it takes, the higher the chance that someone will copy you.

The latter is unfortunately not just a conspiracy theory. I won't mention any names, but I saw a company in Germany that goes to just about every startup event in the region, pretends to be interested in investing, gets as much know-how from a founder as they can, and then builds it first using their advantage of having a larger team and more resources.

The exception is projects where the founder focuses on a local market, e.g. the city they live in, and solves a niche problem that only they and a couple of hundred or thousand people have. The deep, personal knowledge of this market is then something no budget can overcome and no team can replicate. There are plenty of such projects, they just hardly ever make headlines. It will always look better from a media standpoint that company X just raised 100 million from investor Y to expand globally than when a team of three built an online booking system for tattoo studios in Berlin, and as the only owner of the company, they're steadily making 5 thousand euro every month.

Vítek Šubert & Václav Pavlečka on Startup World Cup & Summit 2019

Which way to go, then?

I really don't want to pretend that I've unlocked  some sort of universal truth. You already know that a startup's success or failure depends on much more than saying if you do X, bootstrap, and if you do Y, approach an investor.

If there's one thing experience has taught me, it's this: When your idea is about a technologically challenging product that you need to design, prototype, manufacture and only then launch, reaching out to an investor at the very beginning is reasonable, and I believe you'll be better off when you partner up with someone. If your startup will be working on a digital product for local clientele with the possibility to scale up in the future, try to get as far as you can with your own resources and try to land investment only when you see you're reaching your limit. The further you go on your own, the better negotiating position you’ll create for yourself. Good luck!

Vítek Šubert is a co-founder of the business incubator UP21, a manager with more than twenty years of experience in the corporate world, and a team leader focused on building strong company culture. He has been around since the birth of online business in the Czech Republic - at the turn of the millennium he built and lead the internet division of Cesky Telecom under the brand name Internet Online (IOL). In 2015, after twenty three years in the world of multinational corporations, he began building the business incubator UP21 from the ground up, and has done more than 18 carefully selected projects to date.

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