I sat back and analyzed my startups today and compared my funded startups with my bootstrapped startups. It’s logical to assume that my funded startups did better because we essentially had a huge influx of cash to invest into people, marketing, and product; however, my bootstrapped startups have done remarkably better time and time again.
It’s for this reason that I’ve decided never to raise funding again; so before you go out and raise funding, take the time to understand the key differences between a funded startup and a bootstrapped startup.
1. Fundraising is a full-time job
One of your founders must fully commit themselves to fundraising; this means one less person to get clients or build the product.
In my funded startup, our CEO spent all of his time and energy on fundraising, leaving sales to me and product to our CTO. Don’t get me wrong, the division of labor worked well as we raised over a million in angel funding, closed deals with restaurant franchises that paid for our product, and built a product that had the superior technology in the market.
However, we eventually ran out of cash, took too long to close client deals (the sales cycle was 6-8 months), and found that the technology we built was not compatible with the majority of restaurant hardware systems. What if our CEO had been in the trenches with us, analyzing the client market and the product outlook instead of raising funding the whole time? Could we have seen our problems coming before we smacked right into them?
In my bootstrapped startups, the President (me) was always in the trenches – day in and day out. I closed all of our deals, so I understood what our clients wanted and what were the client expectations. I interacted daily with our engineers and had the opportunity to piece together the puzzle of what we’re building and what the client wants. Most importantly, I wasn’t distracted by investors, a pitch deck, or financial projections. I had no one to impress – only a company to run. This focus on the company allowed me to successfully sell two of my companies so far.
2. More cash means more expenses
Lean-startup mentality tends to get thrown out the window once a startup is funded. All of a sudden people want to get paid, people want a raise, the marketing department wants a budget for advertising, and the development team wants more engineers for QA. More cash almost always means more expenses.
Before we got funding, 10 of us worked out of a garage in Mountain View, CA. The garage was incredibly hot and uncomfortable, but for some reason we managed to persevere and accomplish some of our biggest milestones throughout our time there. The 10 team members were barely paid a salary, but we were all happy to be working together towards a single goal. My marketing team focused on low-cost methods to acquire customers; we tried everything from cold-calling to sneaking into conferences. We did what we had to do.
After funding, we moved our team to an office space and brought on board 6 more people. Salaries increased and we paid our engineers a competitive salary to convince them to work for us rather than a Facebook or a Twitter. My marketing team spent thousands of dollars on conferences, air fares, and direct-mail marketing to acquire clients. The development team spent thousands on prototyping hardware to make our product better and better.
In 1 short year, we burnt through a majority of our cash. We went from a lean and mean startup to an instant cash-hog because of the funding we received.
All of my bootstrapped startups have religiously followed the lean startup mentality: no office space, no full-time employees outside of the core founding team, and no advertising outside of free marketing and advertising channels. We pretty much do not spend any money outside of what is absolutely necessary. And you know what, it’s worked incredibly well for us thus far.
3. Focus on being cool as oppose to being profitable
There is a big difference between the next Twitter and the next 37 Signals. Companies looking to become the next Twitter look to raise millions of dollar in funding, acquire users, and hopefully one day figure out how to make money or cash out before they die. Companies looking to become the next 37 Signals look to sell a solution to a problem and become profitable from the very beginning.
At our funded startup, we focused on building the absolute best technology in the market. However, we neglected to focus on what the target customer actually wanted to pay money for. Even though we had the best product, we found that our target market didn’t know that they needed our product. Instead of selling our product, I spent a majority of my time educating the market on why our technology was necessary and how it would greatly benefit their business. The time spent educating was time spent away from selling. And the more months we spent without selling and closing deals, the more cash we burned.
My bootstrapped startups have never been sexy or TechCrunch worthy; instead, we focused on solving a real pain that our current network wanted to pay money to solve. In our early days, we created a social app agency that built one of the earliest Facebook Apps for big US brands.
It’s never been about the users or the technology; for my bootstrapped startups, it’s always been about profitability. If a client or customer doesn’t pay us to build the technology, then we don’t build it – plain and simple.
Come join me on the profitability side – I promise that it’s a lot more fun, enjoyable, and promising than the funded side :)
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