Funded startup vs Bootstrapped startup

by Jun Loayza on August 22, 2012

funded startup vs bootstrapped startup

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.

Funded Startup

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?

Bootstrapped Startup

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.

Funded Startup

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.

Bootstrapped Startup

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.

Funded Startup

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.

Bootstrapped Startup

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  :)

About the author

Jun Loayza Jun Loayza is the President of Ecommerce Rules. In his entrepreneurial experience, Jun has sold 2 internet companies, raised over $1,000,000 in Angel funding, and lead social media technology campaigns for Sephora, Whole Foods Market, Levi's, LG, and Activision. Find Jun on Google or Twitter

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  • David

    Jun, I left the funding game a long time ago as well; though, I wasn’t as successful as you. I never actually raised more than $100K, but quickly learned that profitability was the way to go.

    Good luck with your businesses!

    • http://www.tourwoo.com Jun Loayza

      Thanks David. Good luck to you as well and keep working hard on profitability!

  • Watson

    Great post Jun,

    In my experience, there are more incredible opportunities to be made with real world and “need solving” businesses than simply the aggregation of users. Companies that concentrate on the number of users are in the advertising business, pure and simple. And its a very crowded market in advertising.

    “Mo money mo’ problems.” similarly the more people you add to your organization, the harder it gets to mobilize and effectively coordinate them. In my experience, the best work was always done with between 3-7 core members.

    Keep up the great posts!

    • http://www.tourwoo.com Jun Loayza

      Hey Watson, similarly, my current company has 4 core team members. We do NOT want to grow beyond 10 for sure – we want to stay lean and mean.

      My goal of course is to eventually replace myself in my lifestyle businesses. Get someone to do the work for me, and I’ll be able to relax and enjoy the steady income :)

      Not there yet, but I’m on the right trajectory!

  • http://www.mygeniustrainer.com Deveren Fogle

    I totally needed this! Thanks for so much great information. I’m a sponge at this point, searching to find the right direction for my startup/lifestyle website.

    • http://www.tourwoo.com Jun Loayza

      Anytime Deveren.

      Shoot your ideas my way and I’d be happy to provide feedback.

  • http://no-fucking-idea.com Jakub Oboza

    To bootstrap startup you need money, and if you are funded you need money. So there is nothing like Bootstraping from nothing. Either way you will need money. So if you don’t want to risk all of your own moneys and life savings being funded by other company is almost only choice you have. And only crazy people risk all their money to build something because around 90% of this business are either very low profitable or just only generate loses.

    • http://www.tourwoo.com Jun Loayza

      It’s easy to start a company with only $100, just ask Chris Guillebeau. So you are incorrect – you do NOT need a lot of money to bootstrap a company.

      If you are funded, then you already have money, so you should need more money. So again, you are incorrect – if you are funded, you need to execute and hit milestones before you run out of cash.

      It’s a mistake to assume that starting a company takes a lot of money; furthermore, it’s a mistake to say that 90% of businesses in ALL industries fail. Brick and mortar stores do have a high percentage of failure, but an internet company with low overhead and startup cost can succeed if the market is right, the leader is great, and the team executes very veyr well.

  • Ludovic Urbain

    My two cents:
    In a bootstrapped startup (the route I’m taking right now), the day you exit, you may still have as much as 80% to the founders (assuming you let a bit off for advisors and key early staff).

    In a funded startup, you can easily drop down to 20% after a few rounds … sure it’s easier not to go out and earn that cash but when you exit it’d better be 4x more too.

    Also, the expenses part is huge.. when I was trying to get funding, my estimated research prototype cost was around 20k.
    I did it on my own cash for 4k and it just so happens I know exactly what I will do with the other 16k.

    I’m going to upgrade some hardware, purchase a lot of test stuff AND ask mellanox to support my research by lending me some kit. If I was operating on investments ? I’d have burnt through 100k by that time easily.

    That’s quite interesting because a major factor in making a company grow (and making it an interesting acquisition) is maximizing profitability and it seems that funding will push you the opposite way, with offices, aeron chairs and a whole lot of staff.

    I also think the MVP is a much more natural route if you’re bootstrapped, and it seems to be the way to go for many things.

    Now of course, I’ll come back in a few years to tell you whether it was such a great idea or not ^^

    • http://www.tourwoo.com Jun Loayza

      Hey Ludovic, I wish you the best success with your company. Keep working hard on profitability and let me know if you’d like any feedback from me.

      It’s true that in funded startups you have less equity, but the goal is also to sell for A LOT more. Funded startups do have a bigger upside, but bootstrapped startups are more of a lifestyle business – one that can last you your whole life and allow you to live the life you want to live

  • http://maxsobol.com Max Sobol

    Great post Jun,

    It’s times like these that I take everything I’ve witnessed being a part of funded startups and whole-heartedly start appreciating the one we’re bootstrapping now.

    Best of luck to you!

    • http://www.tourwoo.com Jun Loayza

      Hey Max! Tell me more about your startup. Would love to learn more about what you’re working on

  • http://appointy.com Nemesh singh

    Jun,

    Great post and I totally agree with you. I started my company with almost $0 with a pc gifted by my father and now generating enough cash without any external funding.

    We have now 29000 businesses using our SAAS product and we are concentrating on developing useful features and being profitable. I tried to raise funding a few years back and lost focus from the product which pushed us behind our competitors. I then decided to keep away from funding. Since then we are generating lot of cash with very less variable expenses and also leader in our industry.

    I am not looking to raise any funding and enjoying my work. That is the best decision, I have ever taken as a CEO.

    • http://JunLoayza.com Jun Loayza

      Congrats Nemesh! Looks like you’re doing great with your business.

      Keep working hard and keep me updated on your progress.

      All the best to you!!!

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  • http://netlek.com Chris Mack

    We’re currently sitting on the fence between bootstrapping and funding – there’s a certain allure to getting investment and rubbing shoulders with well known angels and VCs.

    And it chews up SO MUCH TIME.

    The more I see of that world, the more I’m leaning towards continuing to bootstrap.

    Thanks for the article – it’s too easy to get sucked into the raising money game without really putting enough thought into WHY.

    • http://JunLoayza.com Jun Loayza

      Let me know if you decide to raise funding and how much you’re raising.

      What does your startup do?

      • http://netlek.com Chris Mack

        Hey Jun,

        Thanks for the reply. Will let you know if we change tack.

        We are building an inbound marketing solution for small businesses. Effectively Hubspot for the little guy. We’ve cut down the featureset, provide easy-to-understand analytics across all channels (web, social media & email nurturing), and provide english-language recommendations to our users based on their metrics and the actions they’ve taken to date.

        check us out – click on my name. We’re just starting to build out our public facing site, and we’re launching the application in private beta in a couple of weeks.

        Cheers,

        Chris

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  • http://dicasdomundo.com.br Dan

    Great post Jun, i was wondering if bootstrapping was the right choice of our info-startup. We’re running the bootstrap way :)

    Dan

    • http://www.junloayza.com Jun Loayza

      Awesome to hear! Keep working hard!

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  • http://www.financeoutline.com Edwin

    Really well written article! This information is very useful to everyone.

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  • http://www.GiftOasis.com Ron Clabo

    Hey Jun,
    Great article. Thanks for taking time out to reflect on how your various startups turned out and the lessons learned. I wish there were more articles like this. Choosing to “to bootstrap” or “to get funding” is _such_ a big decision. Most of the info I’ve read advocates one or the other but getting a perspective from someone that has done both, like yourself, is super helpful.

    Thanks!

    • http://www.junloayza.com Jun Loayza

      Glad you liked the post!

      How is your startup going?

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  • http://themodernentrepreneur.com Daniel McClure

    Thanks for sharing your experiences, I’ve only recently started looking as funding as a potential option and it’s good to hear a counter argument from somebody that has actually been through the process.

    • http://www.junloayza.com Jun Loayza

      Let me know how your funding quest goes. Be more than happy to help

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  • Anjali

    Nicely put. Sometimes there’s so much pressure – around you and from prospective joinees – and even guys who want to fund you. “Why arent you VC funded?” The pride we’ve felt when , we, ourselves have got our startup to take off (and turn profitable), we’d never have got.

    • http://www.junloayza.com Jun Loayza

      That’s great! What startup are you running?

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  • Vijay

    Hi
    The first two points were good, but with the third I don’t full agree. I mean focusing on being cool as oppose to being profitable is a problem that either type of start-ups could face.

    Could you clarify the third point as to how it makes a difference between funded and bootstrapped start-ups.

    Vijay

    • http://www.junloayza.com Jun Loayza

      The goal of an internet startup can be to get as many users as possible, even though there is no business model.

      Just take a look at Twitter or Instagram. There goal was to create something innovative (cool) as oppose to making money.

      Sure they were successful, but thousands of other startups have failed trying to do the same because they ran out of cash.

  • http://intromaps.com Darren

    Jun,

    Thanks for the advice in this article. I founded and run a SaaS company that has been bootstapped (with F&F funding). I think we’ll be profitable by the end of the year. It makes a lot of sense to run the company as a lifestyle business but I’m concerned about the exit. I feel like the exit will take longer as a lifestyle business vs. if we raise. I think this mainly because of the kind of connections that come from angels/VCs, their own investment timelines and the scale you can achieve in a shorter amount of time. Do you think it’s wrong to think this way?

    • http://www.junloayza.com/ JunLoayza

      Depends on your end goal. If this is a lifestyle business, then the goal should be to maximize revenue while minimizing hours worked.

      If you’re truly passionate about what you do, then don’t think about maximizing revenue; instead, think about how you can accomplish your BHAG (big hairy audacious goal). This could of course be tied to some kind of financial success.

      For example, my BHAG is to build a $100M+ company. Now this can mean I should raise funding, or perhaps just keep my company bootstrapped so I retain as much equity as possible.

      I can’t tell you exactly what to do, but I can tell you that you should figure out what you want out of your company. Once you figure that out, you’ll be able to make intelligent decisions about the opportunities presented to you.

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