Everything You Should Know About Bootstrapping vs. Raising Money

I’ve been focusing on product-led businesses for over a year, and one of the most frequent topics that comes up with their founders is whether to stay bootstrapped or raise money.

Since product-led businesses are so efficient at acquiring customers, in many cases they have the option to stay profitable without raising a dime. Still, that doesn’t necessarily mean the right move is to bootstrap—it’s a really complicated decision.

What complicates it even more is the current macroeconomic environment—the hesitancy of many venture firms to make new investments, and the lack of clarity around what a “market correction” might look like in terms of pricing venture deals. But the decision of whether to bootstrap or not is a very long-term one, so in my view it’s important to look beyond these temporal factors when coming to a conclusion.

There’s no one-size-fits-all with bootstrapping versus fundraising, but I can talk through some of the many things you might consider when you’re making the decision. This advice comes by way of OpenView’s once-bootstrapped portfolio companies Deputy, Loopio and Calendly—as well as conversations I’ve had with the founders of Tuple and Whimsical, two bootstrapped product-led businesses.

First things first: Not every business is a venture-scale business 

The model of a venture capital fund is to invest dollars in exchange for shares at some entry price, and sell those shares in exchange for dollars at some exit price that’s ideally several multiples of the entry price. 

Rarely does a company see an exit price larger than its addressable market size. So if the market’s constrained, it may be hard for the investors to see a significant multiple of their entry price at exit. 

Therefore, when the market’s constrained, venture funds are less likely to be interested in investing. But that doesn’t make the business inherently uninteresting to build—it can still be highly profitable and grow to become a market leader. 

In this case, bootstrapping is likely the best option.

Ownership and decision-making

Assuming your market’s not constrained, it’s worth starting with the obvious benefit of bootstrapping: avoiding dilution from investors. 

If someone buys 20% of your company, everyone else’s ownership gets diluted by 20% to make room. If that money and/or partner ends up being leveraged to grow the pie, or outcome, by more than the ultimate value of the 20% ownership, it was worth the dilution. If not, it mathematically wasn’t.

This is why it’s so important to:

  1. Have an idea of how you can spend the money you’re considering raising to create long-term equity value
  2. Get to know the person, or people, you’re letting onto your cap table to ensure they’ll be helpful and value-generating

If you’ve decided the dilution’s worth the gain, there are more qualitative considerations. First, along with preferred shares often come rights—in other words, a say on big decisions like when and for how much to sell the company, or whether the CEO should continue to be the CEO. 

No (good) investor will come in and tell you what you need to build or who you need to hire, but they will likely share their perspective on those topics and others. This can be frustrating, valuable—or most likely both.

If you raise, ideally you’ll partner with an investor whose voice you’re excited to bring to the table. But it’s worth considering whether you’re open to adding that voice.

Growth expectations

Different funds have different investment horizons. But in general, venture funds are going to have 7–10 year time horizons (with potential flexibility to extend the timeline if it mutually makes sense for the company and the fund). That means in order to reach the investor’s target return threshold, the company needs to grow at or above a certain rate. 

For some founders, this creates unwanted pressure. I spoke with Kaspars Dancis, founder of bootstrapped company Whimsical, a digital-first visual workspace with collaborative wireframes, flowcharts and sticky notes. “To me, the biggest downside to raising venture capital is the constant pressure,” he said. 

Kaspars acknowledged that pressure can be a good motivator, but it can also lead to establishing goals that aren’t realistically achievable. “This pressure can easily translate into short-term thinking,” he explained. “The company and management might talk a good game about long-term objectives, but at the end of the day the people in the trenches are forced to optimize for the short term.”

While this is sometimes the case, it doesn’t have to be—it’s a matter of picking a good partner who’s optimizing for the same thing you are. 

If you’re a founder who doesn’t want that added pressure, you can build a great business without growing like bonkers. But unless you’re partnering with an evergreen fund or a fund with a relatively low target multiple on invested capital, it’d be wise to hold off on venture funding.

Spending habits

Think: Spending money like it’s your own—because it is. While this is obviously possible once you’re venture funded, it’s forced when you’re not. 

When I asked Ben Orenstein, founder of bootstrapped company Tuple, about this, he explained that his team focused on margins and profits right from the start. “Even while we were still building the product, we started selling it to people. We were collecting credit cards and charging for it because we wanted to make sure we were building something people would be willing to pay for. Delivering—and being compensated for—value has been baked into our DNA from day one.”

Another tactic Ben’s team used was to take a percentage of all the revenue and distribute it as dividends right away. This helped them get used to running a business that wasn’t holding onto all the revenue. “You can’t not pay yourself as your business grows,” he said. “We just take a flat percentage off the top, which enforces good margins.”

Timing

You can take the time to instill good habits and then raise funding once they’re core to your company’s culture. By waiting, you can also ensure you’ve found product-market fit before throwing money at expediting market domination. 

But there are practical reasons to raise before that point, such as needing money in the bank account. It’s hard to build a business without funding if you don’t have access to capital either through your savings or other means. You never know how long it’s going to take to find product-market fit and get to profitability, so to cover expenses along the way, you’ll want to have a safety net of cash.

On the flip side, if you have aspirations of becoming a market leader, you may choose to raise sooner rather than later in order to avoid a competitor outpacing you with their own stack of chips. This consideration is specific to your perceived threat level of the competitive landscape: new entrants, existing startup competitors, and incumbents.

Secondary

The last thing to consider is that you can use venture funding not only to pad the balance sheet, but also to take some chips off the table. While some see this as a sign of divesting interest, I see it as an opportunity for a founder who has put a lot into their business—potentially even their own dollars—to make themself comfortable so they can go long and build a large, enduring business. 

Many traditional VCs are comfortable providing some liquidity to founders, particularly as the business matures—as long as they continue to have significant skin in the game and thus interest in the upside.

It’s not an easy decision, but most important ones in life aren’t. 

If you’re a bootstrapped founder trying to decide whether it makes sense for you to raise capital (or explore what a raise might look like), let me know—my inbox is open to you.

VP
OpenView

Ariel is a VP on the investment team at OpenView. She focuses on product-led software companies and helped lead the firm's investments in Calendly, Loopio, Balena, Zipwhip and Cogito. Prior to joining, she was a Product Manager at Yesware.
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