Bootstrapping vs. VC Funded? You’re asking the wrong question.
July 25, 2017
Every startup needs money to get started, whether it comes from outside the business or from the founders. But ideologically sticking to either bootstrapping or fundraising can be harmful to your business because of how they impact the way you use capital.
- Bootstrapping can prevent you from making decisions that help you grow faster. Because cash in the business is scarce and constrained to coming from founders and customers, you can end up making decisions that value money more than time.
- Fundraising can embolden you to spend excessively, out of proportion with its benefit to the business. Because investor funds can feel abundant and cheap, you can end up undervaluing cash and overvaluing time and growth.
Thinking about tightening or loosening your constraint on cash rather than the stark choice between bootstrapping or fundraising makes choosing your funding path about money and time, not ideology. At some points in your business, you need to focus on the fundamentals and impose discipline on how much cash you’re using to grow. At other points, you need to remove cash as a constraint to push the accelerator on growth.
The measured, non-ideological approach is to be deliberate about the constraints you need to operate within or remove to achieve your goals. Use capital as the answer when you need to and creativity when you don’t. The end result may still be a billion-dollar company regardless of what path you take.
Why Customer.io isn’t a bootstrapped or VC-funded business
When John and I started Customer.io, we both lived in New York City and we had no money. We were both cash constrained. But we also knew that we wanted to build a company and we were ready to leave our positions at ChallengePost to do something new.
We’re huge admirers of Basecamp and MailChimp — it’s just that their paths to success didn’t make sense for us. They both started out as consultancies that discovered their products as part of working with clients. They funded the idea discovery process with customer revenue from their consulting businesses.
- MailChimp started in 2000 as a design consultancy. From the early days, their customers kept asking them to help them reach their audiences via email. The team built a newsletter product as a side project until 2006 when they switched over to focus on it full time.
- Basecamp started in 1999 as a web consultancy. As part of working with clients, they needed a project management tool. None existed at the time that fit their way of working, so they built one themselves. When it took off, they made it their main business.
Our position was different. From day one, we knew that we wanted to build Customer.io, not start a consultancy with the hope of eventually building a product. We needed money to fund product development, not the idea discovery process.
While Basecamp and MailChimp shaped our business sensibilities, our financial constraints shaped our reality. We raised a round of $250k in our first year, which allowed us to get to market with a product, start selling it, and begin growing the business using customer revenue.
Over our first year, our revenue was paltry — it wasn’t enough to cover salaries for John and me. But the investor cash allowed us to build momentum without opening up the cash constraints so wide that it detached us from the fundamentals of our business. Like a snowball rolling down a hill, our initial momentum gathered more momentum. By the end of year two, we received an additional $500k in investor money, which helped us create a valuable product and a self-sustaining business for a team of 5, with a little bit of cash buffer for emergencies. In 2017, our revenue can support a team of 30 and we’ve used fundraising to make investments that set us up for long-term success.
Fundstrapping, neither fully fundraising or bootstrapping
We think of ourselves at Customer.io as a company that’s just happened to have taken money from investors and VCs to achieve our goals. That we’ve taken money from VCs shouldn’t define our company. We’re also not bootstrapped either, even though each year we often have multiple months of profitability while we’re trying to spend money to grow overall.
I know a lot of companies that feel the same way. In SaaS especially, we’ve seen the rise of companies that think of spending cash deliberately and cautiously like a bootstrapper but take funding to build a great product and company for their customers.
We call it fundstrapping, and it’s a pragmatic approach. We think that how the business is funded is a means to an end, and that end is building a great business. I’m planning to talk more about it in future posts. I’ll lay out the principles of fundstrapping, walk you through its key metrics, and show you how it’s helped us build the best and most efficient business that we can build.