As an entrepreneur who has experienced both venture capital-backed and bootstrapped startups, I'm often asked about the pros and cons of each approach. Recently, a fellow entrepreneur considering starting a new venture after leaving his job asked me how to choose between these two paths.
My response?
They're not as different as you might think.
The VC-Backed Approach
Venture capital-funded startups typically begin with a big idea – one that has the potential to capture a significant market share and generate substantial returns. VCs look for:
Large addressable markets (TAM, SAM, SOM)
Scalable business models
Potential for exponential growth
The goal is to create a company that can generate venture-sized returns, far beyond just a million dollars in annual revenue. However, this approach comes with high stakes: statistically, only about 1 in 10 VC-backed startups succeed, with another 2 in 10 surviving but not thriving.
The Bootstrapped/Indie Hacker Approach
On the other hand, bootstrapped startups and indie hackers often take a more measured approach:
Focus on finding initial customers
Understanding and solving specific pain points
Securing early paying customers
While there's a narrative that successful indie hackers might build multiple startups before finding success, it's not about randomly trying ideas. The most effective bootstrappers take a bottom-up approach, identifying strong customer needs and gradually scaling their solution.
Two Sides of the Same Coin
VC-funded and bootstrapped startups aren't as diametrically opposed as many believe. They're more like two sides of the same coin, each with its own approach to achieving product-market fit and growth.
The beauty of starting with a bootstrapped approach is the control it offers. You're not immediately beholden to external pressures or expectations. Instead, you can focus on finding your first customers, understanding their pain points, and iterating your product or service based on real feedback. This methodical approach allows you to build a solid foundation before considering rapid scaling.
What's particularly interesting is the flexibility this approach provides. As Paul Graham aptly points out in his article "Startup = Growth," what truly defines a startup is its growth rate, not its age or funding status. This insight is crucial because it means that founders of bootstrapped or small businesses can consciously choose their growth rate.
Let's say you've bootstrapped your way to a stable customer base and a product that's gaining traction. At this point, you're at a crossroads. You can continue on the bootstrapped path, maintaining control and growing at a pace you're comfortable with. This might lead to a successful lifestyle business, generating substantial revenue without the pressures of VC expectations.
Alternatively, if you feel you've found strong product-market fit and see potential for rapid scaling, you can choose to shift gears. This is where the option to seek VC funding comes into play. The key difference here is that you're approaching VCs from a position of strength. You have proven traction, a clear understanding of your market, and a roadmap for growth. This puts you in a much better negotiating position and reduces the risk of losing control of your company's direction.
In my personal journey, this is exactly the approach I'm taking with my new venture, Wisp. I'm starting bootstrapped, focusing on understanding my customers and refining my product. I'm not opposed to VC funding in the future, but I want to feel the "lift" – that tangible sense of product-market fit and growth potential – before I consider that route.
This approach provides a safety net of sorts. If you raise VC funds too early, before truly understanding your market and product, you risk entering a tailspin. The pressure to grow at all costs can lead to premature scaling, burning through cash without a solid foundation. By bootstrapping first, you reduce this risk. You're more likely to have a clear growth strategy and the operational knowledge to execute it effectively when you do decide to scale.
Moreover, this method allows for greater control over your company's trajectory. You're not forced into a "grow or die" mentality from day one. Instead, you can thoughtfully design your business, choosing when and how to accelerate growth based on your goals and market conditions.
In essence, by viewing VC funding and bootstrapping as complementary rather than contradictory, entrepreneurs can leverage the best of both worlds.
Start with the focused, customer-centric approach of bootstrapping, and if the opportunity presents itself, use VC funding as a tool to accelerate already-proven growth. This way, you're not just chasing growth for growth's sake, but building a sustainable business with a clear path to success.