Comments on: Venture Capital’s Biggest Fear

By: Steve Madsen

Steve Madsen — Wed, 02 Mar 2011 16:20:14 +0000

Great article, Daniel, although I disagree that the goal of the VC-funded company is the same as a bootstrapped one. VCs aren’t interested in modestly profitable businesses. They need big hits to cover their 90% failure rate. And profit isn’t even a requirement if the company can IPO or be acquired for a large sum.

@R: I’ll argue that an entity focused entirely on providing free services is not a business at all, but a charity. If the definition of success is an IPO or buy-out, that’s speculation and gambling. You’re relying on the greater fool theory, not on your own decision making and ability to execute.

By: Kevin Hoctor

Kevin Hoctor — Wed, 02 Mar 2011 05:14:10 +0000

Well stated Daniel. As usual, you do a great job of breaking down and explaining a concept.

Having done both bootstrapped and investor startups, I much prefer the former. Unless you have a severe need for an initial cash infusion, you really don’t want to lose control of your business.

There’s no such thing as a silent investor. They are expecting a large return on their investment and will insist on a say in your operations and products. You will be functioning in a fishbowl with less room for mistakes.

Also, don’t forget about the risk of having too much money. You won’t operate as efficiently if you don’t feel the stress of limited cash flow. There’s a lot to love about bootstrapping.

By: R

Tue, 01 Mar 2011 23:54:21 +0000

If you are bootstrapping a company that will provide resources for free (aka twitter or facebook) and has chances to grow easily. Wouldn’t you need venture or angel capital to grow? Specially on the web space, wouldn’t you need money for more servers as the site grows? If you don’t have that much money saved, I guess bootstrapping has its limitations and it’s mostly ideal for the mobile app like space where the technical expenses are pretty much none…

By: JulesLt

JulesLt — Tue, 01 Mar 2011 23:45:54 +0000

The other thing to remember with VCs is that they have a relatively short term objective – which is to make a big return on that investment within 5 years, tops.

And the only way they’re going to get that is by either a flotation, or more likely, by selling out to a bigger player. At which point decisions get made that are about making the company look a lot better on paper at the point of sell off – i.e. cutting back on investment to boost profit in the short term.

The odd thing is that my view of the online world is exactly the opposite – that Google, Amazon, Apple, ebay, Facebook are far too dominant. If iTunes was a store, it would be Tower – huge, diverse, but at the same time lacking personality.

By: Chad

Chad — Tue, 01 Mar 2011 23:44:27 +0000

I think there’s one area where outside investment might make sense, and that’s a business model where a product doesn’t have much revenue until it hits a ‘critical mass’ of users. Think social network type stuff, where there’s a chicken-and-egg problem of nobody participating until everybody participates.

Of course, the typical VC golden goose is a product with no discernible revenue strategy that for some reason looks appealing for a big-company buyout.

By: Devin

Devin — Tue, 01 Mar 2011 22:55:46 +0000

I liked this article. Simple, straight forward.

vc’s should be scared that “bootstrapping” is becoming increasingly easier and cheaper (especially w/ software companies). a mom-and-pop store can effectively grow into “walmart” without the need for a VC to fund it. setting quality/values are becoming ever more important too (and i think a lot of mac/iphone devs like that).

By: Mike

Mike — Tue, 01 Mar 2011 22:45:50 +0000

Well put, I never thought of it broken down this way, where small software shops, such as Red Sweater can be thought of as a “business that wants to maintain a mom-and-pop Main Street business ideology”. That really clicked for me. As someone who buys more than my fair share of items from Amazon, when it comes to a new product or service that I will require a support infrastructure, I always look local first, that is hopefully more “mom-and-pop”, than “Walmart”. In the “mom-and-pop” situations, I expect the incentives of the owners will match up against processes that provide for a better customer experience, otherwise they will not survive.
As an aside, if I was to start my own company today, I would try to bootstrap, if at all possible. I believe that bootstrapping forces you to listen more closely to your customers and develop features and fixes that they are specifically asking for. That should build more loyalty from your customers and lead to marketing of your product by them.