Should I raise money to start my company?
How I started two companies without raising any money, and the tradeoffs between "bootstrapping" and fundraising.
👋🏽 Welcome to A Founder’s Life for Me! I’m Alek, and I’ll share my experiences building tech companies to provide practical recommendations on building your own thing.
Subscribe to get free access to all past and future posts.
Why I’m writing about this now
In last week’s edition of A Founder’s Life for Me, we went through an exercise in goal-setting for 2024. As I set my own goals, I was reminded of what a blessing it’s been to not have investors. This might not sound like a blessing, but, this week, I’ll explain why not having investors has been advantageous for me.
You’ll leave this article with an understanding of what it means to “bootstrap” your company and a clearer picture of how to navigate conflicting incentives involved in starting a company with investors.
Two examples of how I’ve bootstrapped companies
Bootstrapping is a startup term for “starting a company without external investment.” This can take on many forms, and I’ve done this myself in two different ways:
When building my first software company, GBA, I worked on it while fully employed up until the point where it was no longer sustainable.
Pros: I continued earning my full-time salary
Cons: Company building time averaged 8 hours per week
For my current company, SolidlyAI, I am splitting my time between building the software business and working part-time as a consultant.
Pros: Company building time averages 40 hours per week
Cons: I am earning a partial salary
I wouldn’t say either of these approaches is “better.” Each approach was the right thing for me to do at that point in time. When I started GBA, my earning potential was low because I was early in my career. If I had taken a partial salary at that time, I wouldn’t have been able to cover my month-to-month expenses. Now, I have a higher earning potential, and I’m able to save some money while earning a partial salary.
Both approaches have allowed me to start companies without needing to take any money from investors. To decide if this is a path you want to take, you first need to decide what outcomes you’re trying to achieve.
Four outcomes to consider when deciding to raise money
In an earlier edition of A Founder’s Life for Me (linked below), I introduced the “applied identity framework” for decision-making. It’s useful again here to apply to the decision of whether you want to bootstrap.
Using the applied identity framework, “I want to be the type of person who…” you can think through the outcomes you want to achieve through your company. When I’ve thought about taking investment, there are four main outcome categories that I’ve thought about. Here are the four categories, and my current dream outcomes in each category.
Financial outcomes - what are your financial goals?
I want to be the type of person who can support his family, can own two homes, and can afford to travel regularly.
Reputation outcomes - how do you want to be seen by others?
I want to be the type of person who is viewed by others as intelligent, authentic, and driven. See the footnote if your first instinct is “I don’t care what other people think.”1
Freedom outcomes - what choices do you want to have?
I want to be the type of person who has decent control over the hours he works while also having the freedom to work on what he wants.
Learning outcomes - what do you want to learn from the experience?
I want to be the type of person who can build a working version of any idea.
When you know the desired outcomes you want to achieve, then the question becomes, “How do I maximize the odds of achieving each outcome?”
Watch out for how investor incentives can influence your decisions
Investors want the maximum return on their investment in as short a time frame as possible. By bringing investors into the equation, you are inviting the influence of other people. That influence will pressure you away from your desired outcomes and towards theirs. Often, this pressure comes in the form of:
Quickly growing and hiring - the fastest way to grow is to have more people working. This introduces new risks because you’re increasing your expenses.
Idea momentum - when you have investors in your idea, it becomes harder to change your direction. As discussed in “The Fastest Way to Validate Business Ideas,” being able to nimbly run and act on experiments can be a huge advantage. When you have investors, you have more people you need to keep informed and “bought in” on your major decisions. So, idea momentum introduces risk by adding overhead to trying new things.
Searching for big outcomes - typically in the form of acquisitions or IPOs. This introduces risk because it’s more of an “all or nothing” bet. Investors wouldn’t call a $500k/year revenue company a success, but if I were a solo entrepreneur making $500k/year that would be a huge success in my book.
Don’t get me wrong; I’m not anti-fundraising. I’m emphasizing the cons because so many people don’t think about them before starting fundraising.
There are many benefits to investors as well. Having money to hire people means bringing in new skill sets to complement your own. If you don’t have any way to bootstrap your company, raising money is also a great way to reduce the risk you take and pay yourself a salary while you get your company started. If you’re looking for reputation-based outcomes, raising money from big-name investors is also a great way to get there.
Why I’ve made the decision to bootstrap SolidlyAI (so far)
Let’s apply our understanding of these incentives to maximize the odds of achieving my dream financial outcome, “I want to be the type of person who can support his family, can own two homes, and can afford to travel regularly.” My time horizon for achievement is the next 8-10 years, and I’d need to earn about $2 million to achieve all of my dream outcomes.
Let’s play out the scenarios where I raise money vs. bootstrap my company:
Fundraising scenario:
Failure state - the company doesn’t get acquired or IPO
Salary: over ~5 years of company building, I pay myself a modest salary
Equity: the company fails, and my equity becomes worth next to nothing
Success state - the company gets acquired or IPOs
Salary: over ~5 of company building, I pay myself more as the company grows
Equity: the company is sold for >$50 million, and my share may be something like >$10 million
Bootstrap route:
Failure state - the company doesn’t earn $2 million over the next 8-10 years
Average earnings would need to be <$200k/year
Success state - the company earns $2 million over the next 8-10 years
Average earnings would need to be >$200k/year
Let’s assume I’m going to end up in the “failure state” for a minute. The current bootstrapped pay that I make through consulting is higher than the “modest salary” that most founders take. So, if I fail, I will at least be closer to my dream financial outcome by bootstrapping than by fundraising.
Now, let’s consider the “success state.” After you fundraise a pre-Series A round, your odds of an acquisition or IPO are about 25%.2 Of course, getting acquired would lead to my dream financial outcome (and a lot more on top of that). But, if I can achieve my dream financial outcome by bootstrapping, and the odds are higher of achieving it that way, then that’s what I’d do.3
So, are the odds higher of achieving my dream financial outcome through bootstrapping or fundraising? Honestly, I don’t know yet. But, taking investment is mostly a one-way road. I’ll continue bootstrapping to collect more data and make an educated decision on whether to start fundraising. If the equation ever changes, I’ll revisit my decision to bootstrap, but that’s what’s best for me with the information I have right now.
Should I bootstrap if I have big goals and a short time horizon?
I’m fortunate that my goals don’t have tight time horizons. The longer time horizons remove the time-based pressure on achieving my desired outcomes. If you do have tighter time horizons for your desired outcomes, I want to take a quick minute to explain why bootstrapping may still be a good idea.
The longer you bootstrap, the more equity you’ll have in the end company because you’ve endured more risk yourself. If you’re trying to raise $200k:
If your company is just an idea, it might be worth $500k, requiring that you give a 40% ownership stake in the company to raise $200k.
If your company is an existing product with paying customers, it might be worth $2 million, requiring that you give away only a 10% ownership stake in the company to raise $200k.
If you’re looking for a big financial outcome in a relatively short amount of time, bootstrapping may still be a good decision for you when you get started. You will likely need to fundraise if you want to achieve your big outcome in, say, less than three years. But, consider bootstrapping your idea to a point where it’d be able to fetch a higher price with investors. The further you can take it on your own, the bigger your financial outcome will be if you succeed.
The decision is yours
Deciding whether to take an investment is a big decision that all founders will face. When making that decision, think through the outcomes you’re looking to achieve and how investor incentives may or may not align with those outcomes.
Recommendation: When making the decision on whether to raise money for your company, think about the outcomes you’re looking to achieve. Ask yourself if taking an investment will make you more likely to achieve those outcomes.
If you are interested in more content like this, subscribe through the link below. If you want to discuss how you could apply this to your work, send me an email at newsletter@alekhagopian.com.
My first instinct here was also, “I don’t care what other people think.” I thought about it more, though, and admitted that I would care if people thought I was dumb, fake, and lazy. So, I guess I do care if people think I’m smart, empathetic, and driven.
Source: TechCrunch article
It’s worth considering that in the fundraising route, you’re getting two shots over the ten-year time horizon due to the shorter lifecycle of VC-backed companies. So, assuming you start a new company after your first company fails, you would get two chances at the “success” outcome.