Figuring out whether to bootstrap or find a VC overlord? Read this first

We love the idea of bootstrapping here — we even have a guide to it. Recently I have been noticing a movement toward bootstrapping. It seems that it’s the way to go if you want to avoid being “screwed” by the lovely people known as Venture Capitalists (VCs). But is it really?

Many people make the argument for bootstrapping and I am mostly inclined to agree with them, at the very least in the idea stage. The biggest argument for bootstrapping is valuation. At the idea stage, valuing your company is more of an art than concrete science. Approaching an investor with an idea that may or may not work is risky for both you and the investor. To quantify that risk, the investor will ask for more of a stake in your company. For them that seems fair because they might lose all their money if this venture of yours doesn’t quite work out.

There are several implications to having an investor in a business. Firstly it becomes yours and theirs and you are bound to contracts and deals signed based on the investment terms. When you think about that, bootstrapping seems like a very good idea and many companies have survived by being purely self-sufficient.

Take, for example, WordPress theme shop and ecommerce platform WooThemes. “Up to this day, WooThemes is 100% bootstrapped and self-funded — this is something that I’m very much proud of,” says co-founder Adii Pienaar. Pienaar is a bootstrapping evangelist and believes that if an entrepreneur is “not willing to invest [their] time and money into [their] own business”, persuading someone else to do so could be a hard sell.

“Bootstrapping isn’t about being cheap; it’s about being efficient with your resources, it is about being clever, scrappy, creative and resourceful,” he adds.

For entrepreneur and 4Di VC Justin Stanford, an entrepreneur that has bootstrapped actually makes for an “attractive” investment. He argues that is it “shows resourcefulness” on the founder’s part if they have taken the company to a certain level.

“It is a more attractive investment I would say. The more market validation that has occurred the less risk for an investor. This is also good for the entrepreneur because it means they can ask a higher valuation and give away less equity. It also tells the VC something about the tenacity, resourcefulness and skills of the entrepreneur.”

Not everyone has a 401(k) they can fall back on

It’s easy to see how the case for bootstrapping can be won: get an idea, use what little money you have to turn it into a business, generate some revenue and boom you have a success. That works fine you’ve had a job that allowed you to save up some capital and knowledge that helps you navigate the industry. For some people it’s not that easy.

In the world of bootstrapping, it is important to “generate revenue as quickly as possible. Positive cash flow is ultimately king,” says Pienaar. This is true; positive cash flow means whoever you have employed still has a job and you can keep the house you mortgaged for this. For someone who doesn’t have enough assets to mortgage or a business that can generate revenue quickly, it might not be so easy. These guys might need a little help.

“Startups who want to grow aggressively who don’t have their own significant networks and some cash to bridge the window of opportunity absolutely need VCs or Angels,” says Keet van Zyl of Knife Capital.

Having an experienced VC to hold your hand during the early days of searching and understanding is a good idea. Depending on what industry you are playing in, someone who knows the lay of the land helps with figuring out where you fit in and that is something a VC can do.

According to former Mxit CEO and entrepreneur Alan Knott-Craig Jnr, having an investor back your business is not a bad idea, as long as everyone is clear on the intent.

“It’s no so much that one is better than the other. We need a more fully developed capital ecosystem, with the major missing link being early stage VC,” says Knott-Craig. “As long the VC is open re intent (ie: I’m getting married so we can get divorced), they do no harm.”

South Africa and Africa’s venture capital ecosystem is still in its infancy, which makes it hard for startups to pair with the right VCs and this has encouraged entrepreneurs to try to make it on their own.

“The fact that we don’t have a robust VC industry in South Africa is part of the reason why most of our startups are in a holding pattern and don’t get significant traction,” says van Zyl. “They remain perpetual startups with less than five employees and less than R10 million revenue. And pitch year after year at Business Plan competitions,” he says.

Perhaps it all comes down to an ecosystem that is not self-sustaining, with a lack of big investors and successful tech entrepreneurs?

For Knott-Craig, “the main problem is a lack of people who have made lots of money in tech in South Africa”.

“This is the sort that is at the core of the Silicon Valley investor scene. We’ll get there, [we] just need to be patient. In meantime, bootstrap,” says Knott-Craig.

What kind of entrepreneur are you?

If someone must win in the debate of to bootstrap or not, it comes down to a fundamental question: how many businesses do you have in you? Are you building a legacy, a company to own or a company to sell? Some entrepreneurs that pop up in the tech world are essentially building the internet’s version of a corner cafe: it will never get big and someone will soon enough buy it and absorb it into something else. But is that the kind of entrepreneur VCs are looking for?

According to Stanford, when looking at an entrepreneurs, “the main key is focus and commitment to the long-term success of the business”.

“Track record helps but it’s not critical. You are backing the person and you have to assess their character as well as their business plan, and whether they have experience or not probably just changes how they’ll do things, but not the essence of who they are. The right guy is backable with or without a prior track record, the nature of the help/assistance you provide just changes,” he adds.

If you have only one business in you, then perhaps an investor might not be a good idea when it comes to ownership and decision-making. Because if your business isn’t making money, your VCs will likely want to exit it and cut their losses. If you are a serial entrepreneur, then perhaps bootstrapping might take too long for get you to all the other companies. A VC can help fast track your growth and then exit the company quickly so you can start your next venture.

So, what kind of entrepreneur are you?