Bootstrapping, Venture Capital and the space in the middle

TL;DR: When is VC or bootstrapping the best way to go, and what alternative paths can founders take?

Having a Venture Capital firm invest in you is like having a boss who tells you how to run your company. Bootstrapping means only building a lifestyle business that grows excruciatingly slowly.

There is much prejudice in the startup world around how businesses should think about their finances. And for the longest time, there were only two camps: VC and bootstrapping.

When to choose Venture Capital funding or bootstrapping? ⚖️

1. Ambition of the venture

If the founder would like to create a small to medium sized business that dominates a niche market, bootstrapping is likely the way to go.

If the goal is to build a corporations with billion dollar valuations (or die trying), VC is the right path.

2. Risk appetite

High risk for high reward: go for VC. Most VC-backed startups fail. And when they fail, they go to zero. But if they work out, founders can win big (depending on the amount of equity they are left with).

3. Need for independence

In a bootstrapped business, founders are their own bosses. The cap table consists of the founding team and nobody else.

As soon as VC investors get involved, the dynamic changes a bit. All of a sudden, there is “an adult in the room”, for better or worse. Independence is limited.

What are the alternatives? 🌱

1. Indie Investors

TinySeed is a great example for a new type of investor which provides independent, B2B SaaS companies with an early seed check with the intention for the company to grow customer-funded from there.
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No unicorn hunt here, the goal is to get businesses off the ground that have the potential to grow into a 7- or 8-figure company.

Also, many business angels have started to dip their toes into indie investing, moving away from simply following traditional VC narratives.

2. Revenue-based financing

Pipe is likely the most well-known provider of non-dilutive growth capital, but there are new competitors emerging left and right. Similar players in the market are Lighter Capital and Clearco.

These platforms allow founders of businesses with a SaaS or sometimes eCommerce model to raise capital for their startup from investors who in turn receive a predetermined share of the venture’s revenue for their investment.

3. Micro Private Equity

With the rise of Micro Private Equity, new small funds have surfaced, looking to support small independent technology startups. A prominent example of a Micro PE is the Calm Company Fund, a vehicle that invests based on a Shared Earnings Agreement (SEAL).

The SEAL refers to a contract which allows the investor to participate in a share of the future earnings of a startup in return for their investment.

4. Leveraging the crowd

Crowdfunding has been around for a while, with startups listing on Kickstarter as early as 2009. Getting the masses to fund (or sometimes better “donate”) to get businesses off the ground has helped many founders, especially in the D2C space.

What does the future hold? 🔮

Alternatives to traditional Venture Capital and bootstrapping are emerging and developing rapidly. New innovation and growth in this space are likely to see the light of day for the foreseeable future.

Of course, not all of them will succeed. Indie.vc is an example of one of the earliest drivers in this ecosystem. After funding nearly 40 startups, they stopped making new investments, citing lack of support from institutional investors.

But the indie startup economy is growing with likely hundreds of thousands of small software and internet businesses operating around the globe, looking to leave a mark.
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Ever-growing communities like Indie Hackers and Product Hunt are living proof that new startups and founders are working away at innovative ideas everyday - most of whom do not even consider Venture Capital funding anymore.

And now the founders of the startups can choose whichever path suits them and their ambitions best, be it bootstrapping, VC funding and everything in between.

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