Our POV: When Bootstrapping Works (and When It Doesn't)

We recently wrote about why we’ve chosen to bootstrap. In response, many people asked us when bootstrapping works—and when it doesn't. This is our (hopefully intellectually honest) reflection on that question. 

Initial costs: How capital-intensive is the business to start? 

There’s a continuum here. The lower the capital intensiveness, the more bootstrapping can work. 

For example, bootstrapping works for us because software companies (like Flagsmith) aren’t as capital-intensive to build as they once were. Tooling is free/very cheap, open source exists, and infrastructure costs are lower. This means we didn’t need VC funding to get started. 

If you're building a capital-intensive business the VC model generally stands strong, though. VC firms can provide a cash injection for ideas like a new AWS data centre competitor, a biotech company, or an electric vehicle company.

To the moon! How fast is the company looking to grow and scale?

This often comes down to the founder’s mentality and goals. 

Bootstrapping works for us because we want to go at our own pace and have found our niche. If you want to go at your pace, create a great product and build it with customer dollars, bootstrapping can work well. It’s not a fast track, but it’s possible and it’s how we’ve hit profitability.

If you want to capture a large market share quickly, VC dollars might be what you need. Those open the door to scaling much faster than is (usually) feasible when bootstrapping. There are goliaths out there and getting into a marketing and/or sales arms race with them isn’t cheap. VC firms also offer strategic partnerships, industry connections and distribution channels to throw punches with the big dogs. 

Note: There’s a misconception that you need to compete in that arms race, and another that VC is the entry fee. We believe that very few markets are winner-take-all. You can sidestep the arms race by finding a niche and building in line with your goals.  

Perceiving success: What does stability and success look like for the company? 

Bootstrapped companies are hardened. They’ve made their way through tough choices and financial constraints. When they’ve hit profitability and found a niche, there’s no “burn rate” or “runway”, and that brings a tonne of stability. 

Many founders turn to VC because it can bolster the company’s image. If you raise VC funding, you’ll likely get fewer questions from employees and customers about sustainability than if you bootstrap. Raising rounds (especially in tough investment periods like this) shows that the company has potential. 

There are no silver bullets, though. Joseph Jacks (OSS Capital) recently showed that > 50% of the great software companies in history that have crossed $1 billion in ARR raised < $25M in venture capital dollars. He admits the data is not perfect, but it’s in line with many other statistics. e.g. This Harvard paper showed that 75% of venture-backed startups fail. We can all think of countless VC-funded companies that focus on rapid growth, only to fail and disappear.

We believe the stability of VC is more a perception than reality. Sure, a larger balance sheet can help, but the pressure to spend that money and run unprofitably can make your company less sustainable in the long run.

Getting down to brass tacks: How do salary and financial pressures play into the VC vs. bootstrap decision? 

In our experience, founders hit several key moments where financial considerations (like salary) come into play. 

Let’s look at a few of these points—and when it works to bootstrap vs. raise:

1. Salary
   We initially bootstrapped alongside running an agency. We kept a salary going elsewhere until Flagsmith gained enough traction to give it our full attention. This meant we didn’t have to take the financial leap right away, which fit well. Bootstrapped founders find creative ways to make it work without a salary while starting; working on the project on nights and weekends, consulting on the side, or using savings.
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   Many founders initially raise venture capital because they need a salary, and understandably so. Raising VC can help guarantee a modest salary while starting up, but don’t expect it to be a lot. The investors in your company will want you to keep that initial salary low so that the funding can be put towards growth. 
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   This is a highly personal choice and honestly, the menu of financial options available to founders feels limited. All come with some risk!

2. Profits or dividends
   The barrier to financial gain is lower for bootstrapping. We love the idea that since we bootstrapped, hitting $2M ARR can be a big success for us! At this time, we can increase salaries or pay dividends to ourselves and start to see real financial returns. However, while the barrier to profit is lower for bootstrapping, the scale and potential are usually more modest as well.
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   If you raise funds and your company hits $2M ARR, you’ll still have that modest salary. If the company never gets past $2M ARR, you may end up a “zombie” and never see a payout for your work. Many founders raise VC because it feels like a clearer path to massive financial gain. If you use VC to capture a huge market and you win, the reward can be astronomical (though it’s quite rare to win big like that.)

3. Payout
   Raising a $100 million round sets a high valuation for your company, which can have downsides. It’s not the finish line, and it will likely be a long journey before you or your employees directly benefit financially. You’ll also be expected to raise again and keep doubling down for a larger return.
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   We know founders who feel stuck running a VC-backed company; they don’t feel it will ever live up to its valuation and provide an outcome for them or their team.
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   The payout can be larger on the VC path, but it’s also further out and less likely than a more modest bootstrapped outcome. It’s about your and the company's goals.

Zooming out: What matters to the company?  

The VC track puts focus on growth. The bootstrapping track lets you choose your focus. What works can depend on what matters to the company. 

At Flagsmith, we choose our growth goals and focus on what matters to us. There’s no preordained path, and that freedom is important to us.
On the VC track, the company gets driven by the board and growth goals are set externally. That external influence can help you scale fast, but will also become beholden to hitting set valuation targets. This can dictate your focus. John Hu, Founder/CEO of Stan posted an interesting stance: 

“Investors just want us to grow the company. But ‘growing’ purely for the sake of growth or financial return feels pretty empty and meaningless to me… So I’ve been asking myself questions like: ‘What do I want Stan’s legacy to be?’’’ 

Our employees weigh in: When does bootstrapping work from an employee POV?

People often focus on the founder's experience. Here are some snippets from our employees on why bootstrapping works for them:

• Bootstrapped companies can be a more realistic path to financial gain—whether through dividends (commonly nonexistent in VC-backed companies) or an acquisition.
• Raising capital can lead to hiring too quickly to grow fast, which can be devastating for a team. It can bloat the company, leading to culture and engineering discipline drift. (Plus, the risks of brutal layoffs if things go south.) Bootstrapped companies tend to hire more slowly and intentionally. 

Here are some perks our employees see for VC-backed companies:

• While the path to financial gain is more realistic at bootstrapped companies, it’s also more likely to be modest. The dream of getting paid out (as an employee) for selling for $1B probably needs VC funding.
• Your ability to reap the rewards of bootstrapping can hinge on things like your ability to build with less external guidance. You’re also at the mercy of the founder’s mentality without an external board. This can be a pro with the right founder (as we’ve found), or it can put you in front of things like lopsided cap tables.   

We’ll delve deeper into these pros and cons in an upcoming article! 

Conclusion 

Starting a business is hard. A majority of businesses fail, regardless of which path they choose. VC is not a panacea that will guarantee success. Building a business from scratch is hard no matter which path you choose, and there are no shortcuts.

For us, bootstrapping as a lean, profitable team works. We’re genuinely excited about what comes next.