Bootstrapping in 2021: A Guide to Success

The Shifting Landscape of Startup Funding

The surge in venture capital funding experienced by the technology startup sector since the latter part of 2020 has been remarkable. Unprecedented amounts of capital were distributed globally as an increasing number of firms sought opportunities to invest in emerging companies.

However, alongside this rapid expansion of venture capital activity, a contrasting trend is gaining prominence: bootstrapping.

Bootstrapping as a Viable Alternative

Mailchimp’s recent acquisition by Intuit for $12 billion demonstrated the potential of bootstrapping. It proved that substantial and valuable technology companies can be established without relying heavily on venture capital, even outside established tech centers.

Mailchimp, headquartered in Atlanta, exemplifies the growing number of startups flourishing in non-traditional locations, as previously highlighted by The Exchange.

Expanding Funding Options for Startups

Modern startups now have access to a wider range of funding avenues than ever before, offering multiple routes to growth.

These options include platforms like Pipe, which facilitates the sale of future revenues in a competitive market, and the numerous venture debt providers frequently covered by TechCrunch.

Bootstrapping Doesn't Close Doors to Future Funding

For startups prioritizing revenue-driven growth, further positive developments are emerging. Calendly, another Atlanta-based company, secured its first significant external funding round earlier this year at a valuation exceeding $3 billion.

This illustrates that initial bootstrapping doesn't preclude access to equity capital later on; several other companies have adopted a similar approach recently.

Potential Impact on Founder Demographics

We are investigating whether evolving capital markets, coupled with business models like product-led growth that enhance the feasibility of bootstrapping, will influence the diversity of startup founders.

It is possible that these changes could lead to a more inclusive and representative group of individuals entering the startup ecosystem. This is a topic worthy of further discussion.

The Resurgence of Bootstrapping in Modern Startups

During the dot-com era, nascent companies routinely allocated initial funding to procuring physical hardware. Acquiring servers wasn’t as simple as utilizing on-demand services like those offered by Amazon, necessitating direct purchases and co-location expenses. This required substantial capital investment.

Furthermore, establishing digital businesses was considerably more challenging several decades ago. The availability of APIs for integrating solutions to complex technical problems was limited, and there were fewer skilled professionals to develop new tools, alongside a smaller potential customer base.

Currently, the startup landscape benefits from a reduction in technical risks, often translating to lower development costs. The frequently stated observation that launching a company is easier than ever before may also extend to its affordability, which positively influences the feasibility of bootstrapping.

Additional factors are contributing to this shift. The adoption of product-led growth (PLG) can significantly benefit startups. PLG relies on the product itself to drive customer acquisition, thereby reducing marketing expenditures. Lower marketing costs equate to reduced capital requirements during scaling, creating a more favorable environment for self-funding.

As highlighted by Anna in her Expensify EC-1, PLG has been instrumental in the success of numerous companies, though many initially secured some external funding. The model’s prevalence has increased over time. OpenView partner Blake Bartlett explained to TechCrunch that while Atlassian and SurveyMonkey were early adopters, it was largely an exception to the norm. This situation is evolving.

While observing current trends involves a degree of retrospective analysis, the stories of Mailchimp and Calendly are not isolated incidents. This year, Articulate secured $1.5 billion in July after nearly two decades of self-funding. Similarly, Octopus Deploy raised $172.5 million in April following a decade of bootstrapping. These companies demonstrate that self-funding is viable and doesn’t preclude later capital raises at more favorable terms – both in terms of valuation and equity dilution – once scale is achieved.

Qualtrics serves as a prime example of this approach.

Venture capitalists are increasingly receptive to funding bootstrapped companies, suggesting a flexible approach for startups to combine self-funding during their early stages with later capital acquisition. TechCrunch inquired with investor Michele Romanow regarding her willingness to invest in companies that initially avoided external funding.

“That constitutes the majority of our portfolio,” she responded, noting that the use of the term “bootstrap” is sometimes used with unwarranted negativity. She believes that building a company without external capital deserves greater recognition. (The notion of venture capital as a lifestyle business is a separate discussion.)

The advantages of self-funding for founders are clear: increased control and reduced equity dilution. For VCs, benefits include potentially simpler capitalization tables, fewer stakeholders, and the opportunity to invest in a company that has already demonstrated its viability.

In Calendly’s case, product-led growth helped minimize expenses. CEO Tope Awotona shared with TechCrunch during an Early Stage event that the inherent virality of his company’s product allowed him to avoid certain costs:

Successful bootstrapped companies are readily identifiable in hindsight. However, identifying currently thriving bootstrapped startups is more challenging, largely because they don’t generate the same level of media attention as venture-backed companies. Venture-funded startups regularly announce funding rounds, attracting press coverage and increasing market visibility.

Nevertheless, startups that don’t require – or choose not to pursue – expensive equity financing have access to more resources than ever before. Revenue-based financing is now a well-established option. Some companies are innovating further. Pipe has created a marketplace for buying and selling future revenue streams, facilitating price discovery and potentially offering founders more attractive terms, while providing investors with a liquid market for future earnings; increased access to capital through revenue sharing enhances the viability of bootstrapping.

According to TechCrunch reports, over 8,000 companies have registered to sell revenue on Pipe. Billions of dollars in revenue have been traded through the platform, indicating substantial scale on both the supply (startup) and demand (investor) sides.

We anticipate more financing options and a greater number of bootstrapped startups. This raises a question: Could the increasing prevalence of bootstrapping, over the long term, alleviate some of the pressure created by the accumulation of unexited unicorn companies?

The Renewed Appeal of Self-Funding

The landscape for launching a startup in 2021 differs significantly from previous years, presenting increased feasibility for bootstrapping. While the success of bootstrapped companies achieving public offerings is noteworthy, a compelling question arises: is it possible for these companies to remain privately held indefinitely?

Not every thriving startup is optimally positioned for an Initial Public Offering (IPO), and the current market faces an IPO backlog that even Special Purpose Acquisition Companies (SPACs) struggle to alleviate. However, venture-backed unicorns are compelled to seek liquidity for their investors, leaving them with limited alternatives. Conversely, bootstrapped companies retain a degree of flexibility.

This positions bootstrapping as a desirable path for founders who wish to avoid the pressures associated with venture capital funding – or who find securing such funding unattainable. Although U.S. venture capital investment reached record levels this year, its distribution remains highly uneven. Crunchbase data reveals that startups with exclusively female founders received only 2.2% of the nation’s venture funding during the first eight months of the year.

Moreover, funding allocated to Black founders in the first half of 2021 constituted just 1.2% of the total, despite a “more than four-fold” increase year-over-year. Black women startup founders secured a mere 0.34% of the total funding during the same timeframe. For entrepreneurs within these underrepresented groups, the appeal of bootstrapping becomes readily apparent.

Beyond circumventing the demand for liquidity and potentially fostering a more inclusive founder demographic, startups can avoid the costs and complexities associated with going public.

While a public listing can enhance a company’s operational discipline through stricter accounting practices and improved forecasting, it also incurs substantial expenses and alters the company’s operational dynamics. Discussions during this week’s Disrupt event, involving a CFO, a former CFO now a venture capitalist, and a venture investor, highlighted these costs. Bootstrapped companies, however, lack the impetus to pursue an IPO or a sale, maintaining control with their original creators rather than external investors.

It’s important to note that bootstrapping doesn’t preclude offering equity to employees. In the current employment climate, many workers anticipate receiving shares in the companies they contribute to building. Bootstrapping does not grant permission to adopt practices like those of Mailchimp, where employees were initially told a sale was unlikely, only for the company to be sold without offering staff the opportunity to participate in the financial gains. Sharing success with employees is possible, even without external capital sources.