Downsides of Bootstrapping (by Vaibhav Domkundwar)

This is from articles / content written by Mr. Vaibhav Domkundwar (Seed investor / CoFounder of Better Capital) on linkedIn

Sharing here to bring his multiple articles together and make it easy to read.

Actually its more to understand his points better. Nothing helps better than writing. Copy-pasting the content is not that effective, but its better than just reading for sure.

I am flaunting that he wrote this , because in no scenario I want anyone to feel I was “inspired” by his work to write my original piece. These are brilliant insights, and he deserves all the credit for it.

So here it is -

Introduction (this is my part)

Those who follow startup ecosystem and investments by angels / VCs to some extend, know that one of the most common topics debated are funding vs bootstrapping.

Bootstrapping is when a founder does not dilute ownership in his/her company, owns everything, and grows the company with his/her own money and runs its on the profits / cash it earns from the business itself.

Funded firms are those who take money from investors against (selling) equity (ownership) in their company. This helps the founders with more resources in hand - money, network, intelligent people having skin in the game for their investments to grow etc.

Funding is differing from borrowing. Both types of companies borrow/take debt to run the company

Often, even those who run a successful funded company talk highly about bootstrapping. The hustle behind it. The struggle to survive and “grow with your own money” is appreciated. And one common reason for it is “sense of ownership”. You still call the shots at your company. You are not answering anyone else. You don’t have a board which may or may not be aligned with what you wish to do.

And founders running the bootstrapped companies HAVE to claim it’s cool and it is the way to run a business. The challenges they face are declared to be the part and parcel of the game. And if they truly did not like it, they always have option to raise funds and do something with the money.

Hence almost never we get to hear about the downsides of bootstrapping. Not until Vaibhav Domkundwar brought his thoughts together and penned his views almost 4 years ago.

I must confess, when I had read these few years ago, I did not value it much. Vaibhav is an investor and the write up was about why taking investment is better. 

I have read Naseem Taleb’s “Skin in the game”. Thanks to that book I almost never take things on the face value. Almost always check why someone is saying what they are saying. If they are benefitting from it, I discount the importance big time.

Like when opposition says why the govt is not good enough, or vice versa. Or teachers telling why their school/college is the best, or when a fan tells why his/her favorite team is the best ever etc. The view benefits them in many ways.

But very recently Vabhav’s content was re-shared on Twitter, and this time when I read it, I did not discount it like I used to. I just read the points on its merits. And these are very contrarian and interesting takes.

I am requesting warning you readers that these are very powerful points, and its okay if you discount them off completely. Don’t take them on their face value. Because these points might bias your views considerably. Very important to keep an open mind, and not get influenced by these.

Again, the reason I am highlighting them as very potent points is because your “passing comments” might impact how someone you don’t even know properly, choose to run his/her company. When it can impact a company’s future and its future employees, then its our responsibility to handle it with care. Like “fragile freight, THIS SIDE UP” level of care.

So we remember there are lot of pluses for bootstrapping, and not all companies, sectors, and founders are same. So the “right thing to do” can vary for each startup/founder.

Here sharing what Vaibhav says are downsides of bootstrapping - 

In his own words

“This is a collection of notes on downsides of bootstrapping that are often nuanced, often less understood, often less accepted but may be important to consider while you bootstrap.

None of these are hard views. You may want to take what makes sense for your situation and leave the rest/all :)”

1. Building an average team  (Biggest problem of them all)

   The biggest downside of bootstrapping is that you are likely to end up with an average team, at best, most of the times.

   
   An average team doesn't help you unlock your true potential as a founder.
   An average team leaves you stuck solving the basics for too long.

   
   An average team leads to average work which leads to average outcomes.
   Don't get me wrong - I admire, respect, and root for bootstrapping, having done it myself for a fairly long time - but I believe it helps to be aware of the real downsides of bootstrapping which are often costly.

   
   If you are bootstrapping, saying NO to average teams, average work, average thinking, and average everything is one way you will build something stellar.

2. Inability to scale 10x fast (costliest problem of them all)

   The costliest downside of bootstrapping is the inability scale 10X on hitting PMF.
   
   Bootstrapped founders who find PMF with a new product lose their lead to funded founders who may end up learning from them and scaling faster.
   
   Whoever scales early PMF faster also learns more and learns everything faster, leading to them breaking away from the slow movers.
   
   This inability to move faster and scale is probably the costliest downside of bootstrapping.
   
   I personally know several cases myself where a late-funded entrant learned from the bootstrapped slow movers and went on to own the market.
   
   So bootstrap all you want but when you do hit PMF, figure out a way to scale it as fast as you can - because if you don't do it, the biggest loser from it is just you, the founder/founding team.
   
   PS: this is an extended exploration of the nuanced and real challenges of bootstrapping that aren't explained clearly in the standard bootstrapped vs funded discussions. please see earlier posts for more context.
   

3. Poor Return on Time Invested (ROTI) (heaviest (financially) cost of them all)

   The largest financial downside of bootstrapping may be the poor Return on Time Invested (ROTI) for founders who are able to sustain & run their bootstrapped company for a good period of time.
   
   While there are exceptions, a vast majority of bootstrapped founders can look back at a 10 yr bootstrapped journey and wonder if they lost more than they won assuming they reached a decent enough destination.
   
   If you factor in the constant cashflow struggles, burnout by thousand cuts trying to continue to do the basics, and/or eventual frustration with the slow pace, the Return on Time Invested starts to look really bad.
   
   With high-quality founders, it is fair to say that their ROTI would have been much higher doing something else on many occasions.
   
   This is one nuance that is often experienced but not talked about enough and typically justified by thinking "at least I can control my destiny". More on that in the next post.
   
   PS: this is an ongoing exploration of nuanced challenges of bootstrapping (see earliest posts for more context) that I've seen and learned from first hand. this is far from a hard view but just a set of views that I believe bootstrapped founders may find helpful.

4. Leads to “thinking small” (happens unknowingly)

   The most fundamental happened-unknowingly-and-slowly downside of bootstrapping is how it leads founders and founding teams to think small.
   
   Again, keeping exceptions aside, the constraints of bootstrapping chip away at the big thinking minds that founders start with and leads them to think small, think tactically, and be satisfied with less.
   
   Once you are down the think small spiral it becomes incredibly hard to think big, again.
   
   It's suffocating for the founders who realize this but can't get out of it and create space for themselves to take on strategic shifts in the business and disrupt themselves.
   
   There's no room to do that without seriously jeopardizing your existing modestly growing business.
   
   Just another truth of bootstrapping that is realized but not talked about enough.
   
   This think small problem is one of the most intense downsides accordingly to me.
   
   PS: if you stumbled on this post, please do check the past few posts on the downsides of bootstrapping for more context. none of these are hard views. all of them are real experiences from real companies and founders.

5. you THINK you are in full control (most misunderstood of them all)

   The most misunderstood upside (downside) of bootstrapping is that you are in full control, whereas in practice you are being controlled most of the time...by the constraints of bootstrapping.
   
   You want to move faster but your cashflows don't let you.
   
   You want to hire senior execs to scale your business but you can't afford them.
   
   Senior employees may leave with trade secrets & poach, but you don't have the legal muscle to fight it.
   
   Your competitors leverage your innovation to win market share but you can't execute faster.
   
   There are 100s of such issues that cut the wings off of the bootstrapping founder who has full control but can't fly.
   
   AGAIN, don't compare with the downsides of funding to justify against the downsides of bootstrapping. If you are bootstrapping, you have to focus on just that and understand what is stunting your potential and why you are stagnating.
   
   PS: the intent of these bootstrapping posts is to highlight important issues that bootstrapping founders realize but don't analyze. please refer to past posts for more context. these are only meant to help you with another view only so take whatever you find valuable or useful.

Again, this article is to collate Vaibhav’s points across multiple LinkedIn posts. And hoping these points gave you some food for thought. Leverage these powerful insights in best possible way. Thanks.