In my career I’ve been blessed to be a part of companies (relatively) large ($150 million-plus) and small. On the small side, I’ve been a part of one company that sought (and received) outside funding and one that bootstrapped its way to profitability, which is what makes a recent article on ReadWriteWeb so interesting to me.
My first small company experience was with an angel investor-funded start-up that had licensed some intellectual property from Vanderbilt University’s Office of Technology Transfer and Enterprise Development. I was employee three and we raised about $1 million, hung out our shingle and started selling. Subsequent funding was later sought and was partially raised. The company struggled for a while before being sold to a larger organization primarily for the assumption of debt.
My second small company experience is (I’m still employed at CareHere) with a company that was bootstrapped by its two co-founders. When I joined the company was doing a couple million dollars in annual revenue and I was employee number eight. The company has been profitable since day one and continues to grow by leaps-and-boundsâ€”even in the worst economy in several generations.
The above-mentioned article, entitled “The Downside of Bootstrapping”, poses one possible theory of why my two experiences were so different: Focus. (UPDATE: Here’s another word that all start-ups need to understand: Urgency.)
Bootstrapped companies work with only two types of funding: That contributed directly by the founders or that contributed directly from business operations. Either way, employees of these organizations HAVE to be more focused because they simply don’t have the same level of cushioning that companies with outside funding (may) have. In other words, it’s easier to get distracted when you’re working with someone else’s money.
Bootstrapped companies, however, have a major weakness that’s pointed out in the article (along with a couple of other important thoughts). That weakness is that it’s often harder for them to scale. The reason for this is that business expansion in these type of organizations are typically funded out of cash flow and that cash flow simply isn’t growing fast enough to finance much more than incremental growth.
One notable exception to this quasi-rule is when a bootstrapped company operates in an industry that is rapidly growing and, therefore, the company can grow faster without a lot of cash flow. CareHere operates within such an industry–on-site healthcare–and has been able to grow very quickly. Entrepreneurs should never underestimate the power of being in the right business and the right time.
Investor-funded companies can be focused, too, and the successful ones are. I’m not sure if that’s where my other small company experience went wrong but I definitely think that it helped move us down a path where we didn’t want to go. Regardless, staying focused on where the cash is going and guarding every cent like it’s your last one is important for any company. Taking risks is okâ€”that’s what starting a business is all about anywayâ€”but not paying attention is an unforgivable sin.
Have you ever been a part of a small company start up or stared a company on your own? If so, what route did you go down: Bootstrapping or outside investors?
UPDATE: A great article from O’Reilly has just been posted entitled “The VC-free startup“.