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One problem with bootstrapping is that the founders carry all the risk. The alternatives, i.e. selling equity for capital, usually means the founders mitigate

One problem with bootstrapping is that the founders carry all the risk. The alternatives, i.e. selling equity for capital, usually means the founders mitigate some of that risk. For example their salaries would not come completely from their own capital anymore. I think that's important to keep in mind. Bootstrapping is not the optimal solution for everyone. If you fail, you pay dearly, especially in opportunity costs, but many also touch their savings or their families' money.

beberlei 7y ago
That wasn't at all the problem for me in the first years of bootstrapping. I didn't invest with my own capital, but by putting my spare time into it. Funding was provided by the early customers. I kept working full time for my previous employer for one year, then part time the second and third year with decreasing hours. Also now that its running on its own, I also feel that I have less risk, because with a profitable company there is no requirement for growing a specific amount that investors demand or otherwise they take your control away.
- bayesian_horse 7y ago
  As I said, this varies from situation to situation. Also, you may be confusing risk with outcome. Your outcome was positive. If your business had failed, at any point, you would have lost any benefit from the work you put in. It's also not quite fair to assume that the time you worked on that project is worth 0 Dollars.
digitallogic 7y ago
That's definitely true for some folks, but it's not universal. I split my time between contracting and my bootstrapped business. The business is profitable and operational costs are very low. The only financial risk is the opportunity cost of not being employed full time. Through contracting I make about 30% less than I did as a salaried employee, but I am immensely happier than when I was employed full time. Even if I wasn't bootstrapping a business, that tradeoff feels worthwhile to me.
- bayesian_horse 7y ago
  Situations vary. In your situation, no, your opportunity cost from working on a side project is probably bigger than you think. First of all, I wasn't talking about the contracting/employment choice, so you need to compare the time you lose for contracting. And then you need to differentiate between cost and risk. You sound like you are comfortable with the cost you are taking on (good for you, nothing wrong with that!). But when talking about the risk, you need to compare it to the possible outcome that your business completely fails. That's what I am talking about when I say that bootstrapping means you carry the complete downside risk for the business. I don't know what kind of risk appetite you have, or what percentage of your total net worth got tied up in your side business. So it's completely possible that this is a rational and beneficial choice. But it's not as easy as "I think it's worth it." And people also forget about the upside risk of outside funding. Yes, your piece of the pie shrinks, but the pie also gets larger. And again, I don't want to make people feel bad about their decisions, I just wanted to point out that risk management, with respect to their own personal capital, is something that start-up entrepreneurs need to think more about.
alexcnwy 7y ago
Selling equity for capital introduces new risks though - many businesses are pushed to grow too quickly and take actions in the pursuit of billion dollar exits because they had raised money which causes them to fail. Sure, the capital injection helps grow quicker but many businesses could have been comfortably bringing in a few million dollars per year but end up dying because they were forced to grow too quickly.
- bayesian_horse 7y ago
  Not what I'm talking about. No outside funding means the founders carry 100% of the risk. No amount or form of outside funding can increase that percentage (duh!). And if you are putting in your time (with the associated opportunity cost), you should be asking yourself what kind of growth you are willing to accept in exchange, shouldn't you?
  - alexcnwy 7y ago
    I’m saying you don’t just change the risk allocation by raising money, you change the risks themselves in a way that may be making your risk as a founder greater, not smaller. You don’t carry “all” the risk but your risk still goes up.
    - bayesian_horse 7y ago
      No. Raising money only changes risk allocation, not downside risk, unless you increase the value of the equity, which "raising money" doesn't do on its own. The valuation might increase at the same time, but that effect would not be just from "funding" but rather from non-money aspects of the partnership. There are all sorts of crazy agreements one could think up, but basically if a funding agreement increases your downside risk, it's really not so much about the funding but rather about a fundamental change in the venture. Otherwise, why do it? Of course you can enter an agreement where you increase the risk of the venture failing significantly. But that's not fundraising, and it's probably not smart, either. And the risk of staying small is sometimes underestimated. If you enter into a funding agreement where you put in your own money, or a loan you personally guarantee, that would increase your downside risk. But it's also not fundraising, because it's your money.

beberlei 7y ago

That wasn't at all the problem for me in the first years of bootstrapping. I didn't invest with my own capital, but by putting my spare time into it. Funding was provided by the early customers. I kept working full time for my previous employer for one year, then part time the second and third year with decreasing hours. Also now that its running on its own, I also feel that I have less risk, because with a profitable company there is no requirement for growing a specific amount that investors demand or otherwise they take your control away.

bayesian_horse 7y ago
As I said, this varies from situation to situation. Also, you may be confusing risk with outcome. Your outcome was positive. If your business had failed, at any point, you would have lost any benefit from the work you put in. It's also not quite fair to assume that the time you worked on that project is worth 0 Dollars.

digitallogic 7y ago

That's definitely true for some folks, but it's not universal. I split my time between contracting and my bootstrapped business. The business is profitable and operational costs are very low. The only financial risk is the opportunity cost of not being employed full time. Through contracting I make about 30% less than I did as a salaried employee, but I am immensely happier than when I was employed full time. Even if I wasn't bootstrapping a business, that tradeoff feels worthwhile to me.

bayesian_horse 7y ago
Situations vary. In your situation, no, your opportunity cost from working on a side project is probably bigger than you think. First of all, I wasn't talking about the contracting/employment choice, so you need to compare the time you lose for contracting. And then you need to differentiate between cost and risk. You sound like you are comfortable with the cost you are taking on (good for you, nothing wrong with that!). But when talking about the risk, you need to compare it to the possible outcome that your business completely fails. That's what I am talking about when I say that bootstrapping means you carry the complete downside risk for the business. I don't know what kind of risk appetite you have, or what percentage of your total net worth got tied up in your side business. So it's completely possible that this is a rational and beneficial choice. But it's not as easy as "I think it's worth it." And people also forget about the upside risk of outside funding. Yes, your piece of the pie shrinks, but the pie also gets larger. And again, I don't want to make people feel bad about their decisions, I just wanted to point out that risk management, with respect to their own personal capital, is something that start-up entrepreneurs need to think more about.

alexcnwy 7y ago

Selling equity for capital introduces new risks though - many businesses are pushed to grow too quickly and take actions in the pursuit of billion dollar exits because they had raised money which causes them to fail. Sure, the capital injection helps grow quicker but many businesses could have been comfortably bringing in a few million dollars per year but end up dying because they were forced to grow too quickly.

bayesian_horse 7y ago
Not what I'm talking about. No outside funding means the founders carry 100% of the risk. No amount or form of outside funding can increase that percentage (duh!). And if you are putting in your time (with the associated opportunity cost), you should be asking yourself what kind of growth you are willing to accept in exchange, shouldn't you?
- alexcnwy 7y ago
  I’m saying you don’t just change the risk allocation by raising money, you change the risks themselves in a way that may be making your risk as a founder greater, not smaller. You don’t carry “all” the risk but your risk still goes up.
  - bayesian_horse 7y ago
    No. Raising money only changes risk allocation, not downside risk, unless you increase the value of the equity, which "raising money" doesn't do on its own. The valuation might increase at the same time, but that effect would not be just from "funding" but rather from non-money aspects of the partnership. There are all sorts of crazy agreements one could think up, but basically if a funding agreement increases your downside risk, it's really not so much about the funding but rather about a fundamental change in the venture. Otherwise, why do it? Of course you can enter an agreement where you increase the risk of the venture failing significantly. But that's not fundraising, and it's probably not smart, either. And the risk of staying small is sometimes underestimated. If you enter into a funding agreement where you put in your own money, or a loan you personally guarantee, that would increase your downside risk. But it's also not fundraising, because it's your money.