Kjartan Rist for Forbes Magazine

Although a nascent industry, particularly in Europe, venture capital has become an integral part of innovation and the technology sector. Since 2012 there has been a continuous increase in fundraising by European venture capital funds, and VC has been instrumental to the growth of some of the most successful and advanced European companies, ranging from Klarna to Kahoot, DeepMind to Spotify.

As such, entrepreneurs have become familiar and comfortable with the value proposition of VCs, who offer funds, expertise, and contacts in exchange for equity, to help fast-growth businesses scale. In fact, VC funding is now frequently seen as the default route for founders, many of whom develop their business strategy around attracting venture funding. But is this the only option for startups?

A number of recent success stories show that it is possible to build an innovative tech company without ‘giving away’ equity in the process. Checkout.com was bootstrapped for seven years before raising a record Series A in 2019, while Todoist, the productivity app, achieved revenues of $14m last year, without any VC funding. So how can entrepreneurs decide whether they should go it alone, or follow the tried and tested VC route? And what is life like for an entrepreneur without VC funding?

Why Venture capital?

Some startups will inevitably need to raise external finance, because of the nature of their business. Businesses with a lot of R&D spend, or long development times, for example, are invariably unable to cover these upfront costs without the help of venture funding, as banks or similar would never take on such risks. Similarly, businesses that rely on building a network effect to generate revenues, are unlikely to self-fund, as they require growth before they will see any substantial returns. There is also a speed element to consider, in the case of businesses that want to take advantage of time-sensitive market opportunities. VC funding naturally means you can move much more quickly than you would waiting for revenues to build up organically.

There are other funding options out there of course, but the high level of risk in backing untested ideas means that banks and other lenders are rarely a viable option for early-stage tech businesses. Plus, VC offers a couple of big advantages over bank lending, in that: a) you don’t need to worry about regular repayments, and b) VCs bring value to the business, with investors taking a much more active role, offering additional skills, networks, and experience, to help businesses to grow.

Why bootstrap?

But just as VC is unavoidable for some businesses, the rest have a choice: make money vs. raise money. Which way you choose to go will affect all aspects of your business, from the way you structure your operations to the level of growth you can expect, what you focus on, even the people you hire. But ultimately, there is no template for how to succeed. Growth is not for everyone. And not all companies are well suited to venture capital.

Bootstrapping works when revenues can be generated quickly in order to sustain operations. This means time to market is of the essence, so founders need to focus on having a working product as quickly as possible and then iterating from there. Founders who are strong commercially, or with sales experience, have a bigger chance of generating revenues without external funding help. You also need to have a culture of delivery and be lasered in on profitability, so that you can reinvest in the business. But be aware that this profitability will come at the expense of faster growth.

It goes without saying that bootstrapped founders have to be very cost-efficient, understand cash flow and how to manage it effectively. You have to be prepared to use any and all available means to fund your business, including credit cards, which is not uncommon amongst early-stage founders. You have to know how to hustle to promote your business in the cheapest ways possible, for example by partnering with other companies, to piggyback on their marketing budget. It also helps enormously for founders to have a buffer of savings to draw on – if only to cover their living costs while their business and revenues build up.

Venture isn’t a substitute for customers

Whichever route you choose, however, there is no substitute for generating cash from revenues, by building up your customer base. In recent years, we have definitely seen too much focus on raising venture funding, and too little on building businesses in a sustainable manner, leading to a number of falls from grace – of which WeWork is probably the most famous example. All businesses have to address the fundamentals eventually and if you don’t, it doesn’t matter how big you are, the business will fail. In this sense, venture-backed businesses can take some important lessons from bootstrapped founders, as addressing the fundamentals early can avoid a lot of problems further down the line.

It’s also important to be aware that venture funding can also come with its downsides. It can increase pressure on founders, forcing them into a relentless cycle of growth and raising bigger and bigger rounds to keep up. There are also potential issues if the relationship between the founding team and the VC isn’t right, meaning the latter can cause more problems than they solve. Due diligence both ways is crucial to ensure that there is alignment on vision, goals, and ways of working. Also, look for VCs that can really add value, through being hands-on and supportive, who can facilitate the right introductions to help the business grow. The best VCs invest in founders as much as ideas, so should stick around when things get tough, or the business needs to change tack.

Ultimately, there is no right or wrong way to build a business and the best innovators and entrepreneurs will always succeed, as we have seen time and time again. As a founder, it is always best to keep your options open. Don’t automatically think you need venture money – particularly in the early days – and consider the alternatives available, ranging from crowdfunding to grants and venture debt. Similarly, don’t write VCs off completely, as they can offer huge value in terms of speed to market, growth rate, competitiveness, and being a long-term business partner of your business. But whichever route you choose, make sure you’re clear on the reasons behind it and what it means for your business going forward. And then give it your best shot.

Original Forbes article