How Every Startup Funding Approach Has Pros And Cons

“What are the pros and cons of bootstrapping versus raising outside funding from investors?”

That first question by a student struck me as the right question future entrepreneurs should be asking about funding their ventures.

I was a guest speaker at two graduate business classes at the University of Texas at Austin yesterday, hosted by Michael Peterson.

My answer? There is no one right way to fund your company.

But there are better approaches that will work best for you, in your current situation, and at your stage of growth.

Most software startups are actually started with self-funding: the time, savings, or profits from an existing business.

They get their first product, customers, revenues and employees without outside funding.

Many of these startups stay bootstrapped with no outside funding when they grow up.

This works for a lot of disciplined founders who are very savvy about their customers’ problems, their product, and their business model.

Others prove something early then are “lightly funded” from angel investors or big customers that don’t have the “Get Big Fast And Sell Your Company To Pay Us Back” expectations that professional tech investors with big funds have.

Some do raise big funding from VCs and bet it all to grow fast and make a very big and very valuable company they can sell or IPO to pay their big investors back. This generally doesn’t work for founders, but there are cases where it does work.

There are pros and cons of each path. There are ways to win or lose with each of these approaches.

“What are the pros and cons of each funding approach?” is a much better question than the naive “Do you know any VCs that could fund me?” question new software entrepreneurs often ask.

One thing I can say universally to all new software entrepreneurs is this:

When you self-fund and customer-fund with no outside investors, you have the option to someday attract light funding or big funding if it makes sense for you in your situation with your goals and risk-taking profile.

If you start with outside investors, especially with pro investors who invest from funds like VCs and private equity, you can’t go back and get “unfunded.” Ever. This is a grow-fast-and-sell-your company race and there’s no going back. Win big or lose it all, usually.

From what I see, most serious bootstrapped SaaS founders KNOW the pros and cons of taking on outside investors.

And most first-time startup founders chasing outside investors DON’T KNOW the pros and cons of bootstrapping or light funding. There’s an assumption that outside funding is necessary and what everyone does.

Big outside funding isn’t necessary most of the time for SaaS founders. And it isn’t even as common as bootstrapping.

Thanks for allowing me to share some perspectives with your UT students yesterday, Mike.

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