The Pros and Cons of Bootstrapping vs. Fundraising

What's going on everybody? Welcome to the First Class Founders podcast. The goal of the show is to equip you with powerful mental models and frameworks so that you can master the art of decision-making. In each episode, I introduce and apply these concepts in real-world scenarios. My name is Yong Soo Chung, and I'm the founder of Urban EDC, an e-commerce brand selling everyday carry gear and GrowthJet, a Climate Neutral Certified third-party logistics company.

So let's say you have a new business idea that you want to launch. Should you bootstrap it using your own money, or should you raise funding through a network of friends and family, angel investors, or perhaps even venture capital? This is the question that many of us ask when we begin our entrepreneurial.

After making this important decision myself, I've come up with three main considerations that you need to know and they may not be what you. I'll be sharing real-world stories of entrepreneurs and companies today and weaving them into these three main areas of consideration.

Okay, so when does it make sense for you to bootstrap your business and when should you raise funding? There are a lot of factors to consider today. I'm gonna go over three main considerations that you will need to evaluate before making this big. The first question is stakeholders. Who are the decision-makers in your business?

Or better yet, who do you want as decision-makers in your business? If you want full control over the future direction of your company, bootstrapping is definitely the way to go. When you raise funding. By giving up equity in your company, you're deliberately giving up a portion of the future decision-making power over the lifetime of your company.

Now, this can be both a positive or a negative. If you're building a company in an industry that you're unfamiliar with, it might be advisable to bring on investors who are veterans in the industry. They may be able to help you recruit early employees through their strong network and also provide guidance to avoid any pitfalls in the early days.

Just be aware that your new investors will be with you for the long haul. So you'll wanna consider not only the background and experience of these investors but whether or not you share the same values and vision of the company as they do. As long as you're building this company, you'll be working with these investors, so make sure you can get along with them as well.

The risk with fundraising is that at some point in the future, your goals, values, and vision of the company may diverge away from the one your investors have. There are many stories of founders being pushed out of their own companies by their investors due to conflicting views on the direction of the company.

One of the more recent, well-known cases is Outdoor Voices founded by female entrepreneur, Ty Haney. Outdoor Voices, an athleisure apparel brand was one of the hottest direct-to-consumer startups. At one point, their signature color block leggings had become an athleisure uniform at gyms and on college campuses all across America.

At one point, Outdoor Voices had 130 employees with 11 brick-and-mortar stores nationwide. Outdoor Voices had raised more than 60 million in venture capital. Mickey Drexler was famous for building both the Gap and J. Crew into retail icons invested in the company and served as chairman of its board of directors.

At the time, Haney was excited to bring on an industry veteran to take our company to the next level. Clearly, Drexler, with this experience and track record could turn outdoor voices into another retail icon, right? Not exactly. Haney and Drexler had conflicting views on the company's future. Haney stated at one point that there was a clear generational gap between Drexler and herself and that he had a much more traditional way of looking at growing a retail company.

Eventually, this divide drove Haney out of her own company. So the next time you're considering raising venture capital funding, Ask yourself who the future stakeholders will be making the decisions on behalf of your company.

When working with high-profile investors, there's also an additional layer of pressure to deliver results and grow quickly. Since most investors are typically looking to earn a 100 x return on their investment, just think about that for a minute. 100 x their initial investment amount. That's a lot of added pressure.

That takes us to our second major consideration: lifestyle.

But before we get into lifestyle, if you're enjoying this episode, please consider subscribing to the show if you haven't already. And if you're a repeat listener, tell a friend about this episode. Word-of-mouth referral is the single best way to grow so that we can bring you more episodes and higher production quality to the show.

Thank you so much. If you're bootstrapped, you decide how you want to design your own life and how your business fits within it. As the primary decision maker, you choose how fast you want to grow. In other words, you decide your own growth rate. You can choose to be all in on your business working long hours and weekends, or you can start a side hustle and make some supplemental income outside of your main job.

That's completely up to you. A lot of venture capitalists will use the term lifestyle business to describe any business that's not VC funded and serves to fund the lifestyle of the entrepreneur. I disagree with this assessment completely. I know a lot of bootstrap entrepreneurs who love the game of entrepreneurship and work tirelessly day in and day out.

No, they don't work from the tropical island, sipping on a pina colada, checking their email with their laptop on a. They're hustling on weekends, building their business because they love what they do. For many entrepreneurs, their work is their passion, and their success is what drives them. They're sitting in the sweet spot of what they're passionate about, utilizing skill sets that they're incredibly good at, and their customers are responding positively by paying them for their work.

This is the essence of the Hedgehog concept, which I go deep into in the very first episode of First Class Founders. When you decide to bring on an outside investor, you'll no longer have control over your own time. I heard a real true story recently of a well-respected venture capitalist calling an entrepreneur from one of his portfolio companies on a Friday late evening, grilling him over his growth numbers.

I can just imagine this venture capitalist casually pouring himself a glass out of a hundred-dollar bottle of wine. Walking out onto his porch, overlooking the water, picking up his phone, ready to grill this poor entrepreneur. Talk about buzz kill on a Friday night.

Okay? The third, and perhaps the most important consideration is what type of business you're starting. If you're starting a company in a market that's already well established, it's usually a better idea to adopt the bootstrapping path for the long-term sustainability of your company. Typically, these industries are more mature and have enough operational tools in place for you to get started with very little capital.

For example, if you're starting an e-commerce business selling jewelry, you may wanna stay bootstrapped. You have a lot of technological tools and platforms available to you right away to get you going, whether that's your email market. You're a website hosting or your third-party logistics provider. Now, if you're starting an e-commerce business, and selling an innovative product that requires a lot of research and development, VC funding might be the way to go.

For example, the Aura ring comes to mind. While this is technically considered jewelry, this wearable device can measure your sleep fitness and more. This is not your typical jewelry company. Developing the technology for this product requires a lot of capital. If you're starting a company that's changing or completely reshaping an industry, you may need to raise VC funding so that you can deploy as much leverage as possible over a long period of time and grow as quickly as possible.

In episode three, we talked about using leverage over a long period of time for the magic of compounding to multiply. If you're curious, go check out that episode. Time is the biggest factor for VC-funded companies. You need to grow at lightning speeds to establish yourself as the market leader in that industry.

Reid Hoffman, co-founder of LinkedIn and partner at Venture Capital Firm, Greylock, calls this blitzscaling. According to Hoffman, blitzscaling is what you do when you need to grow really, really quickly. He says it's the science and art of rapidly building out a company to serve a large and usually global market with the goal of becoming the first mover at scale.

This is the key difference between a bootstrap company and a venture capital-backed company. A bootstrap company needs to prioritize cash flow and preserve capital above everything else to survive. While a venture-backed company's top priority is growing as fast as possible at all costs in a race to become the industry leader, the worst thing you can do is not know which type of company you're building.

These two types of companies vary greatly in their values and North Star metrics. They will attract completely different types of both employees who wanna work at the company and customers who choose to use and support the company's products. You as the entrepreneur can decide which journey you prefer.

Ultimately, that choice is up to you. So which company are you building?

All billionaires have one thing in common. They master the art of decision-making throughout their lives. They collect great frameworks and mental models and call on them when needed, and that is why First Class Founders exists. First Class Founders gives you the tools to build your very own problem-solving toolkit so that you too can become a great decision-maker like Charlie Monger, Jeff Bezos, and Elon Musk.

If you want to get the most out of First Class Founders, head on over to FirstClassFounders.com/join. Okay, let's wrap up today's episode.

There are three main buckets of consideration when deciding between bootstrapping and fundraising: stakeholders, lifestyle, and type of business you're building. For bootstrap companies, you need to prioritize cash and preserve capital above everything. While a venture-backed company needs to blitz scale and grow as quickly as possible to become the first mover at scale, here we see the dichotomy of optimizing for either time or money, depending on the path that you choose.

I did an episode on warping the constructs of time and money in episode one if you want to check that out.

That's it for today's lesson. In the next episode of First Class Founders, we're going to compare the journeys of two iconic retail companies, Patagonia and Amazon. And two remarkable billionaire entrepreneurs, Richard Branson and Elon Musk. I'm also going to discuss strategies on how to differentiate yourself when you're a bootstrap company by referencing Seth Godin's purple cow concept, All that, and more in the next episode.

As always, if you enjoy this episode, please leave a five-star review by going to FirstClassFounders.com/review. You can also leave any requests for future episode topics in your review. Thanks for listening, and I'll see you on the next episode of First Class Founders.