Funded Companies are Fragile Companies

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There are basically two theories about funding a start-up. One is to bootstrap the company; the other is to pour on the cash. Bootstrapping is always attractive because if the company becomes viable, there is no dilution for the founder and he or she will enjoy a great deal of freedom. Atari started that way. We launched the company with $250 and didn't raise a dime until the business was generating about $40 million in sales. Yes, I went without a paycheck for long periods of time, and I almost lost the company one summer. But we survived and prospered and found out ways to save money on everything. This created a very robust business, because we were simply more efficient than any of our competitors. For us, bootstrapping worked like a charm.

The other common start-up approach is to raise money early and often. This allows a company to rise quickly up a very steep ramp, achieving large market share much sooner than is typical. Founders often end with very small percentage of ownership. As long as the company grows quite large, of course, this is not so bad.

In this scenario, however, the entrepreneur must be prepared to run a much more fragile company. Start-ups are by their nature messy. Management will make mistakes, markets will be slower to take shape than you anticipated, and the technology will be buggy. In a bootstrapped company, you can survive because your expenses are low and you are accountable to no one but yourself. But in a funded company, you must demonstrate to your investors that you are making progress even as cash flow continues to be negative for a much longer time, requiring added rounds of investment.

If you go for the fast-growth model, be sure to raise more money than you think you need. The good news is that, in general, it is actually easier to raise more money than less. You can always argue to investors that a stronger cash position will only improve your company's likelihood of success.

Last updated: Sep 2, 2009




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