If patience is a virtue, it's one that's often ignored by the startup community. Anxious to create the Next Big Thing, many founders assume that the only way to reach their ambitious goals before someone else does is to seek venture capital funding right out of the gate. Yet this approach is not always in the founder's--or company's--best interests. Take the tech industry, for example, where ninety percent of startups fail. When growth occurs faster than the business model that supports it, the result is an increased likelihood of ending up in that disappointing majority.
It may be less sexy to take the time needed to prove your company's value without VC aid--many Silicon Valley entrepreneurs view large initial funding rounds as a badge of honor. But the proof is in the pudding: a 2014 study by the Kauffman Foundation found that lower levels of startup capital have no significant impact on a company's failure rate. The study also revealed that almost every company in the Inc. 500--the 500 fastest-growing companies with $2 million or more in revenue--used bootstrapping to get where they are now. While it may seem like "everyone" is VC-funded these days, less than 1 percent of startups in the U.S. actually raise capital this way, which implies that the vast majority are self-funded.
Here are 3 reasons to consider using bootstrapping as a strategic advantage to pave your way to your company's future growth:
Patience pays in dollars. Many fellow entrepreneurs in my home state of Utah understand the value of patience and perseverance when it comes to ultimately reaching their vision. As Ilan Mochari reported recently on Inc.com, by the time many of the major players in Utah's tech scene took any funding, they were already fully developed, highly profitable companies, having self-funded their ventures for years--in some cases more than a decade. Mochari also points out that good things come to those who wait: in Utah, the dollar-per-deal average ($51.3 million) for VC funding significantly eclipsed those in Silicon Valley ($15.9 million) and other tech centers around the country. Provo-based Qualtrics, for example, was founded in 2002 but took no funding until 2012--and then received $70 million in its Series A round and $150 million last year in Series B funding.
This "prove yourself first" route is the one that Pluralsight took as well. When my partners and I cofounded the company in 2004, we didn't even consider taking outside funding. Each of us chipped in $5,000 to get us started, and this $20K was our only seed money for nearly a decade. In fact, despite the fact that over the years we had started to make millions in revenue without outside financing, we remained focused on proving out the model on our own before taking funding 9 years later, when technically we didn't really need it anymore. We shifted our course away from bootstrapping only when found a true need for seeking outside funds--to accelerate growth via acquisition. With this clear mission in mind and a highly profitable company to entice investors, we raised $27.5 million in Series A funding in 2013, and $135 million in Series B funding last year.
We used the VC funds to acquire 4 companies in 8 months (and others since then)--an aggressive growth strategy that fueled our trajectory faster than we could have done without the outside boost--and tripled the size of our startup in just 4 months. The additional revenue gave us leverage to be in a stronger position to raise money for the company and still maintain the control that we'd earned as founders. Raising the money when we did also increased our credibility in the marketplace to begin a more aggressive M&A rollup strategy that we knew would serve our customers better over time. Meanwhile, the company's organic revenue also continued to grow at a triple-digit level, proving the value of our original business model.
You're forced to get things right. When it comes to bootstrapping, the temptation to deviate from course can be powerful. Like all startups, Pluralsight had to deal with the usual stresses of growing our customer base and staying in the black. But the financial pressure of having to "make it" on our own steam helped keep us focused on our truest priorities. Had we taken outside funding initially, we likely would have been forced to move faster than our revenue stream really warranted, and lost control of our direction. Bootstrapping at the start makes revenue and profit king, and keeps you connected to your company's financial statement. Only when revenues and profitability increase do you then green-light new opportunities, more staff, increased risk-taking, and growth acceleration.
When we made the decision to pivot our business to a Web-based platform and faced the realities of building online training capabilities, we once again could have easily turned to outside financing. We had to build a new website capable of streaming lengthy, high-quality video tutorials--a major undertaking, especially in those days--and adjust our financial playbook. Despite these challenges, we were focused on succeeding without additional funding. So each of the company's cofounders personally dove into the massive task of writing the code for our entire website and overhauling our pricing model on a shoestring.
One could compare our situation to that faced by the Spanish conquistadors, who burned their boats upon making landfall so they had no option but to succeed. Reinventing Pluralsight certainly would have been easier with the aid of a large funding round. But lacking that safety net, my partners and I were forced to buckle down and make things work ourselves. We kept at it until we saw the results we wanted; year after year, our business grew and attracted more customers. By 2011, we hit $6 million in revenue. We've been growing triple digits year over year since then thanks to the lean and focused culture we developed in those early days, which forced us to use our resources very efficiently.
You'll put yourself in the power seat when you need it the most. Founders can drastically increase their odds of long-term success by tempering their desire for instant gratification with some strategic restraint and discipline. In the startup world, venture capital brings peer validation, industry kudos, and much-needed cash flow to a young business. But taken too early, it can also dilute ownership, reduce autonomy, and weaken focus and resourcefulness, so the timing needs to be right.
Sometimes, that means waiting a long time to generate the financial metrics that really matter: revenue and profit. By challenging your leadership team to focus on building the business organically and figuring out how to make the company consistently profitable on a model that can scale without VC aid, you make your company more valuable to future investors. As Derek Weber writes for the Young Entrepreneurs Council: "Bootstrapped companies are more effective at making constant course corrections, carefully honing the business model to be sharper and sharper, and ultimately constructing a strong foundation for consistent, sustainable growth."
Stable bottom-line, bootstrapped expansion gives founders the leverage and control they need to net large funding rounds when they're really ready for them. By 2012, Pluralsight was extremely profitable, and we could have continued building the company by reinvesting our profits. But to reach our ultimate goal of democratizing the professional training landscape, we needed to accelerate our growth through acquisition. In contrast to our earlier patience, we now knew we had to act quickly to execute our strategy given market conditions. Nearly 9 years into the startup journey, when it seemed we needed it the least, the time was finally right to engage the investment community. By waiting to prove our model, we had dozens of suitors when we finally went on the road in search of capital. Our model was already proven, and we knew the market was ready--all we needed was some additional fuel on a fire we'd built ourselves.
The right outside investments in your company can impact your business in a very positive way. A stronger balance sheet can immediately remove growth constraints brought about by the realities of cash-flow challenges. It can bring the benefits of acquiring new partners and board members to fill in missing pieces as your company continues its journey. And it can ultimately serve your customers by allowing you to expand product and service offerings to deliver more value. Just remember the importance of timing: showing initial patience in fundraising can free you to focus on something even more important first: building a successful business.