Bootstrapped startups, or companies that use their own revenue or existing cash flow to fund growth instead of relying on external capital sources, sit in a very separate box than venture-backed startups. By nature of asset class, bootstrapped startups prioritize revenue to keep alive, while venture-backed startups prioritize growth to keep investor buy-in for future runway needs. Bootstrapped companies follow less of an exponential growth curve, while venture-backed companies need to be an outlier.
Enter a downturn, and both sides get a tad more interesting. The built-in business discipline of bootstrapped startups may feel especially downturn-proof as the overfunded companies announce rounds of layoffs. As venture starts to be more interested in the stable fundamentals of the startup bunch, is it the bootstrapper’s time to swing big?
For Healthie, a payments processor for healthcare companies, now felt like the right time to get on the “treadmill” of venture capital after six years of bootstrapping, according to co-founder Cavan Klinsky.
“If you’re a bootstrapped company who is not yet on the [venture] treadmill, you have that kind of optionality or that ability to choose when to get on,” he said. “Once you’ve already raised a bunch of ventures, you’re kind of building a business for venture scale, whereas if you are bootstrapped … you can be really really opportunistic about what that right time is.
Klinsky and Erica Jain, the co-founder and CEO of Healthie, recently raised $16.5 million for the Stripe-like startup from backers including Velvet Sea Ventures with participation from Greymatter Capital, Watershed, Builders VC and a customer syndicate.
Klinsky thinks that venture capitalists are going to pay more attention to bootstrapped companies because they tend to be cost-efficient with customers, which he sees as “of increasing value” to investors sitting on dry powder right now.
Precursor Ventures’ Charles Hudson, who backed Healthie along with a number of bootstrapped startups this year, validated this idea, telling TechCrunch that he has “generally more interest in companies that have gotten to product-market fit or evidence of it with relatively little capital,” which describes the bootstrapped mentality.
In other words, bootstrapping is less of a silver bullet that gets a founder to an easy venture check and more of a “mindset” that can help a company, if they are in the mood to raise, prove focus in a period where discipline matters.
Healthie’s Jain said that they waited to raise venture capital money until they knew that the business would not need to be overly reliant on it. “We offer business-critical healthcare infrastructure,” she said in a previous interview with TechCrunch. “I cannot run our business being reliant on venture capital when I tell my customers that we are effectively the operating system for how you operate.”
If bootstrapped companies do turn to perhaps more eager ventures, they also need to stay aligned with the values that got them there in the first place.
Two years ago, in the height of the edtech funding boom, medical education platform Sketchy raised a $30 million Series A round. The round came after seven years of bootstrapping and profitability. Yet, per CEO and co-founder Saud Siddiqui, the startup raised money because it saw an opportunity to expand past the med school “edutainment” videos that defined its popularity to date.
“If we were going to bootstrap, we probably wouldn’t be able to achieve the opportunities we saw,” he told TechCrunch in an interview last week. Looking back, the round feels like fortuitous funding given that global venture funding into edtech startups totaled $6.5 billion in H1 2022, compared to a total of $20.1 billion raised in all of 2021, per Dealroom data.
Siddiqui said that the hotness of the market “had very little to do” with the round. He said that the startup is focused on building and “has the means to do it,” but wouldn’t say no to capital if a new opportunity became apparent. For others, Siddiqui thinks that it’s up to investors whether bootstrapped companies become more venture-backed.
“For a lot of bootstrapped companies, they’re not out there fundraising,” he said. “A lot of times it is investors approaching them, so it kind of depends on the climate, and if folks aren’t investing, maybe they’re just gonna keep chugging along.”
Payman Taei, founder and president of content creation platform Visme, said that he’s been given the opportunity to raise money for his bootstrapped company on “a very regular basis.”
“There are hundreds and hundreds of successful growth stories of bootstrapped companies that haven’t raised and yet they generate 30% to 50% margins — and so they’re like, why would I want to give a piece of my company to somebody else?”
Despite this tension, Taei does think that many companies — as Sketchy and Healthie have shown — may choose to turn to venture capital to get to the next level of sales. Even if they don’t want to.
“It’s come to a point where you think about the heavier salaries,” he said, adding that the rise of crypto “has bloated compensation.”
“Engineers and other key hires cost more and more and more. It’s very difficult for bootstrap companies to be able to do that — it’s hard for venture-based companies to do that.” Even if a startup is focused on business fundamentals and wants to self-fund, they may need to capitalize with venture money in order to swing bigger against maybe already existing venture backed competitors.
He added: “A bootstrapped company isn’t burning money, so they have a lot more at stake to burn more of it.”
Taei doesn’t think there will ever be a bootstrapping story as successful as Mailchimp, which sold to Intuit last year for $12 billion, again because of how much it costs to grow a big company at the moment.
“Most of these companies require a lot of funding these days to be able to generate $1 billion in sales,” he said.
Comment