A recent blog post at 37Signals Signal vs. Noise blog takes the business media to task for writing sensational stories about companies raising investment money.
In this case the media in question was the New York Times and the article was about the Pulse iPad application raising $800k in venture capital money.
While the focus of the blog post is mostly on the media, it follows a trend of 37Signals on their blog and in their successful books to speak negatively about companies raising outside investment opposed to bootstrapping a business and surviving and growing off your own revenue. I think their theme is not actually wrong, it’s just unfair because it lumps “web businesses” together too broadly.
It’s a good thing overall that 37Signals is balancing out the stronger coverage of the tech media with coverage of bootstrapped companies on their blog and letting entrepreneurs know that you don’t have to raise VC money to build a successful business.
The downside of this is that at times unnecessary negativity seems to come out in a broader brush against companies that raise investment money as if bootstrapping is the “better” alternative.
The reality is that bootstrapping can often be a better alternative but for many businesses it’s a much worse alternative. It all depends on what the business is trying to accomplish.
Google could have never become Google if it bootstrapped. Same with Facebook. They would have been forced to focus on ways to make money much sooner and they wouldn’t have been able to roll out new datacenters and infrastructure based on how much money they were bringing in.
Opponents of raising VC money also point out all the failures that have occurred from VC funding and how the press doesn’t cover it enough. Well, I don’t see the press covering all of the bootstrapped companies out there failing every day. In fact, we never see that.
While I don’t have any data to back this up, I’d suspect there may be a higher success rate for companies that received professional angel or VC investment vs. bootstrapped companies.
Why you ask? Receiving investment provides some level of external validation of the business idea, the team involved, and the opportunity. Investors can also add value through their experience and connections.
Investment can cause problems by letting companies make bad decisions with the money, causing companies to grow to try and grow too fast, or not getting to profitability in time.
The right thing for an entrepreneur to do is to not think about which path to take. That path should be determined by what they are trying to accomplish with their business and the roadmap that’s needed to get there.
If you can start earning revenue from day one and don’t need to hire a team and pay for lots of things, then by all means bootstrap! If you are going after a big market opportunity where speed is of the essence, you need to hire a team, or build out your infrastructure and organization quickly, then you’ll need outside money.