Principles of bootstrapping
(FYI: This post is optimized to be listened to using text-to-speech AIs in apps like Readwise Reader or Omnivore.)
Yesterday on Warpcast, reka.eth asked:
Currently bootstrapping. Any tips?
to which I replied:
Ignore any advice that comes from a VC or a VC-funded startup. Fit the advice to what you are doing
to which she replied:
hot take fren
But since I don’t consider my take hot and since I run into a lot of sentiment like this lately, I wanted to outline what I consider the principles of bootstrapping and that indeed my take isn’t as hot as it seems.
But first, a definition of what I consider bootstrapping!
What is bootstrapping?
My definition of bootstrapping is to intentionally decline any form of venture capital to when starting your company.
You and your co-founders are investing their own time into the business, and nobody gets paid anything besides the income that the company makes. In my definition, there are no salaries, no traditional employee roles, and there’s potentially not even a legal entity to represent the company until much later. People can contribute to that business in various forms, from hereon out I will call those people “contributors.”
Ideally, these contributors have savings from which they can live, and in the ideal case, they can potentially work full-time from. But for some contributors, it might be easier to help on the side with them retaining their full-time salaried position elsewhere.
Anyway, my point here is this: Everyone who contributes also vests interest in the common business by the time it potentially takes off, and so economically speaking, that’s why everyone invests their personal time and living costs into getting the business bootstrapped eventually.
And this is, in fact, already the first principle of bootstrapping: Namely that, by not paying salaries or compensation packages and through vesting interest in the common enterprise, all contributors load up the risk of it failing or making only a partial return. Meaning that, the longer they won’t get paid, the higher their leverage in owning a part of the business and, therefore, the higher their expectations to some return.
If this isn’t obvious by now, the stark difference compared to a VC-funded project here is that the VC-funded founders and all their employees are in a game of constant deleveraging.
If they happen to raise a round with a prestigious venture capital firm, they can pay themselves handsome salaries to work on technology that could decorate their CVs nicely later on.
They deleverage themselves mentally and reputationally because VCs, as gatekeepers of capital and ideas, will reject stupid ideas, will make sure that their investments work out - and sometimes even rationalize away the founder.
You have to understand that by having a venture capitalist invest in your project, they’re now becoming a co-promoter in the product and your most powerfully aligned ally.
Sure, once a founder takes on this investment, they now take on a legal risk, too, for example, breaking the contractual investment agreements. But this type of legal risk also exists in bootstrapping, so I don’t want to highlight it here specifically as a contrast.
In any case, few of the properties from venture capital investing exist in the process of bootstrapping.
Instead, for a bootstrapping contributor to gain a significant interest in the business, they’ll have to put in quite the work without getting paid.
To become equals, they’ll have to work as much or more than you, the founder. So consider this for a moment: It’s vastly different from waking up in the morning with a VC cheque of 1 million Dollars hitting your bank account. In that case, the VCs now practically scooped up a significant portion of the business practically overnight with a wire and a signature, a feat looking for comparison in bootstrapping! But here is where it becomes interesting! Because introducing VC interest then changes the business’s expectations dramatically!
Focus on growth?
An often-affirmed truism in the VC world is that monetization must always be deferred to grow the business further. After all, more capital is always easy to get by, or at least that’s how it was during the zero-interest rate decade. But a VC’s model is that the business profits from scale more than it profits from immediate monetization which is a big reason why VC firms deliberately aimed for growth over monetization.
Importantly, their economics are such that they want to earn outsized returns on a bunch in a cohort of investments. Many explicitly expect only a few winners per group, and so they tend to plan to make back the entire group’s budget by cashing out the outsized winners. But interestingly, this creates a rather unrealistic expectation for returns towards ALL individual members of a cohort, namely that the VC wants them all to make a 10x, well knowing that 95% of them will fail.
Yet, seemingly contradictory to what I just described, we now see many early-stage VC-funded companies implementing monetization. So, have high-interest rates changed investors’ stance on “growth at all costs?”
A great example of such an early-stage company doing some monetization is Warpcast, which earned 5000 USD in Zora Protocol Rewards and recently made half a million Dollars from onboarding new users to their storage contracts. And while I don’t want to lessen their achievements, as those are great numbers, in the world of venture capital, with Merkle Manufactory having raised 30 million Dollars, and since they’re paying their average engineer 300,000 Dollars annually, it should come as no surprise when I say that the half a million Dollars from storage contract rent is perhaps not considered a serious return for their investors.
Now, in fact, I don’t want to insist on this point. I think Warpcast making some money is actually fantastic and somewhat category-defying. But for me, as a bootstrapper, what matters to convey here is that the business’s outcome expectation is a negotiation between investor and founder, but that they usually don’t shoot for merely breaking even within a year. They agree to want to achieve outsized returns.
For a bootstrapped business, on the other hand, this can be very different. That is because there happens to be no negotiation between an investor and the founder on the value of the company at a specific time. A bootstrapper also doesn’t “spray and pray” invest in a cohort of businesses.
Instead, since all contributors’ time is individually valued by themselves and since “raising another round” is generally not considered to be a viable option to delay failure or bankruptcy, every Dollar hitting the bootstrapper’s bank account is actually deleveraging all contributors’ initial time investment.
What’s critical to understand about this is also that a bootstrapper sets their expectation for an outcome size themselves, and they don’t necessarily set it on the basis of making a nominal return. This is important to understand!
The VC’s “spray and pray” practice of investing in a cohort actually mandates that there are some outsized returns. But the “outsized returns” expectation towards founders has to be kept up to each individually as, at that time, the winners aren’t decided yet. That’s quite different from bootstrapping!
For example, founding Kiwi and making money from it has had numerous benefits for us personally besides the money we have earned. While we do have to “report” to our users, we don’t have to report to any higher-up superior like an investor. We don’t have to give into trends that increase our fundraising chances (“If you’re in crypto, pivot to AI”). We can generally say what we want online without needing to fear dramatic consequences. Generally speaking, I get the feeling we are quite free.
However, the most impactful freedom that we have as bootstrappers, which I consider to be really foundational to the work that we’re doing, is that we can set the expected outcome size ourselves, and we continuously reserve our right to do it. Now, what does this mean?
It means that since we haven’t accepted a huge cheque to grow our business, and since we haven’t made a deal with an investor who wants an outsized return, we can set our own internal expectations for how much money we want to make over a year.
While, yes, we also have some constraints, for example, we have to make some money, it’s generally not that we have to increase our net worths by several orders of magnitude and, as I have mentioned, there are also other benefits that come from just running this business apart from the income.
If our costs of living are low and if we’re OK with maintaining them or only slowly improving them, then not having to achieve an outsized return within a short period of time can actually really interestingly inform decisions being made on the product and business side.
You have to see it like this: It could already be enough to just onboard and retain a small fraction of the crypto space to Kiwi News and could be fine for years on end. It could raise our living standards and really make work more fun.
On the other side, I hardly think that Warpcast can afford to stay as small as just the current crypto space unless they can really extract a lot of value per user. And this is purely a function of the production cost of Farcaster and Warpcast as a tech startup versus bootstrapping it on the costs of living of a software engineer in Berlin and Warsaw.
To me, this is absolutely fundamental to understand and why I think most VC advice is to be ignored when you want to bootstrap a business. Because consider, in their mind, the VC is absolutely biased towards generating an outsized return for their fund (there are basically no shades of grey), and so their advice will always be derived to achieve that outcome, when in fact, that is precisely not what the bootstrapper will have to deal with.
The bootstrapper doesn’t have to grow to monopolize. They just have to grow to sustain their costs of living, which can be a rather small and potentially achievable number. Which, by the way, isn’t to say that the bootstrapper isn’t interested in making more money! But I digress! There are, in fact, even more nuances this yields.
Obsessing over users
When taken at face value, another one of those commonly re-affirmed advice is from YCombinator and Paul Graham, and it states that a startup founder must absolutely dedicate themselves to their users and do everything in their possibility to make them happy.
Ironically, however, this is somewhat of an optical illusion as this “obsessing over users” is ironically not user-aligned but very much aligned with the investor.
Think about it! Paying users have their own individual interests, and those may not be that you have to obsess over them. Instead, users often want the founder to develop roadmap-unaligned features. And a venture capital investor, since they don’t want the founder to solely focus on them, they champion the user’s needs, and hence their advice is to obsess over user feedback.
So, really, what is going on here is also what I already tried to outline in the prior section, namely that accepting the interest of an investor “overnight” really also then means serving that investor and not necessarily serving the users. It is because, quite obviously, when receiving a big cheque, the now VC-funded business becomes dependent on more of this type of money until it is eventually able to make a substantial return itself.
But as simply serving the investor to gain more funds would lead to bad outcomes that are completely user-unaligned, investors champion user interests by promoting to their founders to obsess over user needs!
While this, too, is seemingly one of those unbelievable statements, it is true and can be found to be true when thinking of the concept of the “pivot” as fundamentally decoupled from user interests.
Before the pivot, the business had some users who were interested in the product, but the VC-funded business can often easily pivot, also without much justification, because they’re pre-monetization and because they’re fundamentally not serving that user but the investor. If the user isn’t paying for the product to sustain the business, how can the business truly be serving the user?
Basically, then, the pivot isn’t a movement to realign with the market as to serve the users better! Pivots happen because of mistakes made when assessing the market for venture scale viability before setting out to serve it.
Think about it: If you had paying customers as a regular business and you would rug pull them by pivoting away from that product, it would quickly seem as if you didn’t act according to your fiduciary duty. The only excusable pivot in the non-VC business world is called bankruptcy.
On the other hand, this is, of course, also somewhat true for the bootstrapping business as they also wouldn’t be sustainably loyal to a customer base that cannot cover their costs of living. With the difference being, however, that a bootstrapper is incentivized to capture paying customers from the get-go and because the bootstrapper is most likely more compatible with all sorts of markets sizes since they don’t matter that much, having a lower burn rate.
This makes the bootstrapper then also “obsessed with their paying customers,” however, not as a means to sustain their venture financing, but truly to serve them and acquire more market share.
I know this is splitting hair somewhat, but there are nuances to this that are quite fundamental.
For example, in the case of Warpcast and Kiwi News, while Warpcast has to absolutely obsess over daily active user growth because that’s what investors eventually use as a performance metric for renegotiating a new financing round, for Kiwi News, this hardly matters, whereas for us it’s mostly about how financially sustainable it is to continue to run the business on the backs of paying customers while sustaining our cost of living in Poland and Germany.
Here, “ignoring VC’s advice and fitting it to our needs” is relevant because, while yes, it is useful to track and increase daily active users also for Kiwi, at the end of the day, we don’t have to manage expectations with investors - we just need to make that money.
This way of thinking, however, really then cascades into all aspects of building a business because a bootstrapper makes fundamentally different decisions compared to a VC-funded founder - In really all dimensions of the practice.
It is disappointing for me, therefore, that most, if not all, advice for starting a digital business these days focuses on venture capital and that there are hardly any promoters of bootstrapping out there creating more institutional memory to make it more attractive.
Conclusion
In conclusion, building a bootstrapped business is a lonely endeavor, with the bootstrapper always being at risk of being pulled into the venture capital machine.
Transitioning from bootstrapper to VC-funded is also an act of exiting or deleveraging for the bootstrapper, and so it continues to be a viable business path too.
VC advice isn’t directionally wrong, but when taken at face value as a bootstrapping founder, it can be quite misleading as it would, for example, suggest obsessing and growing a user base without monetizing them for a long time, which is obviously non-sustainable given the bootstrapper’s cost of living and their lack of a sustaining salary.
Founding a VC-funded business can be a great choice. Bootstrapping can be a great choice, too, but there are many nuances worth considering when doing either or.
In any case though, real bootstrapper advice is very hard to get by and a reason why I started this blog in the first place.
So I hope this text gave you some insights and convinced you that “ignoring VC advice” isn’t as much of a hot take as it seems on first glance.