Bootstrapping or VC? One Company’s Path


I was recently headed down the fund-raising road with one of my technology startup clients, when something strange happened.

This client is a company founded by entrepreneurs with accomplished backgrounds. They came up with a novel idea and had developed it over the previous 24 months. Their product had been commercially released, and they were beginning the process of building their market. They secured a strategic business partner based on the powerful nature of their technology and revenue started to come in the door. Impressive for a small business that had bootstrapped itself through a recession. The CEO then came to the conclusion that they needed to be strategic about their business, hire key personnel, and spend their way into market share. The only way to do that quickly was to raise venture capital. I did some introductions for them, and they had some contacts of their own. In pretty short order, they lined up meetings with three venture investors within a week of each other.

The CEO called me after each meeting and the response was similar for each one: “It went great—they want in. We’re going to get a term sheet.” He felt good, but I know him and could tell that something was eating at him. The day after the last meeting, the CEO called me back and said, “We’re not going to do it.” I assumed that he meant they had been rejected by the prospective investors. But what he said next surprised me. Maybe it shouldn’t have, but it did.

“They really want in, but I don’t want to take the money. Their interest has made me realize that what we have is special and we need to keep growing this on our own. Maybe not as quickly as we could have otherwise, and maybe it will be painful, but hopefully not for too much longer. They will be there if I really need it, but maybe I can do this without giving away 33-50 percent (or more) of the company.” Then we went into a long discussion (and modeling) of how the economics could play out to his advantage in the near and long term if they didn’t take venture money and ultimately sold the company, factoring in the likelihood of a reduced price because he wouldn’t grow as quickly.

I was fascinated. I had worked feverishly on venture capital financings over the past 12 years. And absent the time periods when the startup markets were dead, raising money from venture capital investors is just what technology companies did. When quality investors wanted to back you, you said thank you, put them on the board, and deposited their money in the bank. Apparently not in this case.

I had seen most startup companies that were able to survive over the past 18 months, including many clients, do so by bootstrapping themselves, thinking creatively about growth, utilizing the readily available talent on the market as consultants, and slashing expenses. But for the most part, that was out of necessity. They had made their pitch to venture investors and been turned away pretty quickly. Often with feedback of “let’s stay in touch for when the markets improve.” Not many Series A financings were completed in the Seattle area during that time period (until the last several months). And of those that were completed, as successful as some of them will be, many were at a valuation which reflected the fact that capital was not readily available. But now that the markets have improved, and more venture capital firms want to put their money to work, some young companies are just saying no.

Venture capital investments bring a company, among other things, working capital (obviously), expertise on the board, connections to business partners, access to the industry talent pool, and ideally a path to success. And just by linking up with a good venture capital firm, companies often have an inherent sense of accomplishment.

But some companies have realized that they can grow and succeed without that sudden infusion of capital and without all of the benefits of having venture investors. These entrepreneurs have put their own savings into their companies and they’ve learned to run their businesses in an incredibly lean manner. They’ve been able to find strategic expertise and top-notch employees and consultants through hard work, experience, networking, and by utilizing their business, financial, and legal advisors. Perhaps they’re not growing as quickly, and that has some business risk in and of itself, and they’re also not drawing a large paycheck, if any. But they might have the ability to manage their business better, take the time to make thoughtful decisions, work with an independent Board of Directors of advisors, and do so without significantly diluting their equity position in their own company.

These entrepreneurs have learned that success is not necessarily defined by how much money you’ve raised and from whom. It’s what you do with your business at the end of the day—the success of accomplishing your goals. And with or without venture investors, if your business succeeds by the measure of the CEO and Board of Directors, that is ultimately what matters.

And if there is a meaningful liquidity event at the end of the day, even better.

Gordon Empey is an attorney at Cooley Godward Kronish LLP in Seattle. He has worked with startup companies and venture capital firms since 1998 and served as Executive Vice President and General Counsel to Radiant Research from 2004-2007. Follow @

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4 responses to “Bootstrapping or VC? One Company’s Path”

  1. David L says:

    In an obscure way, this is kind of a question of reinvestment risk–that is, reinvestment of the entrepreneur’s time after his/her exit from the current company. An entrepreneur who has lots of other great ideas might be more predisposed to take the VC money, grow quckly, and exit quickly so they can start their next company. For those lucky few, the opportunity cost of bootstrapping is a lot higher.

  2. Gordon, My company just closed a Series A composed of professional, individual investors. However, we had a financing offer from a very prominent corporate investor in our space, but it required a VC lead. Here’s the interesting part…I asked my VC friends what they would do and they uniformly advised me to take the angel money. Even VC’s, in private moments, admit that there is often a better, early choice for a company than VC money. I do like the “deeper pockets” of a VC investor, but I can pretty much get everything else I need for my company right now from carefully chosen angel investors and advisors. It’s more work for me to manage these investors, as a CEO, but I think it will work out well in the long run.

  3. Gordon EmpeyGordon says:

    Hi Jules,
    So glad to hear you go the funding you wanted! And it is really intresting you got that feedback from your VC associates. Interestingly enough, I’ve had a couple ping me yesterday and today highlighting that situations like yours are very common and they really make a point of not puttinig money in where not appropriate (and encourage CEOs to think about alternatives)….And I really do hope it works out in the long run. Good luck!