Bootstrapped vs. VC-Backed Startup

Should you bootstrap or raise money? Also announcing the AWS Generative AI Accelerator!

My startup was bootstrapped. It was not what we had intended, but the 2008 financial crisis and not being in a hot sector forced our hands.

We had an audacious vision and big dreams of disrupting the HR industry. This was the thing VCs love to fund. Just not in a market when capital and jobs were evaporating.

When you are bootstrapped, you get very creative to stay afloat. We did not take salaries, we outsourced everything, and we looked for any shortcut that got us leads and customers.

The most important decision we made early on though was to focus on customer revenue. This is where I excelled, selling product and features and getting paid before we had to deliver.

To be clear, we were not selling "vaporware". We were upfront about the relationship with our customers and set expectations accordingly. They agreed to be our design partners, and in return, they got heavily discounted software and priority for features on our road map.

Not having outside capital definitely added enormous pressure on our young startup. We did not have enough capital to bring our engineering in house. We lowballed offers for potential hires, burning relationships with good talent. And because we could not pay, it became impossible to get halfway decent outsourced talent.

Welcome to the world of bootstrapping!

The choice between bootstrapping and fund raising is a balance of priorities.

Of course, not every bootstrapped startup struggles like we did. Some have managed to buck the odds and grow into substantial companies without fund raising. For example, there are very well-known tech companies that grew purely from being bootstrapped from the startup like Dell, MailChimp, Midjourney, Shutterstock, and Zoho.

When it comes to most startup success stories though, they were from startups that raised funds from venture capital (VC) firms. Amazon, Apple, Airbnb, Facebook, Google, Uber, and hundreds of other well-known tech companies of today raised VC funding. Even startups that didn’t need the capital like Atlassian, GitHub, and Qualtrics took VC money mostly as a buffer in case they needed extra funds.

Everyone assumes these days you need VC funding to scale and be successful. An equally vocal corner of the startup world says the you should never take VC money if you want better odds of success. There are some rather unreliable sources that state that bootstrapped startups have lower failure rates and reach profitability faster. Who is right?

Before we answer that, maybe it is worth defining our terms. Bootstrapping is to build your business without outside capital. In contrast, a VC-backed startup uses outside capital to support growth and scale of the business in the form of equity.

Every startup begins as a bootstrapped startup. There are the rare few that can raise funds with just an idea based on their track record. That is probably not you. The vast majority of founders therefore fund their ideas with their own money or taking small checks from friends and family like Jeff Bezos did to launch Amazon using a $300,000 loan from his parents.

This is when most startup journeys diverge. Many will believe they have enough of an MVP, traction, and other signals to be enticing to investors and be VC-backable. But just as many with forego fund raising to focus on product and customers towards a path to profitability. While scaling is potentially a long-term goal, these startups want to build sustainable businesses built on customer revenue.

What is important to emphasize is that one is not better than the other! It is not a value judgment, even if some VCs may dismissively brush off bootstrapped startups as “lifestyle businesses”. It is simply a pragmatic choice a startup makes early on to build a successful and profitable business. The difference is the size of the ambition and the speed to get there.

If your goal is to go the VC-backed route, understand that you are riding the rocket. Like any rocket, it will get you velocity and acceleration to reach your destination faster. The downside is that VC money is volatile like rocket fuel, highly explosive and unstable. Any wrong move is likely to blow you up.

Considerations of whether to go bootstrapped or VC-backed.

How do you decide what is the right path for your startup? Let’s break down the benefits and challenges to help you navigate:

Benefits of a Bootstrapped Startup

  1. Control & Independence – You retain full ownership and control over your startup’s direction and decision-making without pressure from investors to meet growth targets or exit.

  2. Flexibility & Agility – You can pursue a steady, organic growth path and pivot quickly to market changes without the need for investor pressure or approval.

  3. Financial Discipline – You adopt a mindset of frugality, learn to better manage finances, and become more creative to get the most out of limited resources.

Challenges of a Bootstrapped Startup

  1. Limited Resources – Your growth will be slower as you have limited ability to invest in large-scale marketing, hiring, or expansion.

  2. Financial Risk – You need to rely upon your personal savings, cash flow from operations, or potentially taking consulting work to stay afloat.

  3. Multi-tasking – It’s harder to get talent, so you often take on multiple roles simultaneously like sales & marketing or product management & engineering.

  4. Slower Growth – Without a large influx of capital, it takes longer to achieve sustainable growth and makes it harder to compete with VC-backed competitors.

Benefits of a VC-Backed Startup

  1. Access to Capital – Venture capital provides substantial funding for rapid growth that you can invest into product development, talent acquisition, and marketing.

  2. Strategic Guidance & Connections – VCs can provide you mentorship, strategic guidance, and access to their network of potential customers, talent, and other investors.

  3. Credibility & Validation – VC funding can lend credibility to your startup's potential, which makes it easier to attract top talent and secure early customers.

Challenges of a VC-Backed Startup

  1. Loss of Control – You have constant pressure to meet investor expectations and growth targets, potentially creating conflicts between your interests and those of your investors.

  2. Dilution of Ownership – You will give up a significant portion of equity and control to investors, which could open the door to you being removed from your startup.

  3. Increased Oversight – Investors have information rights requiring you to provide regular reporting, performance updates, and oversight.

  4. Pressure to Exit – Investors want a lucrative exit (either acquisition or IPO) within a specific timeframe as they need to show results to their fund investors.

It is often said that unless you are committed to building a billion-dollar business, you should not pursue the VC path. Many VCs, particularly after the pre-seed stage, will explicitly state this as they need large exits to justify their investments (i.e. power law dynamics). As we saw earlier though, plenty of billion-dollar businesses have been created by founders that chose to bootstrap

We believe the choice between bootstrapping or seeking VC funding depends on your vision, risk tolerance, and startup’s market and growth potential. You can create large, sustainable, and impactful businesses taking either route. While both paths have upsides and downsides, one thing to consider is that should you remain bootstrapped and reach high growth and profitability, you have the power to dictate terms with VCs that give you the best of both worlds; capital to scale while keeping control.

What path are you in currently, bootstrapped or VC-backed? Are there other benefits or challenges that you experienced that we did not include? Let us know, we would love to hear your story!

Since the end of 2022, Generative AI has taken over the startup world. It feels like every startup we come across has pivoted to something around AI. When we attend events, every pitch competition, meetup, hackathon, and startup demo day is 100% AI startups.

There are all sorts of flavors of AI startups that are emerging. Quite a few of these startups are just simple wrappers around an LLM like Claude, Llama, or OpenAI. There are plenty more however that are pushing the envelope on innovation, using AI for impactful solutions in biotech, education, farming, healthcare, robotics, sustainability, and many more industries.

It is this latter category of startups that often require a lot of support. The resources for building an LLM or heavily leveraging existing LLM’s gets prohibitive at scale for most early-stage startups. From the data required to the compute for training and inference, the complexity and costs can quickly add up.

This is why AWS has announced this week that we are investing $230 million in AWS cloud credits for Generative AI startups. We also launched the second cohort of our AWS Generative AI Accelerator program, in partnership with NVIDIA. This program will support 80 early-stage companies globally, with each startup gaining access to technical resources and mentorship from both AWS and NVIDIA, and up to $1 million in AWS credits to help them scale using AWS infrastructure and advanced AI services like Amazon Bedrock, SageMaker, and our AI-accelerator chips AWS Trainium and AWS Inferentia.

Selected startups for the cohort will be announced on September 10 with the program kicking off on October 1 at Amazon’s Seattle campus. The program wraps up with all 80 participating startups invited to attend re:Invent 2024 to showcase their solutions to potential investors, customers, and partners. You can apply today by going to our Generative AI Accelerator page and clicking Apply now (note you will need to use your existing AWS Builder ID or create a new one).

Good luck and let us know if you applied and got accepted, we would love to feature your story in a future newsletter!

Our last post was a bit epic, so we are finally including photos from our events from a few weeks back that we had not been able to share.

May was intense with AWS Summits happening all over the globe. Basil was holding the fort at the AWS Summit Dubai giving talks on Gen AI, leading a panel with founders, and meeting with startups.

Basil making moves in Dubai at the AWS Summit

Mark wrapped up his Asia tour in Vietnam to attend Tech in Asia Saigon Summit, the first time Tech in Asia was hosting a large-scale event in the country. He also met up with the other mentors and advisors for the relaunch of Founder Institute Vietnam and meeting startups founders along the way.

Mark in Ho Chi Minh City, Vietnam meeting with founders & investors.

The next few weeks are a big content push, with Basil working on MVP Lab and Mark launching his second season of Founder Mistakes, focusing this time on technical mistakes startups make. If you have ideas for content, definitely let us know!