When is it a bad idea to bootstrap?

There are two types of startups - those who try to get big quickly and then figure out a way to become profitable, and those who are profitable from the beginning, but grow much slower. The first type is usually funded, the second type self-funded.

Of course profitability from the beginning is something everyone wants, but is not achievable in some scenarios. What do you think those scenarios are? What business models would require fast growth? When is it better to get VC money and grow instead of trying to be profitable?

Bootstrap if:

• This is your first business
• You don't know what you're doing
• You'll probably just pee lots of money up the wall
• You want to keep control
• You have no plans to float or sell

Consider VC if:

• Having the money will make a big difference
• If the factor stopping your growth really is cash, and not experience or something else
• You know what you're doing
• You are comfortable that, at some point, you will almost certainly lose control of the business you are creating

A great resource that might help:
Seth Godin has covered this question in his manifesto titled The BootStrapper's Bible.

He even priced it accordingly for the bootstrapper, free. You can download it here:
http://changethis.com/manifesto/show/8.BootstrappersBible Its probable a bad idea to bootstrap if you have easy access to a lot of capital, need a large distribution channel to operate, have an opportunity to really BRAND yourself/product,have an opportunity to hire and work with some of the most talented people, your ok with taking big risks, you have a business with a profit plan, if you can protect your idea and fend off new competition that imitates your success, if you can scale and change models fast (how does blockbuster respond to netflix, how does netflix and blockbuster respond to the internet?) and so on...

These are a lot of big questions. The best approach for nearly any software or internet startup is to bootstrap until you can achieve demonstrable traction, add solid revenues while maintaining growth and then take either a lot or a little money to scale everything up.

It is a matter of timing, depending on the market.

It depends on both the timing and the market, as well as the type of business you want to start and the business model.

There is a cycle to the stock market... It is up for a few years, and then it is down for a while. When it goes up, there is a tendency to try to raise a lot of capital in order to take advantage of the boom, which causes a bubble to form, and when it bursts, everyone looses. This happened before the NASDAQ crash in 2000, and before the financial crises we are currently in.

If you want to succeed, you need to go against these trends, and be conservative when money is cheap and expend using that cheap money when everyone else is down. Many great companies started during recessions when competition was scarce.

VCs have a clause in their term-sheets that protects them from future round in lower valuations, which means that if you are raising money in the boom years, and you waste it all away on rapid expansion, you will loose everything during the next round of financing. This can be seen in the documentary startup.com (http://www.imdb.com/title/tt0256408/ ).

You need to consider your business model, and see which approach makes more sense. Some businesses can only work if you bootstrap, others only if you raise serious money. In some cases there is a choice to be made, and in many many cases, the business model doesn't work regardless of how you fund it, and it is time to move on to the next big idea.