The Mode Model Bootstrap vs Venture Capital

The Mode Model: Bootstrap vs Venture Capital

The entrepreneurial journey demands careful consideration of the startup's approach – should you choose a model with a very high expected value of return, or a model with the highest mode? (most frequent)

My suggestion is that founders should always choose the model with the highest mode value, regardless of whether this involves bootstrapping or obtaining or obtaining venture capital. But let me explain.

One Life

Founders only have one life. In their lifetime, they only have the time to build a handful of startups. To create something that brings you a lot of fulfilment in your life, you want to have some success, regardless of the degree of that success.

Today, (the back-end of 2023) making a few million in a space of a few years can absolutely transform someone's life. And whilst creating a unicorn could be an incredible experience, the chances of actually doing so are incredibly thin.

Therefore, at a certain point, who cares about the expected value? The main thing is that you get your win, regardless of its size.

I suggest, go for the mode.

Traditional Venture Capital vs. Bootstrapping

There is also the choice to choose traditional venture capital or to bootstrap. Amid the allure of creating the next unicorn, this choice has far-reaching implications for the founders' life and the trajectory of their venture. Let's talk about both.

Traditional Venture Capital Startups:

Traditional venture capital, a common route for startups eyeing rapid growth, often revolves around securing substantial funding to propel the business forward. With venture capital, the idea of the investors is that they want to create an incredibly large company and they're quite happy to invest in a number of startups that fail in order to get that coveted unicorn. It's commonly known that one big win in venture capital, will pay for the rest of the fund.

There is therefore a daunting reality – almost all startups funded by traditional venture capital fail (to some degree).

This high failure rate underscores the challenge of reaching astronomical valuations. Yet, even without unicorn status, venture-backed startups can yield profits for it's founders.

If you raise some venture capital at a certain valuation, you're essentially selling part of your company at a pretty high value. Whilst the idea is therefore that you can use this money to grow, if at this point you all decided to call it quits and sell the company, the founder would make a significant win.

The main reason being that the net assets of the company (inc lifetime value of customers) and the actual value of the revenue streams themselves, is significantly less than how much the venture capital companies pay.

So if you're going to take this approach as a founder, be mindful of how you spend your money. If you're able to go for significant growth without using all of the money, you can hopefully have a pretty high residual value at the point the company fails - and therefore make yourself loads of money in the space of a few years.

Obviously, if you create a unicorn, you have definitely won. But the chances are so infrequent you should think about what is going to happen when your company fails - i.e get that residual value locked in.

Bootstrapping Startups:

Conversely, bootstrapping relies on personal savings or organic revenue to fuel a startup's growth. This method may lack the rapid scalability associated with venture-backed startups (not always true - see below!), since you don't have a massive war chest to go and pay for a load of growth.

One thing that a lot of people don't talk about is the fact that in bootstrapping, you can do it straight away. If you try and raise venture capital, it might take you 6 months, or it might take you two years. That time could be better spent actually creating a company.

Bootstrapping also places a premium on control and autonomy. Basically, you don't have to answer to anyone - no investors to cause you problems and heartache.

By concentrating on sustainable growth and early cash flows/profitability, bootstrapped startups aim for a more reliable and consistent pattern of success.

Therefore, with bootstrap startups, you mainly want to go for models which are high cash flowing (if you can), since you don't have a load of cash to fund capital intensive models. This is easier said than done of course.

Quality of life

One thing is for certain, doing a startup is really, really hard.

So whatever you approach to take, you're going to have a difficult time, but with some approaches, the amount of stress involved can be significantly different.

Under venture capital, you're trying to grow extremely quickly and you have investors that you've got to keep happy. You've taken someone's money, and if you don't succeed, you'll feel very guilty in that you won't be ever able to pay those people back. Now venture capitalists and angel investors know this, but that still doesn't make it any easier for the founder.

High growth startups are also extremely stressful, since everything breaks very frequently. Being the founder of a company, you're basically a firefighter. And in a very high growth company, you're a firefighter who has to work very, very hard.

On the other hand, when bootstrapping, things will still go wrong, but with a lower cadence (frequency). This is because you aren't growing as quickly, and are able to put systems in place a little bit sooner, before the growth massively hits.

Bootstrapping can be significantly slower because you don't have that war chest to pay for growth. Oftentimes growing very quickly and having high revenues, or high numbers of staff can make you feel good, and fulfilled with your life. Venture capital might help you get to this stage much quicker.

Bootstrapping, is also potentially a much lonelier path, as if you have venture capital, you might be able to hire people early on to help you in your venture. This can help you share the ups & downs with your companions .

The Emphasis - Mode vs. Expected Value:

The crux of the decision-making process revolves around whether founders prioritize the mode of success over the pursuit of the highest expected value. The mode-centric emphasis offers a perspective that encourages founders to seek the highest frequency of success rather than fixating on achieving unicorn status. Traditional venture capital and bootstrapping each present their own set of advantages and challenges. Ultimately, the decision hinges on a founder's inclination toward control, risk tolerance, and the desire to craft a journey that aligns with their vision and values.

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