Chapter 12

Should you raise money or bootstrap?

18 min read

I raised a few million dollars for StartGlobal from some of the best investors in the world. So when I tell you to think very hard before you raise money, it is not from the cheap seats. Raising money is not a trophy. It is a tool that is exactly right for a small number of companies and exactly wrong for most. The whole startup world celebrates the raise as if it were the finish line. It is not even the starting line. It is taking on a debt of expectations.

What raising money actually means

When you raise, you sell a piece of your company for cash. Every round dilutes you, so you own less of what you build. That part is obvious. The part founders miss is the obligation that comes attached. An investor did not give you money so you could run a comfortable, profitable business for the next twenty years. They gave it to you to chase a very large outcome, an acquisition or an IPO worth hundreds of millions or more. The day you take the money, you have signed up for that race, whether or not it is the race you actually want to run.

The math of a venture fund

This is not because investors are greedy. It is the math of their business, and once you see the math, everything they do stops being mysterious.

Here is how a venture fund actually works. A fund manager raises a pool of money, say a hundred million dollars, from big investors like pension funds and university endowments. They spread it across twenty or thirty startups over a few years, and the fund has a life of about ten years, at the end of which they have to hand their investors back more than they put in. To be worth the risk and a decade of having their money locked away, those investors expect the fund to roughly triple, to return around three hundred million on the hundred they gave. The fund manager also takes a fee of about two percent a year and keeps about twenty percent of the profits, which is why you hear the phrase two and twenty.

Now the part that controls everything. Those returns do not come evenly from the twenty companies. They come from one or two. This is the power law, and a realistic outcome for a hundred million dollar fund writing twenty checks of five million each looks something like this:

Add it up and it returns three hundred million, a three times fund. But look closer at where it came from. That single winner, two hundred million dollars, made more than all nineteen other companies combined. One investment returned the entire fund twice over. The other nineteen, including some genuinely good companies, barely moved the needle. Take the one winner away and the whole fund loses money.

That is the engine underneath every venture investor’s behavior, and it forces one conclusion you have to understand. For a single investment to return the whole fund, it has to get enormous. If a fund puts five million into your company and ends up owning ten percent of it, then for that stake to be worth the hundred million they need to return their fund, your company has to be worth a billion dollars when it exits. A billion. That is the outcome they are underwriting the day they write the check.

This is why a result that would change your life can be a rounding error to them. If you build a wonderful business and sell it for thirty million dollars, you are set for life, and your investors are happy for you personally, but their ten percent is three million, which does almost nothing for a fund that needs hundreds of millions to work. They were never betting on a thirty-million-dollar outcome. They cannot afford to. They need you to swing for the billion and accept a high chance of zero on the way, because that is the only kind of bet that returns their fund.

So if your honest ceiling is a great business doing a few million dollars a year in profit, you are not a bad founder and it is not a bad business. You are simply not a fit for that math, and taking the money would force you to chase an outcome you may not even want.

Match the fund to your round

There is a related mistake that wastes more of a founder’s time than almost anything else. You see a fund with a hundred million dollars and you think, of course they can put a hundred thousand into my company, that is pocket change to them. They cannot, and they will not, and understanding why will save you months.

A big fund is not free to write small checks. It has a fixed pool to deploy and a tiny team to deploy it, and each partner can only sit on so many boards and pay attention to so many companies. A hundred million dollar fund spreading across twenty or thirty investments has to write checks of a couple of million dollars or more just to put its money to work. A hundred thousand dollar check costs them the same time and attention as a five million dollar one, and from the math above you already know that a hundred thousand dollar position can never return their fund. So they do not do it.

This is why funds come in sizes, and the size tells you the stage they invest at. Roughly:

So if you are raising a five hundred thousand dollar pre-seed, the worst thing you can do is burn your weeks chasing meetings with famous hundred-million-dollar funds. They might take the meeting to learn about your space, and then politely pass, because you are simply too early and too small for their math. You will feel busy and get nowhere.

Before you pitch anyone, find out two things, the size of their most recent fund and the check they typically write. Both are usually on their website, in the news, or one honest question away. Build your list only from funds whose checks are the size of the round you are actually raising. A small, well-matched fund that is genuinely excited to write your first check is worth more than ten big names that were never going to.

What bootstrapping actually means

Bootstrapping means you fund growth out of revenue, plus whatever savings and sweat you put in. You grow only as fast as you can earn, which is slower. In exchange, you keep control, you keep the upside, and you keep your options open. You can sell, stay small, change direction, or just pay yourself. Nobody can force you onto a treadmill.

The understated superpower of a bootstrapped business is that a profitable company is default alive. It does not die when the fundraising market freezes, because it was never depending on the next round to survive. When money gets tight across the whole industry, and it always does eventually, the funded companies that never found a business model start dropping, and the profitable little business just keeps going.

The honest tradeoff is real. You cannot out-spend or out-hire a well-funded competitor in a genuine land grab, and you carry more personal financial risk in the early days. Some markets simply require scale and capital to win, and if you are in one of those, bootstrapping can mean losing to someone who raised.

The decision

Strip away the ego and the headlines, and the choice is not that hard. Raise money when:

Do not raise when:

Here is the one-line test. Raise only if you truly need the capital to win a race you can actually win, and you genuinely want a very large outcome. Otherwise the costs, the dilution, the lost control, the forced growth, outweigh the cash.

How it works if you do raise

If you decide raising is right, here is the shape of it, in plain terms. The exact numbers move around, so treat these as the lay of the land and check the current terms before you sign anything.

The earliest money usually comes from angels, individuals investing their own cash, often somewhere from ten thousand to a couple hundred thousand dollars, on a handshake and a simple document. After that comes pre-seed and seed rounds, the first real institutional money, raised to find product-market fit and early growth. Each of those rounds typically costs you somewhere around fifteen to twenty percent of your company in dilution.

Most early money today goes in on a SAFE, the simple agreement for future equity that Y Combinator created. It is not a loan. The investor gives you cash now in exchange for the right to shares later, when you do a priced round. Two terms matter. The valuation cap is the maximum company value at which their money converts to shares, so a lower cap means they get more of your company. The discount is a percentage off the price the next investors pay, commonly around twenty percent. You generally use one or the other, not both.

As a concrete reference point, Y Combinator’s own standard deal, at the time I am writing this, is five hundred thousand dollars: one hundred and twenty-five thousand for a fixed seven percent of the company, plus three hundred and seventy-five thousand on an uncapped SAFE that converts on the best terms of your next round. Those specific numbers have changed several times over the years, so do not quote them from memory, check the current deal.

And what are investors actually buying? Three things. The team, meaning can these specific people win. The traction, meaning is there real evidence that people want this. And the market, meaning is it big enough to support the outcome they need. The earlier the stage, the more it is about the team and the market, because there is not much traction yet. By the seed stage, traction does most of the talking.

If you bootstrap, you are not alone

There is a whole world built for founders who do not want venture money, and it has grown up enormously in the last few years. TinySeed and MicroConf, both run by Rob Walling, are the accelerator and the community for self-funded software companies that want to reach a few million in revenue rather than chase a unicorn. There are funds like Calm Company built specifically to back sustainable, profitable software with founder-friendly terms instead of standard venture equity. There is revenue-based financing, where firms give you growth capital that you pay back as a percentage of revenue, with no equity sold at all. And there is Indie Hackers, the community where bootstrapped founders share their real numbers and playbooks. You do not have to figure this out alone, and you do not have to take venture money to be taken seriously.

What the two paths look like

On the bootstrapped side, the proof is everywhere now. 37signals, the company behind Basecamp, run by Jason Fried and DHH, has never taken a cent of venture money, has no board, has under a hundred people, and throws off tens of millions in profit a year, on purpose. Tally, the form builder built by Marie Martens and Filip Minev, bootstrapped past a few million a year with a tiny team. And Mailchimp is the case that should end every argument: bootstrapped from a side project, never raised venture money, and sold to Intuit for around twelve billion dollars. You do not need investors to build something enormous.

There is also an honest cautionary tale in Sahil Lavingia’s Gumroad, which raised venture money first, could not raise its next round when growth was not venture-scale, laid off most of its team, and only became healthy after it gave up on the venture path and rebuilt as a lean, profitable, minimal business. Raising first does not guarantee anything, and it can take you somewhere you did not want to go.

And the other side is just as real. Companies like Uber, Stripe, and the big AI labs genuinely needed enormous capital, because they were in winner-take-most markets, or building global infrastructure, or pushing the edge of expensive science. For them venture money was not a vanity move, it was load-bearing. That is the whole point of the framework. The capital fit the business.

The mistakes

I raised money, and I am grateful for the people who backed me. I would also tell my younger self to get to revenue and profit first, and to raise only if and when the business genuinely needed it to win. Money is a tool. Pick it up when the job calls for it, and not because everyone around you is clapping.