Are Bootstrapped Startups Less Valuable?

The value of a startup should be judged by its potential to help the Founder — not everyone else.

But that's not really the way we tend to talk about the value of a startup. We tend to think in terms of how valuable our startups are perceived by people that aren't us, like investors or the outside media.

At the same time we get a very skewed perspective of how many startups even raise funding, much less how many of them ever survive the journey. When we compound those broken perspectives, we make it nearly impossible to realize just how valuable our bootstrapped startups are!

99% of Startups don't Raise Venture Funding

If we're going to assume that only venture-funded startups are more valuable, then we should probably start by understanding how many startups ever get venture funding. It's probably a few hundred thousand, right?

Nope. What if I told you that 99% of startups never receive VC funding? I think the number is actually higher than that, but it doesn't really matter. In the U.S., there are between 1,000 and 4,000 venture investments per year, and millions of startups are launched.

Now we could take that data and point to any one of those startups and say, "Well clearly that startup that just raised $10 million has more value than the two idiots working out of their basement living off their credit cards!" If we stop the comparison there, then yes, the startup with $10 million in the bank — at that very moment — is probably worth more.

Valuable for How Long?

What we'd be missing with that statement is how long that $10 million startup is more valuable for. You see, that's the part where first-timers and outsiders really misunderstand the startup ecosystem. We only pay attention to the initial funding rounds — we don't pay attention to the entire life cycle of those companies.

Every startup feels like it's worth gobs of money when someone just handed them more gobs of money. That's short-term thinking. The question becomes whether that startup is worth gobs of money in 5 or 10 years — or anything at all.

The problem with venture-funded startups is that they tend to have a very high burnout rate which tends to end very horribly for everyone involved. It's a two-part problem. The first part is that they spend well ahead of revenue which puts them in a very leveraged position when the money runs out. The second is that no one benefits from the startup just limping along, so they tend to die painful deaths with no incentivized stakeholders.

Valuable to Whom?

Yet, all of this is really missing the most important point. "WHO are bootstrapped startups less valuable to?" The short answer — investors.

If we ask other Founders who run even moderately bootstrapped companies, "How important is it that outside investors (of which you have none) consider the value of your company?" We're going to get a resounding "Doesn't make a lick of difference." As a Founder that owns one of those companies, I can absolutely concur. If investors think Startups.com is worth 100x what I think it's worth, it makes no difference to me whatsoever.

The value of a startup is whether or not it will make US successful — not investors. That's why sticking to the metric of investor valuations as a barometer for our own value is completely useless (unless we're raising money from them!).

In Case You Missed It

What Should I Never Say to an Investor? I'm going to be raising capital for the first time — I know what I want to tell investors, but what should I avoid saying altogether?

Can I Have a Boss Again? (podcast) As a Founder, what happens when we're forced into going back to reporting to someone else now that we've tasted the freedom of Founderhood?

Funding is a One Way Street Yes, additional funding is a good sign of progress and is a milestone most Founders want to achieve. But there is a downside to it — and it’s a big one.