If you’re like me, it might have been Labor Day in the U.S., and it was a beautiful one here in Austin, not putting in any work is more or less impossible; besides, entrepreneurs throughout the world were working and so with the focus on work, I couldn’t help but put thought to this frequently asked question, “How do I know if I should bootstrap or raise capital?” Bluntly, if you’re asking whether to raise capital or bootstrap, you’re falling into a trap. This question is framed like some sort of morality test for entrepreneurs; are you pure enough to “do it yourself,” or are you “selling out” by taking investors’ money? That’s nonsense. The right decision isn’t about pride or purity; it’s about math. Specifically, it’s about return on investment (ROI) – for you, for your partners, for your customers, and for anyone who might put money into your business.
The problem is that too many people peddle bootstrapping as the one true path, like entrepreneurship is a monastic order. “Never take outside money,” they say. “Build it yourself, rely on customers, keep control.” Nice sentiment. Except, of course, when your company collapses because you needed capital to scale, compete, or even survive, and you refused to take it because some LinkedIn guru told you to stay “lean.” That isn’t wisdom, it’s negligence.
Article Highlights
What Bootstrapping Really Means
Bootstrapping simply means you’re financing the business out of your own pocket, or from customer revenue. That’s still capital. It’s just your capital. I have a saying, “everyone bootstraps, until they don’t,” given the fact that there is not funding to start something. Requiring your own capital, like any other source of money, it comes with an ROI question. Can you spend your limited cash in a way that sustains the business, grows revenue, and keeps customers happy? Sure. But what happens when your competitors raise $10 million, hire a sales team of 50, and suddenly every one of your leads is getting cold-called three times a day? Being “lean” is noble; being undercapitalized is fatal.
Bootstrapping can work beautifully when:
- The cost of acquiring and serving customers is low.
- Growth is steady and predictable.
- You’re not in a market where scale itself is the moat.
But if any of those conditions break, bootstrapping can become a slow bleed toward irrelevance. If we’re being blunter, given the distinction of startup from a new business, most need to raise capital.
External Capital: Same Math, Different Players
When you raise money, you’re not dodging the ROI question; you’re multiplying it. Now you have to deliver returns not only to yourself but to whomever gave you money. That means different expectations depending on the source, for example:
- Banks: They don’t want equity, they want interest. The math is straightforward—can you pay back principal and interest without burning your assets as collateral? Fail that test, and you’re toast.
- Government / Grants: Government grants offer “free” non-dilutive capital and credibility but come with strings; reporting burdens, restrictions, and the risk of chasing bureaucracy instead of customers. Besides, this less-restricted capital in early, is actually known to cause challenges when you need investors later.
- Business Partners: Friends, family, or co-founders bringing in capital will expect both repayment and influence. The math here isn’t just financial; it’s emotional. Can you meet their expectations without hating each other by year three?
- Investors: This is where things get hairy. Investors aren’t writing checks because they like your product demo and certainly not on an idea. They’re buying a return. For small businesses, that might mean a 2–5x return over a decade. For startups, actual startups, not just “a new business,” the expectation is closer to 20x. Yes, twenty. Why? Because most startups fail, and the few that succeed need to cover all those losses.
This is also why founders whine that “investors tried to take over my company.” Well… yes, sort of. They gave you money and have a fiduciary duty to get it back, multiplied. That’s not “evil VC culture,” that’s literally their job.
Startups vs. Businesses: Stop Confusing Them
Here’s where most founders get it wrong: Venture Capital isn’t for businesses. It’s for startups. A business is built to operate within the rules of the market. A startup is built to change the rules of the market. Businesses generate steady returns; startups swing for moonshots. Conflating the two is like blaming a casino for not offering mortgages, different game, different math.
If you’re building a bakery, investors aren’t looking for a 20x return; they want steady repayment or maybe a modest equity exit. If you’re building AI that replaces every bakery cashier in America, that’s where VCs line up, because the upside could justify the risk.
So, Bootstrap or Raise Capital?
You don’t decide based on ideology, ego, or what your Twitter feed says. You decide by answering a cold, clinical question:
Does your venture both warrant outside capital (meaning it needs it) and have the capacity to deliver the expected return?
- If yes, you raise.
- If no, you bootstrap.
- If you don’t know, you’re not ready for either.
That’s it. Everything else is noise.
and have the capacity to deliver the expected return?
The tragedy is that entrepreneurs often approach this question emotionally, not mathematically. They conflate control with prudence, or they confuse ambition with necessity. The only real mistake is assuming one path is inherently “better.” The right choice is always the one that aligns your venture’s needs with the capital structure that can sustain it.
Harshly? If you insist on bootstrapping when your market dynamics require scale, you’ll die. If you chase VC when your business can’t produce venture-scale returns, you’ll also die; just slower, with fancier coffee.
The entrepreneurs who thrive are the ones who stop asking “Should I raise or bootstrap?” and start asking, “What capital structure gives my business the oxygen it needs, while delivering the returns my stakeholders require?” And here’s the trick, knowing who to ask… you should be connecting with and talking to investors NOW, not when you are ready or need to raise capital. Venture Capital firms have teams of people who have a job and responsibility to meet with you and share expectations. Angel Investors should meet with you (or at least answer an email) and explain. If you’re struggling with either, well, that’s why I write, that’s why Founder Institute exists, and that’s why you should be questioning advisors when they tell you what you think, “Great, thank you for that advice. Now, how do I do that and put me in touch with someone.”
Nice. Allow me to add:
There is another dimension: Folks who invest in the mission, rather than the financial return.
But the reality is that VC is not the right choice for the vast majority of start-up founders. You say it above, ‘…. can it deliver the expected return?’ How many start-ups can reasonably expect to deliver the 100x to 1000x returns that VCs expect? The answer is very, very few, in fact fewer than 1%. And if the other 99% raise VC, the founders will lose their shirts. So bootstrapping should be the default funding approach for all start-up founders…… at least until VCs start contacting them, offer reasonable terms, and agree on the founders controlling any exit. Playing the lottery is a choice too, but the right choice for how many?
Steve Jennis but the point more intentionally made is that the vast majority of startups aren’t fundable (can’t or won’t deliver a 20x return); it’s not a “choice” for founders unless they’re too oriented to their own preferences that they won’t assess the situation and raise capital accordingly.
Very few startups warrant VC because very few startups can deliver such returns. Period.
Everyone bootstraps until they don’t. It is the default; no one funds anyone starting out.
Miles Fidelman Good point, good addition, thank you
Paul O’Brien Yes, and I wish VCs would echo this (i.e. ‘very few startups warrant VC’) rather than trying to convince founders that raising is everyone’s goal. It’s more often an own goal.
Paul O’Brien Love the no-nonsense take on bootstrapping vs raising capital. Pragmatic advice
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Well said. Decision making tree at its best
EXACTLY
So true! Too many entrepreneurs treat the capital debate like a badge of honor instead of a calculated decision. It’s all about what works for your business.
Tinny, Appreciate that. Too often founders treat funding as ideology instead of math. Whether it’s bootstrapping, banks, or investors, the real skill is knowing what kind of return each path demands.
Curious of everyone, please share, when you’ve advised or built companies, which funding decision was the hardest to get right?
The slow death over fancy coffee can usually be avoided if you listen to the math and not the cheerleaders.
The idealization of venture capital invites bad behavior and bad actors. The vanity metrics and gold-rush mentality distracts from building sustainable startup ecosystems.
Exactly Ken. VC isn’t the villain but treating it like a shortcut is. Most of the carnage comes from founders chasing the hype instead of asking the only question that matters: what return does this path actually demand and can the business deliver it?
Pradeep M. Appreciate that, too much advice in this space drifts into ideology when what founders need is pragmatism. Glad it resonated, and absolutely, always keen to connect with people cutting through the noise.
Paul makes a really powerful point regarding the decision whether to bootstrap or raise. It’s a question of math to find the most appropriate funding route for your startup.
Gabi, Bertin, Katie, Xin Yee, and Jo – this great post describes a logical assessment of what otherwise might be a decision based purely on emotion.
Thank you for highlighting that. Too often founders treat this like a gut check when it’s really a numbers exercise. The hard part isn’t choosing bootstrap or capital, it’s being honest about what kind of return your path can realistically deliver. I’d love to hear how each of you has approached that trade-off in your own work
The problem I see with many founders is that they’re not honest with themselves when answering the questions you’re asking of them. They delude/convince themselves that they’re VC material. They’d rather berate VCs’ inability to recognize their genius than confront the truth. My speculation on why that may be so:
– VC gets the most media coverage and is top of mind
– they want to see their name in lights on closing a round
– they’re not aware of other sources of capital
– they’ve tried and failed to raise elsewhere (F&F, banks, grants, etc.)
– they’ve short-term thinking for survival and convince themselves they’ll figure out the rest later
– they’re just not aware how hard it is to build and sustain the growth rates VCs require
– “build it and they’ll come” thinking is very prevalent, no awareness of the difficulty of distribution
To most folks, being told (or self-realizing) that that they’re not venture fundable, is the business equivalent of being told that their baby is ugly. And no-one, no-one, ever wants to hear that.
It’s not clear to me if and how this mad rush to raise will ever subside. When will founders find the fortitude to accept reality as it is? VC is unlikely to lose its allure any time soon. Hopefully your work with FI will spread awareness and knowledge in the community.
The hardest mirror for a founder to face isn’t a VC partner across the table, it’s their own assumptions. The mythology around venture makes ‘no’ feel like rejection, when in truth most businesses shouldn’t be in that game to begin with.
What I keep wondering is this: do we solve it by getting founders to embrace other capital paths, or by reshaping ecosystems so they stop glorifying VC as the only badge of legitimacy?
It will have to be a combination of education, easy access to different sources of stage-relevant capital, mentorship, and deglamorizing VC (to a certain extent).
It’s as though you took the words out of my mouth
The breakdown of banks, grants, partners, and investors was spot-on – especially around how expectations shift with each type of capital. TCLM explores the same risk/return balance in corporate credit and liquidity, which might be useful for founders thinking beyond just equity vs. bootstrap.
(It’s free) https://tradecredit.substack.com/
Thank you for sharing this Debarshi!
The real blind spot isn’t bootstrap vs. raise, it’s founders not mapping capital type to growth logic.
Customer-funded growth is cheap oxygen but caps speed. External capital can fuel scale, but only if the venture’s economics genuinely support venture-level multiples.
Most failure comes from misfit: bakeries chasing VC maths or moonshots starving themselves on customer cash. The lever isn’t purity, it’s alignment, does the capital structure match the scale of the proof you need to deliver?
Lee Tumbridge beautifully put. The danger is founders treat capital like a philosophy instead of a design choice. Bootstrap vs. raise is just the surface; the real discipline is engineering the funding model to the growth logic, as you say. The irony is ecosystems often reinforce the misfit (celebrating VC rounds as the only marker of success, or glorifying bootstrapping as moral high ground).
What if we got better at teaching founders that capital structure is as much a part of product-market fit as the product itself? Anyone doing that well??
More like, “How to translate what’s right for your startup”
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Thank you, works the other way though, you’d follow me to stay updated. Here: https://www.quora.com/profile/Paul-OBrien-1
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Absolutely, Paul. So often founders treat ‘bootstrap vs raise’ as a moral choice rather than a strategic one. The math is what really matters, like knowing when outside capital accelerates growth versus when staying lean preserves the business. Thinking about capital structure early, rather than as an afterthought, is what separates companies that survive from those that struggle.
Stephanie A. Rieben-de Roquefeuil love the encouragement of using the term “capital structure” to help push entrepreneurs to appreciate that it isn’t simply funding and certainly isn’t readily available. It’s both structured for a purpose and to deliver returns AND founders should be considering how they want to structure their approach to being meaningful to it.