Originally published on November 2023 and written by John White.
The plethora of platforms available to an entrepreneur today is staggering. There’s something to help manage every single aspect of their company. From accounting and tax to marketing, customer service, web development, e-commerce, content creation, hiring, managing and paying workers, and distributing products and services worldwide – it’s never been easier to set up a global venture.
This impact of automation has been rippling through our global economy for many years now. The rise of the digital nomad, distributed workforces, online manufacturing marketplaces, dropshipping, and global co-working spaces has been driving many to choose the entrepreneurial life.
But this new infrastructure isn’t just making how we work more distributed globally. It’s also having a direct effect on how companies are born, how they finance themselves, and how they grow. According to the Global Entrepreneur Monitor, entrepreneurs needed an average of $65,000 to start a business in 2006. In 2015, this dropped to $13,000 and has been steadily dropping ever since.
Why? The internet happened. In 2023, founders can launch a business and start making money without needing hardly any infrastructure (office space, servers, utilities, employees) beyond access to a laptop.
Nearly half a million new businesses are started every month in the USA. Only about 6,000 of these will secure angel investment, and fewer than 500 will attract venture capital. With VC funding in start-ups halving over the past 12 months and with the current macroeconomic climate, is it any surprise bootstrapping is picking up its popularity again?
Today, there is a growing number of bootstrapping enthusiasts eager to push back against the venture capital industry – like Melissa Kwan, co-founder and CEO of the automated webinar platform eWebinar.
“I’m a 3rd time bootstrapped founder who has had the privilege of growing a start-up to profitability and acquisition without taking venture capital, something that has ultimately given me the freedom to live the life I want to live…on my own terms.”
entrepreneur and sales expert
Over recent years, securing venture capital has become so commonplace we’re all used to the headlines that ”X founder has raised X millions to tackle X problem.” But no one really talks about what is happening behind the scenes.
By taking on venture capital, founders essentially commit to the industry’s growth by any means mentality. Investors are interested in returns. The founder’s passion for their craft, industry or sector is just a bonus. Some thrive off the challenge, but for others, it can feel like a noose around the neck.
So what’s the cost of freedom? Interestingly, bootstrapping actually appears to be the more financially sensible option. In “The Pulse of SaaS”, the latest report by CapChase, a non-dilutive capital partner for software firms, the company states that bootstrapped firms are currently outperforming funded ventures.
“Despite the war chest of funding that VC-backed firms raised last year, bootstrapped companies are doing better than VC-backed companies across nearly every metric we analysed.”
CapChase’s The Pulse of SaaS report
Sources of non-dilutive capital – debt financing, government grants, and revenue-based funding – are all growing in popularity, and with more and more successful bootstrapped start-ups edging their way to a billion-dollar exit, it’s no surprise that last month, TechCrunch proclaimed, “bootstrapping is cool once again…”
Mailchimp grew to $700m in revenue with no external funding and was acquired for $12 billion. GitHub achieved $300m in revenue before being acquired for $7.5 billion. And just last month, Zoho became the first ever bootstrapped business to reach 100m users worldwide and with over $1 billion in annual revenue.
Honourable mentions go out to Shutterstock and Shopify who, whilst they technically raised external funding, are regularly praised for being profitable and with zero debt from very early in their journey.
Is early-stage venture capital dead?
So, if bootstrapping is back in vogue, what does it mean for early-stage investing? If the costs to get started continually drop, the incentives for a founder to sell a part of their business will almost certainly fall in line.
Although the current downturn in VC investing is mostly blamed on the macroeconomic climate, has this downturn been on the cards for a while? Sam Lessin, former VP from Facebook and VC Partner at Slow Ventures, released a report last week suggesting that may be the case, arguing that the underlying model VC investing is built upon is “broken.”
“Over the last 20-odd years, VC effectively reorganised itself into a ‘factory line’. Each stage funded a certain type of ‘development’ of a company with specific inputs and expected outputs, and fed that product to the next stage – taking the markup along the way… But the VC factory line, once smashed in [the COVID] era, hasn’t come back in the same way – and it won’t for a long, long time (if ever).”
Partner at Slow Ventures
The rise of cloud computing and software-as-a-service business models have undoubtedly added to the disruption of the traditional VC “factory line.” But they’ve been around for nearly two decades. Why are VCs only just now recognising the issue? Bill Gurley, formerly of Benchmark Capital, has been calling it since 2015…
“I became convinced that the industry is structurally flawed and is always going to boom and bust. This went so long [since] ‘09. There were tons of people in the ecosystem—founders and investors—they didn’t know any other way. They just thought this is how it will be forever. And then it crashed.”
formerly of Benchmark Capital
So, where does that leave the venture capital market? For pure software businesses, it sounds like there are one of two choices. Either they take on some early capital and push for sustainable profitability as fast as possible, or they bootstrap their way to a healthy business and then secure investment to accelerate growth. Whichever route, the combination does seem to be dying.
Outside of software, start-ups in climate tech, pharma, biotech or those building hardware still carry their fair share of risk and are capital-intensive. VC investors will undoubtedly still be the best source of support for founders in this space.
“The VC industry has been stuck on one very specific formula of funding enterprise software companies and will have to find more innovative ways of backing climate tech and industrial hardware companies. The venture ecosystem will evolve. Tomorrow’s successes are not going to look like yesterday’s.”
Partner at La Famiglia
A perfect AI storm
The infrastructure that has fuelled the rebirth of bootstrapping has recently received a further shot in the arm as advancements in AI are accelerating the performance of all the tools founders use to manage their businesses.
AI-driven accounting and tax management, automated marketing campaigns and customer service bots, AI-powered web development, e-commerce and content creation are all already the norm. Activities that used to require expensive specialists are gradually being replaced by AI.
Not only will these tools bring business start-up costs down even further, many predict we’ll begin to see a whole new era of solo-entrepreneur lifestyle businesses that grow sustainably and won’t ever require any outside investment.
At OpenAI’s developer conference last week things went even further as they announced a series of new updates, including an enhanced version of its GPT-4 model, dubbed “turbo” that improves the model to handle prompts equivalent to around 300 pages of text.
But the most significant update, centred on ChatGPT as OpenAI has made it possible for individuals to create their own custom ChatGPT applications, termed “GPTs,” without needing any programming skills.
This means users, businesses and institutions can now design their own ChatGPT variants, tailored for specific needs, sectors and industries. Additionally, OpenAI announced the launch of the “GPT store,” akin to Apple’s app store, for sharing these personalised applications.
Not only does this mark a significant shift in the generative AI landscape for entrepreneurs everywhere, but by enabling the creation of custom chatbots, OpenAI is essentially canabalising the existing market of specialized “ChatGPT for X” or various “wrapper” products into one shop window.
“Creating one is as easy as starting a conversation, giving it instructions and extra knowledge, and picking what it can do, like searching the web, making images or analyzing data”.
OpenAI Blog “Introducing GPTs”
So AI won’t just be able to write the software that underpins a new business. It’ll be able to use it as well. Earlier this year, a brand designer and writer Jackson Greathouse Fall created a new GPT offshoot, HustleGPT, that provides a glimpse of a future where AI agents run the show.
After giving HustleGPT-4 a budget of $100, it was asked to make as much money as possible. Its business plan entailed setting up an affiliate marketing site for content about eco-friendly products and after just four days it it had raised $7,812.84 in investment, established a small but growing team, and had content in the pipeline.
At the moment, HustleGPT still needs a human agent to act as its liaison with the physical world. As AI agents become a new reality, this will no longer necessarily be the case. Entrepreneurialism, without the entrepreneur. Bootstrapping, without any boots.