There is a swell of momentum behind a school of thought challenging the assumption that venture capital (VC) investment is the default route for early-stage founders.

The headlines say it all. "Fundraising is no longer the default." "Startup founders are trying to rewrite the investment rules".

While there will likely always be businesses that need to raise outside capital to scale, for some founders, focusing on efficiency over 'growth at all costs' is an increasingly compelling option.

In a previous life, before banking, I founded a consumer brand producing nutrition bars – a journey that involved raising funds from investors and eventually an exit.

With my own experience in mind, I'm fascinated by other founders' stories, and understanding what drives people to build and scale enduring businesses? And more specifically, what factors influence the crucial decision to eschew venture funding and grow a company 'the hard way'?

To understand more, the team spoke to Amman Ahmed, who grew his business, Music for Pets, from scratch to an eight-figure exit in 2023, and Tom Hacquoil, CEO of bootstrapped HR software scaleup Pinpoint. They offer invaluable lessons for early-stage founders deciding whether or not to raise venture capital.

But first, let's get to grips with a key definition.

Bootstrapping is a model for building a business in a self-sufficient way without relying on external capital.

Rather than diluting their ownership by seeking equity investment, bootstrapping founders scale up using the revenue they earn from customers and/or debt.

That means the economics of a bootstrapped company are markedly different from most early-stage venture-funded businesses, where founders seek external capital from investors to scale up product development and operations in the expectation that revenue and profitability will follow later.

The key difference? Most bootstrapped founders retain significantly more control over their company than founders in VC-backed companies, whose stakes are diluted when they accept VC investment.

It's this control that leads founders early in their development to weigh up the benefits and challenges that come with bootstrapping. It's a complex choice, influenced by many variables, ranging from vertical to the founder's mentality.

"There are definitely benefits to the venture model, in terms of credibility with customers and your ability to attract talent," says Tom.

"Bootstrapped companies don't have the luxury of paying top-of-market salaries for employees, at least in the early days. So you've got to be very determined and single-minded about retaining that control as a founder."

So what does it take to scale sans external capital?

Music for Pets - a media company producing soundtracks for pet owners and their furry friends, distributed through YouTube, Spotify and other digital channels – wasn’t Amman’s first rodeo as a startup founder.

When he founded his first company, he assumed that he'd need to raise money from investors as the 'default' way to scale up. But, he says, "I learned that raising VC money sets you up for years of high-pressure work that can genuinely be bad for your health."

He founded Music for Pets as a side hustle, but it quickly picked up steam. This time round, though, Amman prioritised a sustainable work-life balance - even with user growth starting to ramp up. "I thought deeply about how I want to live as well as how I wanted to work. Starting Music for Pets as a side project actually gave me more freedom to test and experiment, and I went through that phase without needing to work 100 hours a week."

In addition to deciding what kind of work-life balance you need, it’s essential to decide what kind of business you want to build from the earliest stages of your journey.

By contrast, founders building in sectors like AI or biotech will likely find it near-impossible to fund operations with their own revenues in the early days due to upfront capex demands.

While bootstrapping is largely a solo endeavour, scaling means bringing in the right people.

Once you’re up and running, the question of attracting and retaining talent is a perennial concern for bootstrapped founders. To streamline costs, Amman combined a small core team in the UK with contractors and freelance talent. “I outsourced much of the technical development to India,” recalls Amman. “The main technical challenge was building the capacity to support millions of concurrent multi-hour streams. We built some really effective technology that would have cost hundreds of thousands of pounds to do in the UK for a fraction of that.”

Where Amman leaned into the value of working with a distributed engineering team, Tom found that candour and a shared sense of skin in the game was key to making great hires in a bootstrapped context. “I was totally open with new joiners in the interview process that our business model was very different to competitors in our space – we couldn’t pay as much,” he says. “But we offered all our employees meaningful equity.”

Prepare for investors at your door

Tom recalls that as Pinpoint was growing, venture firms regularly expressed their interest in investing – he recalls receiving “as many as 10 inbound emails a week from VCs, especially when the market was frothy between late 2020 and early 2022.”

Investors also came calling as Amman scaled up Music for Pets. “Luckily, I wasn’t under pressure to sell because the business was already profitable. I had the luxury of choosing the right moment to exit for myself, as I wasn’t facing pressure from board directors,” he says.

One of the key advantages of bootstrapping a startup is retaining control of your company’s destiny. And whether it’s a sale or opting to take money from investors for the first time, bootstrapped founders hope to be able to pick their moment for relinquishing some or all control of the company.

When the time comes, what does it feel like to accept investors’ cash? And what about selling up entirely?

By 2023, Amman had scaled Music for Pets to the point where the business had millions of users and billions of streams, operating with gross margins of around 80% and healthy EBITA.

When the right offer came, though, it was from an unexpected source: not a tech company, but a US-based record label (specialising in rap and hip-hop).

As discussions formalised, Amman hired investment bankers and lawyers to prepare for the sale. What did his advisors think of the business and his approach? "The bankers, accountants and lawyers said to me that because I'd kept the structure so simple, and retained ownership of all the company's intellectual property, it was one of the easiest transactions they'd worked on," says Amman.

The venture-backed model can give rise to complications in a sale or merger, because of the distribution of equity among a broader group of shareholders and elements like the preferred stock often held by investors. As a bootstrapped company, Music for Pets avoided many of these obstacles in closing the deal.

Amman's approach to building Music for Pets without external capital led to a surprising finding after his exit. "When I spoke to VC-backed founders who'd sold their companies," recalls Amman, "I was startled to realise that their returns post-acquisition weren't much different to mine, or actually lower, even when they'd sold their companies for far more than I received for Music for Pets. Their stakes had been diluted over multiple rounds of VC funding, while I had held on to 100% of the equity in Music for Pets as we grew."

Choosing when, or whether, to opt for support and investment from venture capital investors is one of the most impactful decisions any founder makes. In this light it's important to remember that bootstrapping is a spectrum.

Some founders intentionally decide to never take VC money, while other startups are built without external capital initially before opting for external support later. Some investors, such as Expedition Growth Capital or Kennet, specialise in providing growth-stage equity for founders that have bootstrapped up to a certain point (such as between £3 million and £10 million in recurring revenue).

Tom chose to partner with Expedition when he elected to raise money for the first time. His principal reason for doing so was to take out a portion of liquidity, for himself and the wider team.

"I'm really proud that we were able to reward our team for their efforts, and gave people a meaningful financial outcome," he says. Since the investment, Pinpoint's growth has continued its momentum, and headcount has risen from under 30 people at the time of Expedition's investment in late 2022 to around 70. However, the hiring push has been financed through a combination of free cash flow and debt. Clearly, bootstrapping habits die hard.

Bootstrapping a startup means choosing the hard route.

Founders have to be ruthlessly controlled in their capital allocation. Be warned – this means you are likely to forgo many of the luxuries VC-backed businesses enjoy, from top talent through to high-end office space.

But bootstrapped founders retain a precious commodity: autonomy and decision-making power over the business.

Today, Amman spends time investing and mentoring other founders. What lessons does he impart to the startups he works with?

Prioritising efficiency in this way is a hallmark of the bootstrapped approach. This mindset helps bootstrapped founders reap the benefits when it comes to eventually mergers, investment or exits.