Acquisition/Investment vs. Bootstrapping

entrepreneurship ycombinator

Fri Aug 15 12:41:00 -0700 2008

Everyone loves a good flamewar between opinionated, respected internet personalities. So like everyone else, I pulled up my chair and got out the popcorn when Paul Graham and David Heinemeier Hansson started going at it. Watching these titans hurl boulders at each other is guaranteed to be a good show.

It’s particularly relevant to me because these two guys have probably contributed more thought leadership to my current venture than any non-founder. Heroku is a Rails deployment platform, so the Rails Way (aka the David Way) runs deep throughout our technology design. And since our company is Y Combinator backed, we got three months worth of Paul-Graham-direct-IV-drip-to-the-brain during our company’s infancy. When these guys disagree intensely, that’s pretty interesting to me.

The summary, in case you haven’t been following it: PG says that investment and acquisition paths let founders focus on their strengths, which is innovating technology products in high-risk markets. DHH says that “made to flip” companies are shallow, unsustainable, and inherently riskier than sustainable profit-oriented businesses.

Having done three 37signals-style consulting-bootstrapped ventures, and one Y Combinator and VC-backed venture, I’m in a unique position to compare the two. It’s hard to separate out the variables - naturally my later ventures have done better than my earlier ones, since I have more experience and wisdom about business - but off the cuff, I’d have to say that being investment-backed is a lot better.

For starters, there’s being able to take a paycheck during the development cycle of the product, instead of limping by with the distraction of client work.

But maybe more importantly is the sanity check. When you’re doing your own thing, you have very little feedback on whether your path makes sense. You’ve got users/customers, sure. But for any random thing you might build, you’ll always be able to find some weirdos that want it, and maybe are even willing to pay for it. Whether those people represent the vanguard of a sustainable customer base, or whether they are a niche too tiny to build a real business on, is impossible to tell early on.

But convincing investors of the viability of your idea - enough to place a monetary wager on it - provides early confirmation that you’re on a viable path. It may even provide some course-corrective feedback. This is why VC-backed companies tend to get more respect than non, all other things being equal. A firm whose sole purpose is predicting technology trends believes that there is a reasonable chance that this company’s product will be the next big thing.

As for the acquisition path, it seems to me that this is just a matter of economic efficiency. Founders are best at innovating new solutions, totally from scratch, in environment of maximum freedom. Big companies are good at managing proven technologies and growing them into larger markets and making them sustainable long term. Both of these things are incredibly valuable; in fact, each would be nearly worthless without the other. Why not assign each task to the type of person and organization best suited to do it? That’s what the startup acquisition path does.

Another way to decide the best path for yourself is to look at your personality type. Geoffrey Moore’s Crossing the Chasm (which is the best book on business I’ve ever read, and I’ve read a lot of them; if you haven’t read it yet, drop everything and go buy it now) describes two personality types relevant to business: pioneers, and settlers.

Pioneers are all about the early chaos. Forging a path from nothing. Limited resources, risk, experiment - that’s what gets their blood pumping. Like the pioneers who struck out across the American west, they’re rugged individualists who feel caged in in structured environments. Successful startup founders are almost always pioneer personality types.

Settlers like consistency, routine, solidarity. They derive satisfaction in taking a proven product to the next level of success. Taking a known problem and improving its efficiency, bringing it to a wider audience, building process and infrastructure to make it sustainable long term. The people who do well in established companies are almost always settler personality types.

Settlers are uncomfortable in the early chaos of a startup, and their presence would be likely to damage its chances of success. In this environment they become wet blankets, stifling innovation and the necessary experimentation that it arises out of.

And pioneers are uncomfortable in the structured environment of an established business, and their presence is almost always destructive to its long-term success. In this environment they become loose canons, rattling cages and disrupting efficient processes to fulfill their personal craving for dynamism.

So getting investment, going full bore on a risky product for a few years, and then getting acquired and moving on to the next startup is perfect for pioneers.

Whereas building a more predictable, less groundbreaking product in a known market, with steady long-term profit potential and full ownership and control, is a route more suited to settlers.

Both personality types are vital to a healthy business and to a healthy society. The trick is to know which one you are, and put yourself in the right environment, where your natural tendencies will be an asset instead of a disruptive force.