It seems like there has been a lot of recent discussion on the “right way” to fund a startup. The “current right way” seems to be bootstrap, with a healthy dose of venture capitalists vilification. By bootstrap I mean funding yourself based on profits from customers. By venture I mean taking money from investors, whether it be your parents, angle investors, or established venture firms.

Joe Kraus has been widely quoted on the current cost of starting a company. He points out we are in a time when it has never been cheaper. In fact, in downtown Palo Alto you would have trouble throwing your new blackberry 7290 (with bluetooth headset) without hitting somebody starting a company. After surviving a successful bootstrap company (Kintana), and now working at a venture backed company (Jotspot), here is my position:

There is no right way or wrong way — they are just different.

Take a few minutes to recover from that strong statement. Let me know when you are ready to go on.

OK. So you made it past that crazy, outlandish, definitive statement. Now that you have recovered, let me explain why it is so non-committal. Asking whether a company should bootstrap themselves or take investors money is a little like asking if you should take a bus or train to get from New York to Boston. Both have advantages, both have problems, and both can get you to Boston. They are just different experiences.

One of the most important considerations when starting or running a company is what natural behaviors will result from the decisions you make. For example, put all your employees together in cubes in one large room, people will naturally collaborate. If you put people in offices, you will have to make more effort into fostering collaboration. This is not to say you shouldn’t put people in offices — it just means it drives a specific behavior you might have to combat.

The reason I stress natural behaviors so much is because of the effort it takes to address negative behaviors. Never will you have harder choices to make about where you spend your time than at a small company. To be successful, it is critical you spend your attention on the right problems. Different natural behaviors result for a company that is bootstrapped than a company that has taken venture money. Both styles of funding have a set of negative natural behaviors that will require time and attention.

Discipline

In a venture backed startup you have give regular updates [1] to a group of people who gave you millions of dollars [2]. This creates an amazing amount of discipline. Any company can have a board, but not board is more captive than one with money in the game. While founders and management can enforce discipline they are often too close to the problem. They can be too understanding. There is a reason that track coaches ride along next to their runners when training. If they ran with them, they might know how much pain they are in and wouldn’t be as apt to push them.

Positive natural behavior: venture

Change

Rapid change is much easier in a bootstrapped company. Because they are most often run by (hopefully enigmatic) founders, strategies can change quickly and without signoff from a board. To make major changes in strategy at a venture backed company is harder because you have to convince the board it is a good idea. While this can be a good thing, it also means it can be much harder to reinvent yourselves if you see a unique market opportunity that isn’t in line with your initial vision.

Positive natural behavior: bootstrap

Contacts

A silicon valley lawyer who has represented hundreds of startups during their funding rounds once told me had never seen a startup get funded with more than two degrees of separation between the venture capitalists and the founder. This is true (but to a lesser extend) in business as well. If you think a good product is going to make you successful, think again. A good product simply puts in you in a place to potentially be successful. Your success as a company will be driven by the relationships you form and the contacts that can help you establish partnerships.

Positive natural behavior: venture

Experimentation

Money gives you the ability to experiment. While building a successful business in one area, you can experiment in another. Venture backed companies have a natural behavior of experimentation that comes from having defined funding. A bootstrapped company can do this as well — it is just harder because the natural behavior is to focus on the main revenue stream that pays the salaries. People often discount the stress of making payroll once you have a company of ten or more. This stress can make companies less adverse to experimentation. Experimentation is critical because companies rarely end up doing what they started out doing.

Positive natural behavior: venture

Frugalness

Venture backed companies are often freer with their money. This is no accident. When there is less money, people naturally spend less.

Positive natural behavior: bootstrap

Growth

Having money in the bank immediately gives you a great deal of freedom when it comes to hiring. When you have the opportunity to hire somebody who is great, you need the flexibility to pull the trigger. Rarely do these people come along when you planned. Venture dollars can also allow you to grow quickly to go after a market quickly. This means you can build the company you need, not the company you can afford.

Positive natural behavior: venture

Contrary to popular opinion, funding profile doesn’t have impact on product quality, business viability, customer service, teamwork, employee dedication, or probability of success.

The World Series of Poker this year had 5,800 participants. To get to the final table you had to be really good at poker, work really hard, and get very, very lucky. On average, the final table of players had to risk all their money ten times to get there. The success of a startup is similar — you need highly skilled people, a lot of hard work, and a ton of luck.

I realize this is an extremely unpopular opinion right now, but I prefer the venture funded startup. I personally find it much more enjoyable and I don’t mind combating the negative natural behaviors.

In the end, you have to decide what is right for you.

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[1] It is true that some start-ups do not give regular updates to their board. I never understood this. Who in his or her right mind would give somebody millions of dollars and then not meet with the regularly? That’s crazy talk.

[2] Yes, I did say they gave you millions of dollars. Venture isn’t like a loan. There is no guaranteed return on the money. If you are talking to a start-up that took money with terms that included a guaranteed return, run away quickly. Guaranteed returns are called loans and shouldn’t involve company equity.