There are many ways to capitalize a tech-enabled service business in its formative stages. Angel capital and venture capital are frequently sought after, but sometimes difficult to come by sources of capital. Angel capital and venture capital are appropriate for many early-stage businesses, particularly in winner-takes all markets where an early product, user base or other competitive advantage can compound over time leading to a disproportionate market share.

As a growth-stage investor, we see a large number of previously venture backed businesses whose performance ranges from floundering to crushing it.  It is admittedly difficult for us to structure an investment in a previously venture backed company that “works” for the management team and the prior investors. In the case of a floundering venture backed businesses, the existing investors are more likely than not “under-water” on their investment, but reticent to recapitalize by converting preferred stock with liquidating preferences to common stock.  In the case of a venture backed business that is crushing it, the investors may have valuation expectations that are odds with ours.

It is no surprise that, over time, these dynamics have naturally shifted our investment efforts toward entrepreneurs that have – either by choice or lack of access to venture capital – chosen to bootstrap their business. We have tremendous admiration for all entrepreneurs, but bootstrappers have a special place on the pedestal we’ve reserved for entrepreneurs.

There are so many attributes of bootstrappers that we admire. A short list follows:

• Engagement in Customer Success: I have consistently seen that bootstrapped businesses are engaged in the success of their customers at a very high level. After all, when your only source of capital is your customers, you will do anything and everything in your power to make sure that source of capital is well-served.
• Focus: Bootstrappers typically have a maniacal focus on the small number of things that matter most to their business. Bootstrappers don’t have the time or money to do frills. But they get the basics that matter to their business really right.
• Humility: Bootstrappers aren’t in it for the notoriety or glory. They are in it to build a fundamentally sound business. I’ve consistently seen high-levels of humility from entrepreneurs who have bootstrapped.
• Respect for Capital: Well covered by Jack and David’s thoughts but worth repeating.

Many entrepreneurs exhibit these characteristics, whether they access venture backing or decide to bootstrap, so this isn’t an indictment of venture backed companies or entrepreneurs. However, when we engage with an entrepreneur that has bootstrapped their business, we find we spend less time qualifying the entrepreneur’s motivations and objectives than we would otherwise.

The other dynamic we like about bootstrapped businesses is that they don’t need to take capital. As a result, when an entrepreneur running a bootstrapped business considers taking growth capital, there is a wonderful built-in self-selection process at work. A bootstrapped entrepreneur will only take growth capital if they believe that the access to capital will help them create more value for themselves than if they pass-over the opportunity. A bootstrap entrepreneur who takes growth capital is saying:

I can create more value for myself with this capital than I could otherwise create.

Conversely, an entrepreneur who chooses not to take growth capital is saying:

I cannot create more value for myself with this capital than I can otherwise create.

These built-in “gut-checks” make our job evaluating investment opportunities a little bit easier.

A sidebar: The guys at Basecamp (formerly 37 signals) have been long-time proponents of bootstrapping, despite their proximity to the epicenter of the venture capital world, silicon valley. They even have a list of bootstrapped businesses that are Bootstrapped, Profitable and Proud.

Cheers to all entrepreneurs. And to you bootstrapers, you have a special place on our pedestal.