From OnStartups.com comes another nice post from Dharmesh Shah. I love reading his writing, he has a great way of expressing what many of us already know. Everyone loves to hear reassurances of their own ideas, to hear that other people agree on “how things really are.” I suppose I am no exception.

Here’s a nice snippet:

“Given that you have a finite amount of cash, how long your startup can survive is a function of how much cash you put in (revenues + funding) and how much you take out (expenses).  You’d think that a venture-funded startup would be more likely to succeed, because it has longer to “figure it out” (i.e. more time to get to success).  But, I’m not sure that’s true.  What ends up happening is that VC-funded startups tend to increase their expense-base such that their time horizon is actually pretty short (about 1.5-2 years on a Series A funding).  On the flip-side, a bootstrapped startup might not have a large influx of cash, but might actually have more time to figure things out.

As an example, my first startup was bootstrapped.  No VC funding.  We did things the old-fashioned way.  We charged people money, and spent less than we made.  We were profitable from our first year of existence (and remained that way for 9+ straight years).  We were profitable, because we had no choice.  How much we spent was always a function of how much we made.  In the long run, we didn’t grow as fast as we might have otherwise, but overall we succeeded. 

Contrast this to a couple of venture-backed competitors of this bootstrapped startup.  They had each raised $25MM+ in venture funding.  Of course, this was in the midst of the bubble, but the lesson is still similar (it’s an issue of magnitude).  These companies ran through their cash, and couldn’t get funding to keep going.  They failed.

This is just one data point, and it would be silly to try and generate any conclusions from it.  But, it does generate an interesting idea:  Perhaps startups should simply be trying to give themselves enough time to figure out what will work.  And, the time available is not a function of the amount of cash raised, but the amount of cash being consumed.  Profitable startups don’t consume cash — they generate it.  Hence, they’ve got more time.”