Do angel investors ever encourage startups to stay 'bootstrapped'?

I may not be the best person to answer this as I am both my own start-up and my own angel. Bootstrapping definitely has it's advantages - it encourages the company to keep its costs low and keeps ownership limited to the original investors. The most compelling reason to stay bootstrapped is that it allows you to demonstrate that you can get to positive cash flow independent of access to external capital. The ability to demonstrate that you are a 'going concern' will give you more leverage when it's time to seek outside sources of funding.

We are in bootstrap mode now but clearly recognize that we will need to go for an initial round of funding within in 12 months. At that point, this angel will gladly share the success with external investors.

I have, in the past, had investors with a very strong desire to keep us bootstrapped. They want to minimize dilution and, I suppose, keep us operating a tight ship. That can be okay for some companies, but others may need significant capital and while it may be 'possible' to run w/o further external cash, it may actually damage the long-term interests of the company and, ironically, its shareholders. But some shareholders are just built with a hard bias to running lean and don't really think about accelerated growth. Or perhaps they don't believe in it - hard to tell.

At the end of the day, the board and the CEO need to come to grips with which strategy is best for the company. I'm one of those folks who would rather own a slightly smaller piece of something huge, than a bigger piece of a tiny business. But I still believe in running a tight ship. You can do both simultaneously.

Alan,

In today's market, access to capital is much more difficult for a pre-revenue startup because investors are much less likely to invest. As a result, I've seen many angel investors advise a company to bootstrap through proof of concept, rather than take investment capital earlier even though the investor would get a larger ownership in the business for the same amount invested. I think you have to understand the risk analysis that an investor considers in order for this to make sense. In my opinion, and I believe in the minds of most investors, the two most important risks are execution risk (can the management team do what they claim?) and market risk (will the customers actually buy the product/service at the price assumed?). It is better for everyone if an entrepreneur can mitigate these risks by developing a product that works and having customers buying or ready to buy, everyone is better served in the process. Then when the investment is made, more of the money can be used to generate sales and grow the business and everyone is rewarded.

These are all good points. I also think you need to look at the investor profile, whether you have a single investor with deep pockets or a spread of angels contributing modest amounts. The bootstrapping approach enables more time before more investment is required, and while a single angel investor may have the desire and financial ability to invest in future rounds to keep the company going and potect against dilution, many angles might not be so inclined. Hence the pressure to try and get the Company over the line to cash flow positive without dilutive new investment.

I agree with Simon that all the points brought up are good ones. My experience has been that all investors what you to get to cash flow positive with as little capital as possible. You are seeing more and more start-ups operating virtually, meaning as much as possible is being outsourced, or done without such as a for facilities they are working out of ones house, even through development of the product. I do agree it is critical that that you be careful who you take on as investors. You prefer them to be value added investors who can contribute more than just money.