Launching your start-up is one thing but growing your venture leads to one of the most important decisions you may have to make in your start-up journey; whether to bootstrap or seek inventors.
In this article, we take a look at the advantages and disadvantages of both so you can decide which method is best for you.
Here goes…
What is Bootstrapping?
Before we take a look at the advantages of bootstrapping versus seeking external funding we need to ask what exactly is bootstrapping?
In simple terms, bootstrapping refers to the process of growing your business organically using your own money or cash flow.
This could mean using cash flow from the business to re-invest into the business growth, using savings or even working a job to help fund the growing company in the early stages.
Pros of Bootstrapping
1. Full Control:
The main benefit of bootstrapping is full control. In the early stages of your venture, you may want to grow and set the direction of the venture without the influence and undue pressure of investors.
This can be extremely important if you have a particularly unique venture that investors are unlikely to understand or see value in until market conditions catch up to your particular use case.
2. Equity Preservation:
Since you are not taking on investors you will retain one hundred percent of the shares or equity in the business. This could be extremely valuable should there be an opportunity for profits or acquisition in the future.
3. Discipline:
Bootstrapping your start-up forces you to be disciplined not only financially but with all the resources of the company. Counter-intuitively, this could lead to more creativity and problem solving in the vital early stages of your business.
A disciplined mindset forces you to minimise losses and even make a profit, rather than relying on external funds to cover losses.
4. Simpler Start:
Raising funds is not an easy process. Less than one percent of start-ups manage to raise external funding. Ethnic minority founders fare even worse with less than one percent of those one percent managing to raise external funding.
Investors will want to put you through a due diligence process and you will need to create a pitch-deck or even a full business plan in order to pitch your idea to them in person.
All of this takes time which can be critical if you are a fast-moving start-up.
Without a fundraising round, you can simply begin your start-up right away. No need to seek permission from investors.
Read this article on start-up funding challenges for ethnic minority founders:
Cons of Bootstrapping
1. Limited Resources:
Without investor capital, growth of your venture might be incredibly slow. There is also the risk that better funded competitors will outperform and leapfrog your venture in the marketplace.
2. Higher Personal Risk:
Bootstrapping essentially means you are putting your own money on the line, it’s not for the faint hearted.
If your venture fails for whatever reason, the financial loss is yours alone.
3. Burnout Risk:
Launching and running a start-up is not an easy task. Launching and running a bootstrapped start-up is even more demanding.
Bootstrapped founders may find themselves wearing multiple hats without help and may become overwhelmed by the sheer volume of tasks.
What is Seeking Investment?
Seeking investors often means raising capital from VCs, (venture capital firms), angel investors, crowdfunding platforms or even friends and family.
This external funding will be provided in exchange for equity or shares in your business. Sometimes it may be useful to raise funds in exchange for debt but it will mean you will have to pay the funds back at some point.
With equity fundraising there are no regular repayments, the investors get their money back via the shares or the equity they own in the company.
Pros of Seeking Investors
1. Capital:
Having capital available to a new business is essential. The capital can be utilised to hire top talent, scale faster and market effectively. Venture funds often have hundreds of thousands if not millions of dollars to invest in early-stage start-ups.
2. Support:
Many investors not only come with funds but also with experience in the market you are looking to break into.
This could mean you gain valuable insights and support to help grow your venture.
They may also bring valuable contacts to open doors and make your entry to market easier.
Most importantly, investors may prevent the common pitfalls many start-ups make when launching their venture.
3. Shared Risk:
Should things go wrong you will not be the only one losing out as the investor will also have significant sums at risk.
Having an investor means you will not be risking everything on the success of your venture.
Even if the venture fails as long as you have acted appropriately you may gain investment for another venture further along the line.
4. Credibility:
Start-up founders gain considerable kudos for raising funds. Far more kudos than when bootstrapping.
Securing large investment funds with high-profile investors can work wonders for your brand’s reputation and make it easier to attract partners and even customers.
Read our article on how to find investors here:
Cons of Seeking Investors
1. Loss of Control:
The big downside of seeking investors is loss of control. Taking on board investors will mean giving up equity and most importantly influence.
Major decisions will more than likely require investor approval and your initial vision may be streamlined or compromised.
Some founders may even find themselves eventually ousted from the company should the requirements of the venture outgrow their skills set.
2. Pressure for Rapid Growth:
Another issue with investors is many will require large and quick returns on their investment.
This can lead to undue pressure to monetise leading to short term growth strategies that could damage the brand.
There may also be pressure to sell the business early so the investor can make returns on the exit.
3. Time-Consuming Process:
Raising capital takes time. It can take months or sometimes even years. You will need to create pitch decks, answer loads of questions and possibly deal with multiple rejections.
4. Dilution
Each time you seek funding it reduces your stake in the company since you are giving away a percentage of your company in return for funds.
Over time, you may find yourself owning less and less of the business.
What’s right for you?
There is not an easy answer to this question. Things you should consider include:
If your business model is brand new and has not yet been tested in the market you may want to bootstrap first to prove that your concept works and then seek investors.
If your business model requires the purchase of high-value equipment or requires talented staff to help develop the product, venture funds may be the best and only viable solution.
You may also need to consider the competitors in the market. If your competitors are funded and are growing quickly it may be essential that you too raise funding to avoid being left behind in the dust.
However, if there are few competitors you may have more time and freedom to bootstrap in ‘stealth mode’ and only seek investors once you have fully developed your concept and tested it for traction in the marketplace.
Also, if you require full control to guide your venture according to your unique vision, bootstrapping could be your only viable option.
Only seek investors if you are willing to compromise on the control and direction of your venture.
Final Thoughts
Both bootstrapping and seeking investors are both valid paths to success. The important thing to consider is whether the approach taken aligns with your core values and vision for your business.
It’s important to know your goals and understand your business needs. Do not just be tempted by the lure of a big cheque. Remember any external funds comes with strings attached.
Ensure you make decisions based on your long-term vision and success of your business.
Whatever path you take you will need to show relentless execution, customer focus and vision to turn your dream into reality.
Good luck!
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