A common dilemma for startup founders is to bootstrap their business or go for external funding to accelerate growth. This is a significant decision that startup founders make that determines the course of their business, their own financial growth and personal fulfillment at the end of the day.
Let’s understand the ins and outs of bootstrapping and VC-funding a startup that impact its growth and sustainability.
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Bootstrappers are entrepreneurs who take an idea and use talent to build it into a business without the backing of investors. This breed of entrepreneurs “make it” without any external capital or resources. It takes great determination, work ethic, commitment and single-minded focus to achieve business success with bootstrapping.
Instances where bootstrapping is necessary
Sometimes, founders choose to bootstrap because they don’t want to be restricted by investors’ opinions and strategies that may or may not match their own. However, bootstrapping is necessary for B2B startups because sales cycles are long, and it’s hard to ramp up sales by investing more.
Also, if you don’t need to grow the company to be profitable by scale, bootstrapping can be easier and may be the preferred option.
The Definitive Guide on How to Bootstrap Your StartupEntrepreneurs use a combination of methods to minimize the amount of external investment they might need in the form of debt and equity financing. Some of these methods include:
Companies That Succeeded With Bootstrapping
Many successful giants of companies around us were once humble bootstrapped startups. Here are a few of those:
Having said that, we would like you to know that there’s a bigger world out there in terms of startup funding. Before getting into the discussion about Bootstrapping vs. Venture Capital, get to know about the many types of startup funding available in the entrepreneurial space right now.
Related Reading: 6 Types of Funding Every Startup Should Know About
Venture capitalists invest in startups, focus on growing the company’s valuation and aim to achieve high growth and monetary profit for themselves. Startups backed by VC funding often have the potential to outperform their peers in a high-growth industry or increase their market share exponentially in a modest-growth market.
Instances where VC funding is necessary
VC funding is the right way to go for a startup trying to sustain itself in a market with a dominating organization, such as in the case of Walmart, Amazon, Google and Facebook. Or, when founders need to grow the company to get the scale they need for profitability, they consider VC funding to drive that growth.
Methods to VC-fund a startup
Here are the various methods of VC financing:
Related Reading: Your Guide to Investor Outreach for Startup Fundraising
Bootstrapping a startup is far more complicated than it seems. It can work for you if you’re willing to put in the work and money into it. If you can pull it off, it can bring more rewards for you. But that doesn’t imply that bootstrapping doesn’t have any downside. Before jumping into it, weigh your pros and cons, gauge your risk appetite, identify your goals and then make a decision whether to bootstrap your startup or not.
Option to raise VC funds later
According to Kurt Beyer, a lecturer in entrepreneurship and innovation at UC Berkeley’s Haas School of Business, even though bootstrapped startups don’t fit into the traditional Silicon Valley mold, a few VCs are looking to invest in these companies. Investors may prefer to invest in bootstrapped companies for many reasons, including:
Given the countless other reasons VCs may prefer backing bootstrapped startups, bootstrapping allows for the option of raising funds later.
Build a resilient business
Bootstrapping proves the resilience of a business and its founders like nothing else. Founders who bootstrap their startup do so on a minimum budget, without any external support or resources, and get through based on good decision-making, effective hiring and pure entrepreneurial skills.
These companies are often based outside the wealthy Bay Area, which has a large established tech ecosystem. So, founders do a lot of hard work getting access to technical talent. They face many challenges and stay committed to their business, building resilience in their own leadership and the company.
Related Reading: What Does Strategic Resilience Look Like for Startups in 2022
Low entry cost
Bootstrapping a startup takes all you have. But the cost of entry is low. You don’t have to first pitch to investors before you take off. You start building your business up efficiently and know the day-to-day costs. That way, you start a business with little to no pre-requisite from an investment standpoint and operate on a lean business model.
Focus on building the business
The fact that you don’t need to strategize and build a plan to raise VC funds means you can concentrate fully on the core aspects of your business, such as business development, marketing and sales.
Founders who get VC funds are compelled to focus on growth acceleration instead of business building for the customers. Investors and not the customers are their priority.
Cash flow issues
If a bootstrapped startup doesn’t generate enough revenue, it could land in a difficult position. Since bootstrapped companies don’t take hefty investments from venture capitalists, they often find themselves weighing the pros and cons of decisions such as hiring, business development, and how much to invest in each.
Cash flow issues can become an opportunity for business resilience and frugality if the founder possesses rich business acumen and leadership. In the worst cases, a startup can stagnate and perish due to the lack of funds.
Equity issues amongst founders
Equity issues spring up when multiple founders are involved in a bootstrapped startup. An imbalance among founders in capital/time invested or the experience they lend to the business can cause disharmony or adverse tax consequences.
In cases where personal and business funds are not separate, it can help to record-keep founders’ capital and consult an attorney to ease any conflict.
Risk of failure
When profits generated by a bootstrapped company are not enough to cover the operational costs, the risk of failure is high. This risk is more pronounced as the money invested in the company didn’t come from a wealthy investor but a founder who possibly gave the business their all.
All risks and issues in a bootstrapped startup become personal risks and issues of the founders as everything falls on their shoulders. Therefore, another challenge of bootstrapping a startup is handling the stress that comes with it.
When you are focused on building your business from the ground up, you have little time left to network with other entrepreneurs. Partners at a venture firm spend a lot of time building and growing their network to ultimately help the companies they invest in. Access to this network can fast-track your growth and put you in touch with the right people at the right time.
The “People” part of the equation comes in handy whether you want to build new partnerships, fill up your lead pipeline, boost sales, hire top talent or raise another funding round.
Resources to accelerate & scale
Venture capital can amount anywhere between $100,000 to over $25 million for more mature startups. Startups can also raise VC money several times to accelerate business growth and pursue opportunities continuously.
Besides monetary resources, experienced investors bring along insightful leadership. They augment the experience of the founder in scaling a company and solving its pressing challenges.
Strategic funding is a lucrative way to obtain capital from potential clients and prospective companies that may want to acquire you. For instance, Lyft’s investment from General Motors falls into that category.
Companies seeking strategic funding form a long-term strategic alliance to work together on a common agenda that benefits both.
Attract top talent
What got you here won’t get you there. The team that helped you start up may not be the one to help you scale and grow. Getting VC funded puts you in the limelight and enhances your credibility as a business to attract top talent.
VC firms help you get the right people through the door. Many top performers consider joining a VC-backed startup less risky and more lucrative than a traditional one with no external funding.
Focus shifts from business building
Fundraising can take months and essentially distracts founders from managing the daily operations of the business. Often founders make the mistake of starting a fundraising campaign when all their resources are exhausted, meaning they now devote nearly all their time trying to achieve VC funding. By starting the process earlier, entrepreneurs can continue to manage their company whilst raising funds.
Cost of financing
Giving up equity in your business is more expensive than taking out a loan. The cost of equity comes to the fore only when you sell the business. VC capital offers so much more than money, but the decision needs to be well thought out if other forms of financing are available.
Extensive due diligence
Venture capital partners extensively and exhaustively screen startups for their technology and business fundamentals. Then they conduct a more thorough review of the startup team’s background and the company’s legal and financial standing. This process yields some advantages but can take up to months and a lot of effort.
Pressure to grow
VC firms aim to grow their investment in your business. That only happens when the startup can grow rapidly, which puts immediate pressure on a startup founder to scale. Founders can manage this stress by aligning themselves with the investors’ goals and delegating when appropriate. The pressure to grow can be enormous for some founders, nevertheless.
You lose leverage in negotiations
Often startups seek VC funding when it’s the only option they have. In these cases, startups have no leverage over the terms of investment and end up giving away too much for too little or compromising on their North Stars. This can be mitigated by starting the process of raising VC funds when you still have a runway and some leverage.
Here are the primary factors that dictate whether a startup founder should bootstrap or go for VC funding.
Companies often end up following a hybrid approach where startup founders self-fund their company for a while as they hunt for the product-market fit. Revenue from early customers helps them stay afloat and refine their offering.
Then, when they are in their prime, these companies go out for VC funding with leverage and a better negotiating position.
Give this piece a re-read and decide for yourself. If you need some more help to identify which funding round your startup needs to raise and when, we hope the blog below helps you clear your doubts.
Also Read: How to Know Which Funding Round Your Startup Needs to Raise and When
Still at sea about the right approach to fund your startup, help is always available. Reach out to expert consultants at KiwiTech to receive guidance through the fundraising process.
Meanwhile, you can also stay informed about the latest developments in the Venture Capital and Startup Funding space. We’re sure our Learning Centre will be of great help.