Bootstrapping vs Raising Capital

Introduction

An important step in the entrepreneurial journey is to determine how you will fund your business. In this blog post, we’ll explore two primary paths: bootstrapping versus raising capital. In general, bootstrapping allows you to start, learn and maintain full control, but growth might be slower. On the other hand, raising capital provides access to significant funds and expert guidance, however involves giving up some control. One way is not right and one way is not wrong. Think of raising capital as a tool. Sometimes you need a hammer but sometimes you can get by with tapping it with a wrench.

It completely depends on the needs of your business on which path you should pursue. Let’s delve into the pros and cons of each approach, helping you make the right choice to kickstart your venture!

Bootstrapping

Bootstrapping is starting a business with your own resources and without seeking external funding or investments. While it offers independence and control, it also means being resourceful and creatively managing limited finances to grow your business. Operations may be lean while you are building your company.

Advantages of Bootstrapping:

 

1. 1. Full Control and Autonomy– When bootstrapping, you call the shots! Without external investors to answer to, founders can make decisions aligned with their vision and long-term goals, fostering a sense of ownership and independence.
   2. No Equity Dilution or External Obligations– Unlike raising capital, bootstrapping allows business owners to retain 100% ownership and avoid diluting their equity. This means you don’t have to share profits or decision-making power with external investors, enabling you to steer the company’s direction as you see fit without any binding obligations.
   3. Resourceful Innovation– With limited funds, creativity thrives! You’ll learn to make the most of what you have, finding clever ways to grow without breaking the bank. Do you use off the shelf products to build your prototype? Do you integrate with another company to complete your deliverable? There are many ways to deliver your early product without building out the final product, usually referred to as your Minimum Viable Product (MVP).

Disadvantages of Bootstrapping

 

1. 1. Limited Resources– Bootstrapping means starting with your own savings (or a small investment by friends and family), which might not be enough to support significant growth or ambitious projects. Bootstrapping often means working with limited manpower and technology, making it challenging to compete with well-funded rivals.
   2. Slower Growth– Without external funding, your business might take longer to reach its full potential. You may have to reinvest all early profits back into the business to allow it to grow.
   3. Personal Financial Risk– Your hard-earned money and time invested is on the line, and if the business fails, you might face significant financial setbacks. The burden and buck stops with you as the founder.
   4. Potential Burnout– Wearing multiple hats and handling everything on your own can lead to burnout and exhaustion. Be sure that you have a support system in place to handle difficult times. Whether that be a business partner or social support network, find a place that you can lean on when times get tough (and they will get tough).

Raising Capital

Raising capital is the process of securing funds from external sources to finance a business venture. It involves attracting investments from various channels, such as venture capitalists, angel investors or crowdfunding platforms. Depending on the amount capital and the stage of the business you are currently at will determine where to seek your needed funds. Keep in mind that the further you are along before seeking capital, typically the less expensive the capital costs you and your business. For example, if you are a brand new start-up and you raise capital, you will probably need to give up a higher percentage of your company to secure an investment. If, however, you already have an MVP and can show customer traction, the amount of equity and control you have to relinquish will be reduced.

Advantages of Raising Capital:

 

1. 1. Fueling Rapid Growth– Raising capital opens doors to substantial financial resources, enabling your business to scale quickly. With sufficient funds, you can invest in marketing, product development and infrastructure, accelerating your growth trajectory and expanding your market presence at a much faster pace.
   2. Previous Experience– External investors bring more than just money to the table; they often provide valuable guidance and expertise. They’re seasoned pros who can mentor you, share valuable insights and boost your chances of success.
   3. Shared Risks, Shared Rewards– By having investors on board, you’re not carrying all the weight alone. They’re in it with you, cheering for your victories and helping weather any storms.
   4. Networking Opportunities and Mentorship– Venture capital opens doors to powerful networks. Building relationships with experienced investors can offer networking opportunities, access to industry connections and valuable mentorship, helping you navigate challenges and make informed decisions for your business.

Disadvantages of Raising Capital

 

1. 1. Equity Dilution– Raising capital often involves giving up a portion of ownership in the business to investors. This equity dilution can result in the founders losing control and decision-making power as external stakeholders become involved in key business decisions.
   2. Intensive Fundraising– Securing external funding is a time-intensive process, requiring founders to pitch their business idea to potential investors, attend meetings and negotiate terms. This diversion of time and focus from the core business operations can delay progress and hinder growth. Be prepared to hear many no’s along the way.
   3. Investor Expectations– Once funded, startups are under pressure to meet investor expectations, such as achieving specific milestones or delivering returns on investment. This can lead to added stress and short-term decision-making, potentially impacting the long-term vision of the business.

Factors to Consider When Choosing the Right Approach

There is no one right an for a business on which approach to utilize in starting your business. There are many factors to consider that will affect your decision.

 

1. 1. Business Idea and Market Potential– Evaluating the viability and demand for your product or service in the market is crucial. Conduct thorough market research to understand the competition and customer needs to determine if your idea has the potential to thrive.
   2. Founders’ Financial Capabilities and Risk Appetite– Consider your personal financial situation and willingness to take on risk. Bootstrapping may require more financial sacrifice, while raising capital involves shared risks with external investors.
   3. Growth Rate and Time-to-Market Expectations– Assess how quickly you want your business to grow and whether you need immediate resources to capture market opportunities. Raising capital can accelerate growth, while bootstrapping may offer slower but controlled progress.
   4. Long-Term Vision and Exit Strategy– Determine your long-term goals for the business and how you envision exiting the venture. Raising capital may involve giving up some control and aligning with investors’ exit timelines, whereas bootstrapping allows you to chart your course independently. If you plan on operating a lifestyle business (a business that generates a healthy living but exiting is on the back-burner) then perhaps taking on an investor is not the best path. However, there are investors looking for a steady cash flow for their return, not just a significant paycheck at the end.

Finding the Middle Ground: Hybrid Approaches

Another approach is a hybrid model where you can identify what parts of a system work for you and which ones do not.

 

1. 1. Delayed Financing– As a founder, you can choose at which stage your company requires which resources. As mentioned earlier, it is usually less expensive to delay seeking outside financing as your company is further down the road in proving its viability. If you can acquire the resources to cobble together an MVP and generate initial interests from customers, you are much better positioned to negotiate better terms from an investor. Don’t think of raising funds as either/or. Think of it as if and when.
   2. Blending Bootstrapping with Strategic Partnerships- A hybrid approach that combines bootstrapping with strategic partnerships allows startups to access resources and expertise without sacrificing complete ownership. By collaborating with established companies, entrepreneurs can leverage shared strengths and reach a wider audience, fostering growth and mutual benefits.
   3. Revenue-Based Financing- This innovative hybrid model involves raising capital based on a percentage of future revenue, avoiding the equity dilution seen in traditional funding rounds. Startups can secure financial support while retaining control and flexibility, aligning the interests of investors and founders to achieve sustainable growth.
   4. Crowdfunding with Bootstrapping: Entrepreneurs can harness the power of crowdfunding platforms to validate their ideas, generate pre-orders, and acquire initial funding. Coupled with bootstrapping, this approach allows for an organic and community-driven startup launch while retaining independence and creativity. Think Kickstarter or Indigogo.
   5. Strategic Angel Investors: Leveraging the expertise of angel investors who align with the startup’s vision can be a powerful hybrid approach. Entrepreneurs gain not only financial support but also valuable industry insights and mentorship, propelling the business forward with the added advantage of strategic guidance.

Conclusion

Whether you choose to bootstrap or raise capital, remember that there’s no one-size-fits-all solution. Assess your business’s unique needs, your risk tolerance and growth aspirations. Both approaches have their merits, and success can be achieved through careful planning, determination and adaptability. It all depends on the type of business you are starting and how quickly growth is required to potentially utilize first-mover advantage. If you are starting a trades company, then it probably doesn’t make sense to raise capital, or for a venture capital firm to be interested in your business unless you have found a novel approach. If you are starting a 2 sided marketplace, eBay or Spotify, then unless you have access to resources already, raising capital is probably the best route. If you are starting a restaurant, you may want to enlist an angel investor if you can find one that aligns with your goals. It all comes down to aligning your long-term goals with what is currently available in the market-place for funding. Good luck on identifying your path.

Additional Reading

 

1. 1. “Bootstrapping Your Business: Start and Grow a Successful Company with Almost No Money” by Greg Gianforte and Marcus Gibson: This book focuses on the strategies and tactics entrepreneurs can use to start and grow a business without relying on external funding. It offers practical advice for those looking to bootstrap their ventures.
   2. “The $100 Startup” by Chris Guillebeau: Chris Guillebeau explores the stories of entrepreneurs who built successful businesses with minimal investment. This book provides inspiration and practical tips for those interested in pursuing a bootstrapping approach.
   3. “Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist” by Brad Feld and Jason Mendelson: While this book leans more toward venture capital, it’s an excellent resource for understanding the ins and outs of venture financing. Understanding both sides of the coin (bootstrapping and venture capital) can help you make informed decisions about your business’s funding strategy.