Bootstrapping versus Venture Capital

Bootstrapping versus Venture Capital

Starting your own business is a decision that brings a flood of questions.

One of the first is how to finance the new operation. As a founder, you are faced with a couple of options.

You could start by 'bootstrapping' the business. That means you fund the enterprise yourself, or reach out to family and friends for some investment help. Or you can sell some of your start-up for venture investment that may allow you to build your business a lot more quickly.

If you are leaning towards the bootstrapping option, you are not alone. Research from the Global Entrepreneurship Monitor found that 83% of startups globally begin through self-funding and there is a lot to be said about this approach.

But how do you know if it’s right for your business?

Bootstrapping boot camp: The basics

Bootstrapping offers a number of advantages.

The entry barriers are low, especially if you are in a service business with low overheads. You can control the direction of the business, set the pace of expansion, and develop the culture you want. You will also find out very quickly if your idea is profitable. This is key; the biggest challenge of any new business isn't raising capital - it’s ensuring that you have a viable product that is in demand.

However, the earlier you look to raise investment, the more you will pay in lost equity.

If you are going to bootstrap, it is important to put good practices in place from the outset. Pick your team members wisely. Be focused on generating revenue quickly, while watching expenses and negotiating costs. Avoid credit card debt, which defeats the purpose of bootstrapping. Be prepared to take on all roles within the operation.

Outsource only the necessary, such as legal and accounting. Look into government subsidies or available tax breaks. Ask for favourable payment terms from suppliers. Vitally, make sure you are getting paid: invoicing is fine, but money needs to be coming in.

Be warned – bootstrapping is tough work. Prepare yourself for a lot of initial pain.

Inviting investors in: When to raise the stakes

Despite the advantages, bootstrapping isn’t always the right path. An investor can give a start-up legitimacy from the outset, and this can be a factor if you are selling to business customers. Another problem is it can be hard to hire good people to work for equity or low wages, particularly if they are coming from a stable job.

There will likely be a time when making the shift to an outside raise will make sense for the business to take the next step. Times of plenty can lull you into thinking funds will always flow into your bank account because that’s been your experience so far, but the cruel reality is that capital sources can dry up overnight with no warning.

But, if you can put off raising venture money, it will allow you access to more attractive terms. Even a few months can make a stark difference.

A company with no revenue won’t be valued as much as a company with early traction, translating into larger infusions of money. In the initial stages, the difference between no revenues and even a minor income can be enormous.

Venture capital can be crucial for scaling up businesses. But capital should be viewed as a means to grow, rather than the end goal.

The practical reality of a start-up is creating a product or service that meets a market need effectively.

Bootstrapping best practices

If you’re going to bootstrap – get some good practices in place. Here’s a checklist to make this route work for you:

• Pick team members wisely
• Be laser focused on how to generate revenue quickly
• Adopt a cost-conscious mindset: always watch expenses and negotiate costs
• Be prepared to take on many roles to manage costs
• Only outsource what’s absolutely essential, such as legal and accounting
• Look for government subsidies and tax minimisation strategies
• Make sure you’re getting paid: invoices are fine but money needs to come in the door

Finding ways to fund your vision calls for creativity, and resilience. Bootstrapping may be a challenge, but it can pave the way to you making your business even more attractive to potential investors down the line.