Raising Capital vs Bootstrapping, A Startup Founder’s Guide

You can read many compelling stories of companies that found success after relying on investors to get the capital they needed. But how often do you hear about company founders who bootstrapped their way to success, opting for modest surroundings while using their own funding with no venture capital and little to no angel investing?

If you’re the founder of a startup, take these points into consideration before you make the big decision on whether to raise funds from outside sources or do it all yourself.

Manufacturing Cost

Do you have a tangible product that needs manufacturing? Do you need to increase production to meet high demand? Whether you employ bootstrapping as part of your business model or seek a boost from venture capitalists, you need to examine the manufacturing costs and if there are any. If your product is in high demand, it may be appropriate to jump on the venture capital bandwagon and get money from investors to make increased production possible and take advantage of the demand. On the other hand if your business is service related or web based, you can build a website and partake in digital marketing with nothing more than sweat equity. 

Complexity of Business

A company’s complexity, whether high tech, bio-tech, or any other research driven market, can be a valid reason to seek venture capital rather than build from the ground up. Perhaps you have scientists working to cure a disease or solve a problem with a not-yet-discovered solution. Funding for research and development may be imperative for that company. If you have the skillset to make your venture successful, put in the work to get as far as you can, then raise the funds to build a team and get the resources you need for further growth.

Market Opportunity

Are you sitting on top of a huge opportunity that needs to be capitalized on swiftly? Do you face competitors that are looking to fill that market void? Is there something you can do that has a good shot at pushing your company to the top?

Perhaps you’re in a race to be “the real thing,” That’s where Coca-Cola was when it banked on its “Real Thing” campaign to win the Cola Wars and stay on top. Actually being the real thing helped them do so. (Although it could be argued, good marketing can turn that around).

If time is of the essence and you truly believe that you need to strike quickly to be first in the mind of the consumer, by all means, raise the capital and make it true.

Opportunity Cost

The costs of doing business includes opportunity cost:

“The loss of potential gain from one alternative when another alternative is chosen.”

Consider the opportunity cost of raising capital to grow your business. The process will take time and energy and may hold progress back in your business. The loss of potential gain in this scenario is the progress you could make in your business if you focused most of your resources on building the company rather than seeking capital.

Also, it may be a bitter pill for an entrepreneur to swallow, but you shouldn’t assume things will go your way. You may not get the valuation you need, get the funding at all, or you may not receive it in time to keep your company afloat.

Scalability

Anything can be scaled, providing you have a strong product or service and a strong business model. But are you positive you have figured out a way to do so? Are you in an industry in which scaling can be done in a timely manner, and is the market really there for you to scale? Forecasts can be tricky. 

It’s not always possible to build a market for your product in time to take advantage of venture capital. If your company still has some hoops to jump through, you could end up burning through your funding and end up having to give up more equity, only to find a solution after giving up most of your company to investors.

Profitability 

Can you bring your company to profitability? In the end, no matter how much you want to make a difference, you won’t be able to do so if you’re not bringing in the necessary revenue to grow. You have to make dollars before you can make change. If you don’t bring in profits, you won’t have a company through which you can make a difference.

Ideally, you should raise capital if you have a winning formula and you want to scale it. Unfortunately, most founders raise money to find that formula, which is a huge mistake. You want to raise funds to pay for results, not to pay for mistakes.

Don’t be the founder who hides weaknesses with capital. Make your mistakes on a smaller scale to avoid making them on a larger scale. Once you work out the kinks, slowly hire the people who can do what you can’t.

Even if you raise funds, don’t jump into hyper-growth phase. Use the power of exponential growth to make progress that keeps progressing.

In the end, you want to make sure to focus on results. Don’t do it for fame or glory or any other intangible cliche. This is the real world, and business must be tended to accordingly.

Make Your Own Way

Use these points for consideration, but don’t rely on the advice of others; find your own way. Business owners who raised their own funding may look back and advise people to look elsewhere for funding new businesses, while those who did not raise their own funding may look back and say fundraising is the best way. Because let’s face it, bootstrapping is exhausting. 

Everything looks different in hindsight. You can’t know for sure what the future will bring, but you can make smart decisions based on who you are and what your business is all about. Propel yourself into the future by using these guidelines and make a decision based on your own values.

by

Sean Dudayev is the founder of The Thinker's Tantrum and currently consulting dozens of entrepreneurs in their start up efforts. His passion is making the world a better place through consumer oriented business and writing about himself in third person.

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