You are all in with your new idea and ready to start doing business. Now you are faced with an interesting dilemma and you have to choose. Should you bootstrap tapping into your own reserves risking no one’s money but your own? Or should you seek funding, getting that much-needed money but giving up a piece of ownership or equity in return?
What’s the difference?
Let’s start with bootstrapping. It basically means using your own money, savings, or money you can produce on your own (like pre-sales) to create your business.
Bootstrapping comes with tons of points for it, and a few against.
- Having to find your own money to fund your business will give you grit, experience, drive and tenacity that you may not have to tap into if you have tons of cash at your disposal.
- It will force you to develop your ingenuity to find a sustainable model for your business.
- Money sometimes kills the innovation mindset. Your reduced resources will force you to spend smart, innovate and pivot quickly when something is not working.
- Bootstrapping will give you a track record, a proof of concept that your business is working. The valuation you will receive before proof of concept will be substantially less than the valuation you will receive after proof of concept.
- The focus is 100% on your business and how to make it grow, instead of focusing on chasing money.
- You don’t owe anything to anyone else, you don’t have to pay back and you remain 100% in control of your business and how and when you want to grow.
- Your growth can be slower.
- You must absolutely know when to stop if things are not working out. You don’t have a lot of room for trial and error.
- You can probably forget about that fancy Google-like office for a few years.
On the other hand, you have the possibility to seek investors who will fund your business. Funding can come in a few ways like angel funds or venture capital funds.
Angels usually have a fair amount of personal wealth that they use to fund ideas that they believe can and will turn a profit later, somewhere down the line.
Venture capital or VC funding is provided through a professionally managed fund and is typically for a larger amount of money than an angel investment.
- Getting funded provides market validation and sets valuation.
- It could potentially offer some liquidity to early employees.
- Funding also can provide prestige, which is not to be ignored, depending on which market you are operating in.
- It helps to accelerate growth and fight off competitive threats.
- Could potentially lead to that fancy office space, which can help with recruiting.
- You need to devote time and effort to prepare for receiving funding and chase potential investors. This is time that you need to take from growing your idea into a business.
- Funding money is not free money! It comes at a cost and that cost is usually partial ownership of your business and equity. This money can come with a combination of debt, loss of equity and fees.
- You are not the sole owner of your vision anymore. Investors will inevitably be involved in how the project is developed.
Is there an alternative?
You can always try crowdfunding. Crowdfunding describes a system in which many people give comparatively small amounts of money to help fund an idea.
However, depending on the kind of crowdfunding you choose, you might find yourself with increased debt or less equity.
Crowdfunding could be an alternative to Angel or VC funding when you need the funds quickly and cannot afford endless rounds of visits to banks or the offices of private investors.
It’s important to note that crowdfunding does not work for complex projects. The idea needs to be simple enough for a normal person to understand. And it’s usually an all or nothing approach, so if you don’t get your project 100% funded, you don’t get anything.
A few pearls of wisdom…
Before determining if you want to raise money at all, you first must decide how you would like to build your business. I would like you to consider the following:
- Everything comes with a price. Whatever you choose, you will have to give some to get some.
- If your business model can’t stand on its own, it probably won’t do much better with an injection of capital.
- Somebody once said that “money makes you more of what you already are”. The same can be said of your business. If your model is great, with more money your business will soar. But if your model sucks, more money will expose all the issues.
Before making any choice, know what kind of business you want, how do you want it to grow and how comfortable are you with giving away part of it.
You also need to know what kind of entrepreneur you are, how comfortable are you with risk, your ability to act, as well as to take feedback and advice. Know that all money comes with strings attached, and understand how comfortable are you with those strings.
If you would like to know my take on it, I highly recommend you to start your business bootstrapping. It is slower and might be harder, but you will learn what makes your business tick, you will be in the trenches making it grow and you will be able to validate your business model before moving your focus to chasing money. I don’t discourage seeking funding, but I believe bootstrapping is a solid first step into it. Nailing bootstrapping like a ninja will pave your way to nailing funding.
Would love to hear your thoughs on this! Let me know.