“Bootstrapping vs Venture Capital” are terms people use in business circles while thinking of raising funds.
Here are some practical things to consider when deciding if you want to raise capital and what kind of capital.
What Is Capital?
Capital includes the cash and other financial assets held by an individual or business, and is the total of all financial resources used to leverage growth and build financial stability. Capital can include funds held in deposit accounts, tangible machinery like production equipment, machinery, storage buildings, and more.
Venture capital is only applicable to a very small subset of businesses that have the right, high growth profile where the risk-reward profile makes sense for that type of investor.
It’s important to understand all of the different types of capital out there and identify those that might make sense for your business.
Why Do I Need Capital?
New businesses that are still in the startup stage will need funding to get off the ground, and good cash flow is essential to a small business. While most directors will use their own funds to start the business, very few manage to entirely self-fund the company to profitability, and will therefore have to seek external funding. There are a variety of options for external startup funding, including bank loans, borrowing from family and friends, equity investment from a business angel, crowdfunding, and funding grants.
A loan to start a business can be used for everything from buying stock to marketing to hiring staff, but startup funding can be difficult to secure and many traditional finance providers will require lots of information, such as a detailed business plan.
What Kind Of Business Do I Have And What Are Your Ambitions?
It all depends on the size of your business as well as ambitions, For example, if you open a coffee shop and your goal is to become profitable for years, you won’t want to or won’t be able to get venture capital. But you might want a small business loan to buy more inventory or hire more employees. However, if you want to become a smart condo developer you’ll probably need and be able to access venture capital (if you have any business traction at all) because of the market size and possible outcomes of your business.
There are no “official rules” for any of this. For example, Blue Bottle coffee started out as an individual coffee shop but decided its ambition was to become a large brand and scale rapidly. So its business profile changed from one of being more well suited for a small business loan to one that might be appealing to a venture investor.
Defined: Bootstrapping vs Venture Capital
A bootstrapped company is one that relies primarily on the company’s cash flow to grow the business, taking on little investment (less than $20m depending on the circumstances). The money raised mainly comes from FFF (family, friends, and founders) and angel investors, but could also come from a small VC round.
A VC-funded company, on the other hand, is not dependent so much on the amount of money raised, but rather the dependency of a company on VC money to fund future growth, regardless of the amount the company raised.
Should You Bootstrap Your Business?
The default funding strategy is bootstrapping, so the question remains, should you maintain that funding strategy or take on VC money?
Some startups might take for granted that they have a choice between growing with and without VC money. In the general startup narrative, taking on VC money seems to signal prestige or success for the business.
Consider the other important variables:
- Control. As a founder, how important is controlling the outcome of your business to you?
- Risk. How much risk are you willing to take on as a founder?
- Potential size of outcome. How big can your pie reasonably get?
- Competitive landscape. Do you need an insertion of VC money in order to reasonably compete in your space?
Before you resolve to take on VC money, consider the below thoughts.
Should You Take Venture Capital Money?
If your company is doing well enough to attract the attention of VCs, you have a business to be proud of. But before you start a Series A, you need to know what’s at stake.
When You Should Take Venture Capital Money
Taking on VC money might make sense for your company if:
The market opportunity is massive. When the market opportunity is large, there is enough space for your business to grow to a multi-billion-dollar company, in which case a smaller piece of a bigger pie is worth the trade-offs.
Innovation costs are high. When initial innovation is costly and requires an infusion of capital to get off the ground, VC money might be your only option.
The market is highly competitive and product differentiation is difficult. When competing products aren’t intrinsically different, companies rely on sales and marketing to differentiate the product for customers. Scaling sales and marketing for rapid growth will likely require capital.
Network effects are key to success and require speed to market. If the first to market wins the entire market due to the value of the network, then a VC can help you gain customers quickly and strengthen the network effect.
The founder has valuable yet underutilized skills. If the founder has special skills that currently aren’t being used because they’re having to focus on other aspects of the business, venture capital can help expand out the management team and give that founder more time to focus on core aspects of the product/business.
To sum up:
Score:
< 30: Bootstrapping.
>40: Fundraising.
Between 30 ~40 More consideration of the pros and cons of both options before choosing.
Also Read : Does Your Business Need An App? You Bet It Does!
Conclusion
Stories from Silicon Valley tell us how venture funding catapulted startups into stardom on a fast trajectory. Whatsapp, Groupon, Snapchat, Alibaba, and Zynga are some of the examples of spectacular success with venture funding. Whatsapp is a great example of the perfect venture case: a consumer product that was simple to useand that simply needed to reach as many users as quickly as possible to be here to stay.
Talking to entrepreneurs who have tried and succeeded (or failed) in both approaches will be a valuable exercise to help collect your thoughts. I personally consider this to be an enriching experience on many levels. Getting some professional help from experts in this space and strengthening your advisory board with members who have the right experience would help you to make informed, confident choices about your business and about choosing bootstrapping vs. venture capital.
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