Bootstrapping vs Funding: The Dilemma
Here is the toughest question for an entrepreneur: Should I bootstrap my business, or make an effort and raise capital through a venture fund? While the choice rests on a myriad of divergent factors, it is important to understand these financing methods and how they can influence the future of a business.
In layman’s terms, bootstrapping refers to the act of starting a company with an individual’s personal finances and without external funding. If people are building up a company with whatever money they have in hand and from the profits they are earning, that is ‘Bootstrapping’. In contrast, ‘Venture Capital’ funding is when funding is put into a new business by venture capitalists as an investment in exchange for equity in the business. It allows a startup to move and scale quickly.
More entrepreneurs are showing up to shoot for the stars and go for the gold to fuel their startup by either adopting the guerilla-style bootstrapping path or by trying to raise funds. In determining whether entrepreneurs should bootstrap or seek external funding for their company, it is necessary to weigh up the pros and cons associated with a plethora of significant factors and decide which is the better fit.
There are several external factors that the company must keep in mind while making a funding decision. Suppose a company is functioning in a highly competitive market, like Uber or Slack, this means that they have to scale as fast as possible and become or remain a dominant player. It most likely implies that investment is required to afford growth in the near future, which makes it suitable for the company to opt for venture capital funding. In juxtaposition to the above market structure, a fragmented market where many mid-sized firms coexist, like Snappa and Buffer, funding may not be necessary. Under these circumstances, entrepreneurs can choose to bootstrap their company and grow it by themselves.
Let’s walk through the internal factors that help in deciding between bootstrapping versus funding. The goal that the company strives to achieve affects their decision to bootstrap or seek external funding. For bootstrapped companies, the goal is generally to become more profitable whereas funded companies aim to maximise revenue growth and become the market leaders.
Next, if the company has the ambition to continue growing forever and founders want to stay with the firm, then bootstrapping is a viable option. On the other hand, if they are planning to exit in a couple of years, then raising venture capital money to scale faster may be the right choice. This is because venture capitalists typically invest with a target to exit in about 3-10 years. Since a bootstrapped company works with limited resources, its growth rate is slower in comparison to the funded companies that gain traction quickly. Bootstrapping becomes successful when a startup can sustain itself over a period of time. After initial hiccups, like investment arranged by the founder, the company starts making profits out of its products and services that carry the business forward. Needless to say, both can achieve good growth.
Now most importantly, when it comes to the freedom and the control of the owners, there is a lot more flexibility in a bootstrapped company. It allows gung-ho entrepreneurs to experiment with what they can do. They can focus on partnering with someone who brings in the required skill set and industry-specific expertise. The focus is directed towards a clear goal and there is no interference from investors who might have conflicting visions. However, the downside is that this form of financing might also place the entrepreneur under unnecessary financial risk.
On a similar note, the funded company’s ability to pivot is constrained. This essentially means that the companies have to consult with their venture capitalists in all the decision-making processes. In addition to this, it brings more people into the business with different ideas, expertise and varied backgrounds. Experienced investors can also act as mentors for young entrepreneurs, and guide them through tricky situations. But instead of owning a business, the founders usually end up owning just a smaller portion of a much bigger pie after going through multiple rounds of fundraising that continuously dilute their ownership.
In the realm of email newsletters, Atlanta-based MailChimp is a successful giant. Co-founders Ben Chestnut and Dan Kurzius started the company in 2000 from a bootstrapped dream and it became one of the biggest companies in its space with due course of time. The company was named Inc.’s Company of the Year in 2017 and till today it is still 100% founder-owned. Thriving startups like Mailchimp, Spanx, GoPro, Craigslist and so many more have bootstrapped their way to success and have gained mainstream attention that began to attract investors.
Conversely, RUSSSH started its journey in 2012 as GetMyPeon and was the only errand-running and delivery service in Mumbai, India. The seven-year-old bootstrapped company lacked the capital to fight competition. It could not offer great discounts like other emergent players, and to achieve success in a developing service market proved unnerving. Like RUSSSH, numerous bootstrapped startups such as LoanMeet, Woolpr and Koinex among many others could not survive in the market for long.
Furthermore, giving prominence to the best-funded startups like One97 Communications (Paytm), Ola Cabs, OYO, Snapdeal, Swiggy, BYJU’s, Big Basket and so many more that have funding totalling billions of dollars are flourishing.
Unlikely, Anki Inc, founded in 2010 by three Carnegie Mellon Robotics Institute graduates, focused on creating unique consumer products. The company’s total funding amount was $182 million. According to its long-term roadmap, it could no longer continue as a hardware and software business even after selling 1.5 million robot units due to insufficient funds. Similarly, Call9, Aria Insights, Stimwave Technologies, Oryx Vision, and many other companies sustained in the market for a very short period of time. Not to mention the world-famous case of Theranos!
At the end of the day, bootstrapping and funding both have their own benefits and drawbacks. There is no one option that is inherently better or worse off than the other. From a finance outlook, funding gives the startup more power to scale, but it also comes with high stakes. When it comes to bootstrapping, it makes it harder for entrepreneurs to scale their company, but while it might grow at a slower pace, there still remains the advantage of owning and controlling the whole pie.
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