In the startup world, especially with tech startups that tend to attract the greater volume of financing opportunities, entrepreneurs have to consider how to fund their idea to get it to market. A lot of attention is given to finding the right VC, mainly because most new entrepreneurs do not have the cash flow to fund the launch of their new business or to at least test it in the marketplace to establish a minimum viable product or service idea.
So, what is “bootstrapping” and why should you consider it?
Bootstrapping is self-financing your funding requirements, at least through launch and perhaps early stage. Owners can retain full ownership and control over the fate of their company. My last startup, which we grew from bootstrapping our initial launch financing, earned its first $1 million early in the 2d quarter of operations, and grew revenues to $10m/year within 4 years, employing 150 people. Because we had such a successful launch, we were able to hold on to 100% of the equity in the company. When it was time to scale the business, we were well-positioned to craft our expansion goals from the driver’s seat of solid growth of our revenues to attract great acquisition opportunities to take the business to new heights.
Advantages of Bootstrapping:
You can retain total control over decision-making
You retain freedom and flexibility to take advantage of new opportunities and creative ideas
You have equity to give away once you’ve proved your viability in the marketplace and/or have generated revenue, leaving you in a stronger position to scale your business with partners, on your own or with institutional funding
Disadvantages:
You may not have a financial safety net
You will have to create your own good mentors and advisers to facilitate and implement your strategic thinking
You may run out of money before you’ve been able to prove your concept or get to revenue to position you for additional financing support
Equity Financing of Your Startup
Equity financing your startup means that you have to attract investors who are willing to put their money into your business in exchange for some ownership participation and a very fair (to them!) return on that investment (ROI)
Advantages:
Bringing in equity investment can give the enterprise financial flexibility
The founders benefit from experienced capital investors to draw from
You may find it easier to expand various initiatives with solid capital available
Disadvantages:
Equity investment is hugely expensive, especially in the early stages of a startup
Founders may have to give up voting control over their own company
Entrepreneurs may be inhibited to create expansion initiatives
Terms are highly-negotiable and can hinder the ability of the founders to take in future rounds of funding
Some Questions to Help You Decide What Kind of Financing is Best for Your Business
How much funds are available without having to offer equity or take in investors?
Is it possible to get bank or other institutional investors to lend to you? It may be an expensive loan, but probably less expensive than taking in an equity investor who will have some influence over your business that you may not want to invite.
How quickly can the business get to revenue to continue to self-fund growth – you don’t want to bootstrap your launch only to run out of runway too soon to get to revenue to fund your continued operations?
The investment can be too expensive for future investment rounds – whatever you give away in the beginning is going to be very expensive. Moreover, it reduces how much of the pie is left to offer later, or dilutes the current owners in one fashion or another.
Once the funding is accepted, how much runway does it allow you, and can you get to revenue quickly enough, or will you have to bring in additional capital, and can you do it in a timely way to stay afloat and not have to interrupt operations?
How much runway do your own bootstrapped funds give you? You want to know that whatever you have planned for the use of funds, you will have sufficient cash flow to accomplish your goals. Running out of money too soon can prevent your business from getting lift off. Assume that whatever you think the “right amount” is, it’s probably not enough!
How to fund your startup is a critical step for any entrepreneur. Make sure you understand clearly just how expensive equity financing can be at a time that you are most vulnerable – it can be a matter of life or death to your company, which is a very challenging time to think clearly, and you may be ready to do anything rather than give up on your dream. Having a good support team or advisory board is critical to navigating these obstacles and opportunities.
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