Finding a venture capital (VC) investor to give you substantial funds for your company may sound quite appealing. But it’s important to understand the realistic potential for this as well as the trade-offs it requires. While there are times when external funding is necessary or even preferable, there are also benefits to bootstrapping, i.e., launching your company with limited or no outside funds.
First, consider the differences. VC investors take equity in your company, generally have a say in how it’s run, and want you to have an exit plan. The upside is they can provide the influx of money you need to achieve your business goals.
Bootstrapping, on the other hand, gives you control and freedom, but may require more of your time and funds than you can spare without significant personal sacrifice. And limited funds may also limit your growth potential.
Assessing your options
How do you decide the path that’s right for you? Here are some steps to help:
Do some analysis. “Develop multiple scenarios for bootstrapping your company … then do the cost benefit analysis of trying these approaches over raising funds,” suggested Chris Cera, CEO of Arcweb Technologies.
Learn what works for your business type. Some businesses, Brandi Baldwin, CEO of Millennial Ventures Holdings, explained, more easily fit one approach or the other. For example:
- Services businesses are fairly easy to start quickly without investors. You may just need a website to get started.
- Product-based businesses often have high start-up costs. You may need to seek VC or other funds.
- If you’re in a disruptive industry and have a proven business model, you may be a candidate for VC funds.
Develop multiple scenarios for bootstrapping your company … then do the cost benefit analysis of trying these approaches over raising funds.
Chris Cera, CEO, Arcweb Technologies
[Read: 3 Things You Need to Know About Raising Venture Capital]
Know yourself. Baldwin explained that deciding between VC and bootstrapping is more about how you’re designed as a person. “It is a psychological orientation,” he said. “What can you handle? VC is high stakes.” If you’re considering the VC option, you need to be able to say yes to the following questions:
- Can I give up control?
- Is financial gain my priority for launching a business?
- Am I excited about new ideas and want to eventually leave this company and start another?
Carefully consider the deal. “Make sure you understand the “venture economics” of the investment capital you’re looking to raise, and make sure that makes sense with your vision,” Cera said. This means that you need to understand what your company must achieve in order for the VC to get the returns you’re agreeing to and if that will compromise any of your goals.
Understand your financial options. “My message is there’s alternatives [to VC]; whether you do family or friends [funding] or you come up with creative ways to finance it yourself,” said Jason Coles, founder and CEO of Katika. He referenced entrepreneurs who drive for Uber or rent out their places through Airbnb to pay bills and fund their startups. Coles added, “You’ve just got to be creative and be passionate and be driven.”
[Read: A Practical Guide to Funding Your Small Business with Business Loans and Beyond]
As you evaluate your options, keep in mind that if you choose to launch your business as a bootstrapper, that doesn’t mean you will always be one. In fact, with successful bootstrapping, there may come a time to seek funding to help you build a team, expand your product line or market your business. However, as Baldwin pointed out, it doesn’t work the opposite way — once you choose VC, you cannot go to bootstrapping. So, when making this decision, be sure you’re comfortable with the method you choose.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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