Many startup entrepreneurs begin by bootstrapping and utilizing their personal finances to fund their businesses. As they continue to develop their products or services and expenses start to add up, there comes a point at which they strongly consider – 1. bootstrapping, 2. debt financing, 3. venture capital (VCs) (including angel investors), or a little-known 4th alternative, known as a Reg D 506 (c) offering.
While there are strengths to each strategy, each also brings specific challenges. Choosing which strategy fits your needs depends on your business and specific growth strategy, and in most cases, requires a sophisticated business analysis by professional capital advisors, such as TAP-Financial.
Fundraising vs. Bootstrapping: 4 Things to Consider
To help you decide whether to keep bootstrapping or turn to one of the alternatives above, TAP is here to assist you in considering these four concerns.
Ownership and Control
An important factor to consider between bootstrapping and raising funds is the amount of control you have over your business. Bringing in equity or debt capital essentially means that you are choosing partners to work with you in your business, and each alternative brings specific considerations. Venture Capital and its close cousin, Private Equity (“PE”), often wish to exercise a significant degree of control. However, all forms of outside capital require you to think of a “exit strategy” so that the investor can be repaid. Debt requires an exact and unforgiving schedule for repayment but usually lower interest rates. VC and PE equity is generally more flexible with terms of repayment, but demands a higher return for being more patient and taking greater risk. VC’s can also offer great advice based on their own experience with similar businesses, which may result in faster growth, or the avoidance of unforeseen pitfalls. However, if you choose to raise funds from PE’s or VCs, you may give up significant control over your business. So, any plan or action you want to take must meet investor approval.
With bootstrapping, you keep 100% control and ownership over your company. You have the final say over business decisions, which do not have to meet any approval but yours. In addition, since the capital comes from your personal finances or revenues, you don’t have to meet investor requirements or conditions to get paid. However, you may not have sufficient capital to grow, or to grow fast enough to outpace your competition.
A Reg D 506 c offering gives many of the advantages of outside equity; however, because you will be admitting Limited Partners, (“LP’s”) loss of control will be limited since limited partners are just that, “limited.” However, you must still plan to repay the investors within a mutually agreed time frame, and like any form of external equity, LPs expect a healthy return over the life of their investment. Also, since LP’s are experienced investors, they can frequently offer excellent business advice when requested.
Growth potential and expectations
The rate of growth is another significant difference between the strategies. With bootstrapping, there’s slower growth, so it may take a while before your business achieves sufficient scale to become profitable. Some entrepreneurs may prefer this route because they can focus on developing a great product without feeling the constant pressure to meet investors’ expectations.
On the other hand, investors can help you scale quickly and maximize revenue because they bring valuable experience of their own to your business. First, their financial investment may help multiple areas of your business, such as marketing, talent, and technology. Second, investors have a wealth of knowledge and connections. They may provide helpful insights and advice on growing your business. Plus, they may even connect you with industry leaders in their network. So the amount of value you get from a financial and business standpoint can be quite advantageous.
What are your personal goals for your business? Bootstrapping makes sense if you consider your business your baby and are in it for the long haul. You have complete ownership of your business and will feel great accomplishment because you essentially did it on your own.
But if you’re a creative entrepreneur who wants to grow your business quickly and expects to profit from your investment and enjoy the rewards of your hard work before old age, then a planned exit strategy may be a significant improvement to your lifestyle, life partners, and your family. In this case, external fundraising is an ideal option. Investors help accelerate growth rapidly, which may provide an exit opportunity sooner than later.
Spending and expenses
With bootstrapping, you risk losing your investment if your business falls apart. While that may sound scary, it can be motivating. It encourages entrepreneurs to be organized, careful, and responsible with spending. For example, bootstrapped developers will work diligently to create a product that people would pay for; if they don’t, they risk not getting paid.
On the other hand, investor funding provides greater flexibility. You have more capital for quicker growth, allowing you to expand your business and new resources necessary for rapid scalability. Plus, you have an increased marketing budget to help spread brand awareness. But, of course, investors will expect a return on their investment eventually, so you must balance spending with growth to satisfy your investor agreements.
Bootstrap or Raise Funds? The choice is Yours
Ultimately, choosing how to get funding for your business is up to you and what you want to achieve. However, these four main areas will help you make the best decision for your business.
If you need professional advice, TAP Financial Partners has a team of financial experts who can provide valuable insight to help you with the next steps.