To successfully put a business idea into action, you need a practical strategy that allows for the right amount of control and growth. Most people view bootstrapping and venture capital as opposite paths, despite the fact that they have certain similarities, and founders can use both at different stages. As the partner of a venture capital fund, Blue Field Capital, and as someone who has both bootstrapped and used venture capital to scale businesses, I know there isn’t a one size fits all approach. Every founder is unique, and so is each business they launch.
The key to success with choosing either route is knowing yourself, your business, and understanding the cost of both paths.
Bootstrapping Isn’t For Every Company
Since bootstrapping involves gathering funds to start a business from close sources, it’s only for people who have access to enough money to launch and scale a business through these sources. This can involve savings or returns from other investments, as well as loans or contributions from family and friends. If the business is a partnership between two or more people, they must all source funds in the same way without external help.
While bootstrapping relies on initial funds to start the business, it also depends on the initial operating profits of the business to grow. In theory, this is a simple and effective way to start a business and ensure its growth while maintaining full equity. I’ve met many founders who insist it’s the right path for them, because they’re unwilling to give up equity and control. But in reality, usually only businesses with lean staff and a quick path to monetization are able to pull this off forever.
Why Bootstrapping Sometimes Fails Founders
There are several problems bootstrapping can pose, and I’ve experienced many of them first hand. For one, not having a cash injection via venture capital can create a barrier to growth. What if you want to hire full time employees, but can’t because you don’t have the cash flow to do it? You might find yourself in a catch 22 where more staff is required to increase revenue, but you don’t have the revenue to hire staff. This is just one example of how problematic bootstrapping can be, and how businesses who refuse to seek venture capital can fail.
Another roadblock might be your ability to bring in revenue early on. If the first year or 2 of your business is going to be spent engineering technology and beta testing, you aren’t going to have revenue. This is where venture capital can give you the runway you need to build when close sources of cash are limited.
The ability to start and scale a company without external help might sound appealing, and for some founders it’s perfectly doable. But it’s also important to understand the cost of choosing this path.
Pros
You hold the reins.
Of course, one of the reasons to start a business in the first place is to be in control of it. With bootstrapping, you make all of the decisions and control the profits as well.
Long-term benefits.
Since there is no external pressure to make money as quickly as possible, you are able to hold on to investments for longer and make decisions that drive long-term benefits.
Short-term investments.
Since the purpose of bootstrapping is to reinvest profit from the business back into it, business owners are able to reinvest as much as they can for growth—especially in the early stages. Essentially, the business model, in theory, can operate fully without having to consider paying investors back.
Cons
You manage all risks alone.
Investing a large sum of your hard-earned money into a new business is risky. Therefore, it’s up to you to make the right decisions to ensure it does not fail. If it does, it takes everything you have worked for down with it. This could mean financial disaster if you’re not ready or financially stable enough to take on this risk.
Your growth might be delayed.
As they say: “Scale or fail,” and bootstrapped startups don’t have this luxury. Without venture capital, you won’t necessarily have the resources to scale (or fail) fast. This might come at the expense of wasting time on a model, product, or market that isn’t a fit. Moving slower means that each stage of your business, from concept validation to going to market, will take longer to perfect.
Why Venture Capital Might Be a Better Option
Venture capital is for founders who need to add fuel to their jet. If getting to the next level means you need more money to make more money, as it often does, your best bet is looking at raising capital.
Venture capitalists like myself, with a background in real estate investing and startups, are interested in seeing companies that are innovating the real estate industry scale quickly. I personally don’t want to see a great idea sit on a shelf to the point of expiration simply because the person who thought it up didn’t have the financial means to make it a reality.
Time is of the essence when it comes to technology startups, and that’s where a cash injection can make all the difference. Bootstrapping and maintaining 100% equity is great, but not when it takes you 10 years to build what could’ve taken 2 years. Especially if competitors jumped in and outpaced you in the meantime.
There’s an opportunity cost to everything, and some degree of perspective and wisdom is required to budget this way. Another way of putting it is, I’d rather own 70% of something valuable than 100% of something that isn’t worth much at all.
Requirements For Raising Venture Capital & Alternatives
It’s not as easy as just deciding that you need venture capital, however. In order to “qualify,” a company needs to demonstrate that they have a large enough market size to hit 10X returns at a minimum, though I often look for companies that show 100X returns. A venture capital firm can provide you with a large cash injection, but you do have to prove you can use it to make them money.
Pros
Longer runway.
Having access to a wider pool of funds lengthens your runway and allows you to focus on what’s important, like developing your idea. Not stressing about when your money will run out.
Shared risk management.
With an investment-backed business, the risks will be shared across all involved parties. This brings a sense of security to the founders, as there is a lower chance of losing one’s savings in the event the business fails.
Cons
Dilution & control.
The most obvious disadvantage of taking in venture capital is giving up equity early on in your lifecycle, especially at the pre-seed and seed stages where you may give up 15%-25% of the company in each round. Along with the dilution, there is the fact that you now have new shareholders you are accountable to and the subsequent loss of control. Keep in mind that losing control isn’t always proportionate to the equity you give up. In many cases, an investor can negotiate special rights such as board seats or the ability to veto major decisions.
Finding the right fit.
As expected, finding investors is not an easy process. It takes a lot of research and luck to find the right venture capital firm to partner with. You often won’t see the true colors of how an investor operates until you’re deep in the trenches with them or when there is a conflict of interest and you see how they conduct themselves. Finding the right investor is a big time commitment, will require many reference calls and doing your own due diligence which can distract you from running your company. Ideally, this is only a temporary distraction, although managing investor relations can become a permanent distraction if you partner with the wrong investors for your company.
Is Venture Capital Right For Your Business?
Choosing how to finance your business is a big decision, and that’s why it’s important to do your due diligence. If you’re looking to maintain full control, and you have the financial means to do it, bootstrapping can be a good choice within the right circumstances.
On the other hand, partnering with a venture capital firm provides trusted guidance from experts and sets the stage for faster growth. As a partner in a venture capital firm, I love to connect with visionaries in the proptech space and help bring their ideas to life.
I’ve also personally raised capital for my companies as a founder, and I know how stressful yet crucial that process was for the growth of my companies. As the CEO of Vungle, I raised $25 million from many investors including Google and AOL. Without those investments, I’m not sure if we would have had the same successful exit with Blackstone for $780 million.
Keep in mind that you don’t have to commit to one path and never look back. Many successful companies start out bootstrapping and make room for investors later on when it makes more sense. Regardless of which route you take, it’s important to have a clear plan that outlines your business model and how you intend to make a profit. Careful financial planning and strategy is critical to the success of your business.