Taking an idea and turning it into a functional business can take time, effort, and money. While founders can grind their businesses using time and effort, securing the necessary capital is one important challenge entrepreneurs face. When a startup needs capital to grow, the choice between bootstrapping or raising capital becomes important, as each choice has its own needs, benefits, and challenges. In this blog, learn more about bootstrapping vs fundraising, the benefits and challenges of each method, and key considerations for entrepreneurs seeking funding for their startups.

Bootstrapping vs Fundraising

What is Bootstrapping?

Bootstrapping is the practice of a founder/founding team using their own personal capital to start and grow a business. This often involves using personal savings, taking on debt, or relying on support from family and friends. Once the startup begins to generate revenue, those profits are reinvested into the company.

Benefits of Bootstrapping

One attractive benefit of bootstrapping is the ability for a founder to retain full control of their startup. Without external investors, the team only has to answer to each other and customers. This can help provide a single, centralized vision and ability to quickly pivot without opinions from investors.

Another benefit of bootstrapping is the minimization of early dilution. As startups raise funding rounds, early employees’ and investors’ typically become diluted. By choosing to bootstrap, a startup can limit equity dilution of the founding team.

Finally, bootstrapping can help foster financial discipline and creative pivot strategies. People tend to be more careful with their own money and bootstrapping forces founders to make smart decisions based on cash flow and profitability due to the limited amount of capital.

Limitations of Bootstrapping

One of the apparent risks of bootstrapping is the startup failing. Founders that bootstrap may assume significant amounts of personal financial risk. If the business doesn’t begin generating revenue for a while, personal savings could be depleted.

Additionally, bootstrapped startups have the potential for slower growth. It typically costs money to scale a business, and growth could be limited to the rate of cash flow. If the startup hasn’t begun generating revenue yet and the founding team has already put in as much capital as they are able to, the startup may not have the funds to hire key talent, invest in marketing campaigns, or scale production quickly enough to capture market opportunities.

What is Venture Capital?

Raising venture capital means exchanging equity in a startup for funding from external investors. These investors are given an ownership stake in the startup with the potential to receive growth on the investment for their portfolios.

Benefits of Raising External Capital

One of the benefits of raising external capital could be a larger cash infusion at once. This can help startups hire talent, invest in marketing, scale infrastructure, and expand into new markets, typically faster than bootstrapping efforts.

Additionally, raising external capital can unlock expertise and networks from investors. They can provide strategic guidance, mentorship, and a network of potential customers, partners, or additional investors.

Finally, securing external capital can provide market validation and credibility. It shows that investors have vetted the startup and believe in the vision and mission enough to put their own capital into the startup.

Limitations of Raising External Capital

One of the limitations of raising external capital could be some loss of control over the company. Investors may take on board seats or obtain voting rights. Major decisions now require investor approval instead of just being made by the startup’s founder or founding team.

Additionally, each subsequent equity funding round can reduce a founder or early investor’s percentage ownership in the company. This equity dilution is another limitation of raising external capital.

Finally, venture capitalists typically have one main goal: making money. With this can come pressure for rapid growth, for the startup to begin generating revenue quickly, find exit opportunities, and get to the point of a favorable exit event for investors.

How Startups Can Choose

Making the decision between bootstrapping vs fundraising can be a challenge. Startups may want to think about the following key considerations when making their decision:

1. What is the startup’s business model?

Can a startup generate revenue early with low upfront costs? If so, bootstrapping may be an option. Otherwise, does the business model require significant research and development (R&D) or expensive infrastructure before it will be able to turn a profit? If so, the capital injection from venture capital may make more sense.

2. What is the market’s competitive landscape?

Does the startup operate in a niche market where it can grow steadily? If so, bootstrapping could be a viable option. Are there a significant number of well-funded competitors in a crowded market? If so, the accelerated growth that venture capital can provide may be the best way to capture market share.

3. What are the founder’s personal goals?

Does the founder want to build an independent company in which they maintain full control? Or is the goal to build a large, market-leading company rapidly? The personal goals of the founder may lead the decision to either bootstrap or raise external funding.

A Hybrid Approach

There are also companies who have found success in the middle ground by taking a hybrid approach. They may begin by bootstrapping to kickstart the business and achieve goals like finding product-market fit, building a core customer base, and establishing revenue streams. Once these milestones have been achieved, they seek out external capital, balancing initial control and discipline followed by raising capital for accelerated scaling.

Final Thoughts

Ultimately, the choice between bootstrapping vs fundraising is going to be different for every startup. The decision relies on specific goals, financial situations, and the growth stage of the startup. Bootstrapping can help build discipline, control, and foster a deep understanding of the startup, despite potentially hindering growth. Raising external funding can help provide the resources to scale rapidly and access expertise that comes with investors. Startups can choose to access both types of capital and may benefit from taking a hybrid approach.

Is your startup looking to raise external capital? MicroVentures may be able to help. Apply today to raise capital with MicroVentures!

Want to learn more about fundraising for a startup? Check out the following blogs to learn more:

• What Private Market Investors Look for in a Startup’s First Funding Round
• Financials and Fundraising: Financial Reviews vs. Financial Audits
• Flexibility vs Ownership: Revenue-Based vs Equity Financing
• Cap Tables 101: The Foundation of Startup Investment

*****

The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.