Fundraising and bootstrapping are two of the most popular methods of funding a business. Learn more on this blog about the pros and cons about fundraising and bootstrapping.
To be or not to be? Even Shakespeare would not be able to answer this one, but in this article, we will try the impossible and reel in some of the hottest takes for you to make your own opinion on whether you should raise capital from investors or run for the hills. Let's start waving a white flag: There is NO correct answer! Yay! Once that's out of the way we will try to have an unbiased 360 look at the evidence.
Introduction
Entrepreneurship is a dynamic and exciting journey. One of the most important decisions an entrepreneur must make is determining how to fund the business. Two of the most common methods are fundraising or bootstrapping. Each has its own sugar and spice and has different impacts on the startup. Before we start, I ask you… Have you talked to your cofounders about what they want to do? If not, you could find some spooky surprises far along the way. So grab that phone and call him/her after you read this article.
Let's grab that dough: Fundraising.
Fundraising is the process of raising money for your business from investors. This capital can come in the form of debt or equity. Typically, the fundraising journey involves pitching your idea to potential investors, negotiating the terms of the investment, and closing the deal. Starting with that uncle or auntie you convince to put in 5K and ending with a ringing bell of glory in Wall St. The process can be time-consuming and complex, and it is important to have a plan in place to ensure a successful outcome.
Pros
- Access to larger amounts of capital than available through other financing sources.
- Ability to benefit from the guidance and expertise of angel investors and venture capitalists.
- Opportunity to develop relationships with potential partners and expand the startup's network.
- Increase the visibility of the startup and help attract talent.
- Potential to expand quickly and achieve higher growth with the right investment.
Cons
- Substantial dilution of equity ownership.
- Loss of control over the startup. (Usually in later stages).
- Risk of not finding the right investors and dealing with bad ones, remember most successful VC-Startup relationships last longer than the average marriage.
- The time-consuming process of finding and negotiating with investors. (You will have to devote a lot of time to your investors, finding them, tending to their requirements, and if you grow big enough having them on your board).
- Potential for investors to interfere in the operations of the startup
Many famous companies like Uber, Google, Airbnb, Amazon, Meta and many others have gone this path and you could say they are doing alright… Yes, now and again you have cases like FTX or WeWork that ring the alarms in VC Olympus and make them run for the hills and hide under stones for a while, but you get the point…
Bootstrapping: The Heroes Journey
Now, if you thought building a startup was difficult, now imagine having no one else cheering for you but that angry customer that wants the money back… Bootstrapping is the process of funding a business out of your own pocket and the business's own profits. This can be done through personal savings, loans, or other methods like factoring and confirming.
Pros
- No need to give up equity in the company.
- Prioritizes financial discipline and profitability from the start.
- Provides more control over decision-making and direction of the business.
- Opportunity to build a longer-term vision for the company.
- Potentially faster growth with a smaller burn rate.
- Difficulty in hiring top talent without investor money.
Cons
- Limited access to capital for scaling.
- May need access to more capital in a crisis.
- Higher pressure to hit milestones quickly and consistently.
- Difficult to secure customers with limited capital.
Many of the companies that bootstrap their way to the top of the hill make less of a boom than the one raising millions and millions, many people say they don't get the recognition they deserve as this is doubly hard. Playing devil advocates here (fundraising isn't easy either, the process of getting capital is only achieved by 0.5% of all startups, and using third-party capital has tremendous amounts of pressure). But let's get back on track, companies like MailChimp, GoPro, and Atlassian are some of the fierce warriors that have conquered this insurmountable task.
Now you know, so what do you do next?
Well, it depends… I know you don't like that vague answer, but in the startup world, there is nothing given. Both fundraising and bootstrapping have their advantages and disadvantages in the entrepreneurial journey. Fundraising can provide a large influx of capital, but it can also result in a loss of control. Bootstrapping, on the other hand, can provide entrepreneurs with control over their business, but it may not be enough to scale the business at a velocity that can escape the fierce competitors.
Conclusion
Fundraising and bootstrapping are two of the most popular methods of funding a business. Each has its own advantages and disadvantages, and it is up to the entrepreneur to decide which approach is best for their specific situation. Regardless of which method is chosen, it is important to remember that both can be effective tools for fueling the entrepreneurial journey.
In the end, if you have created something people want, that's 10X what is out there, with sustainable and scalable economics and a great team with extra fuel to work obsessively and deliver what you promised, then does it really matter which one you choose?
We have our applications open for our pre-seed program, apply today to the PY program to learn more about fundraising strategies and how we can help you raise your first pre-seed round.
