Best approach for a Startup. Raise capital or bootstrapping?

By madhubalank

Posted on April 8, 2017

Starting a business in the contemporary economic environment is not for the fainthearted. In fact, there has never been any ideal time for starting a new venture.  However, there are many new challenges that startups today face. Unique challenges today include high cost of operations, geopolitical shifts such as Brexit, a globalized marketplace, increased regulations, and shrinking markets among many others.

In today’s business landscape, a startup has to be very innovative to stay afloat. A U.S Small Business Administration (SBA) report published on Forbes shows 90% of startups fail. Among the main causes of such failure is poor cash flow.

Startup Financing Options

For a startup to survive these formative years, it is crucial to have a financing strategy in place. The two main options for startups are raising capital by floating equity shares or bootstrapping. It is important to get more insight on these two approaches in order to make the right decision.

Bootstrapping in Brief

Like the term implies, you are able to pull yourself up using resources within the startup and without external help. To do this, you have to be cautious about every coin that comes and leaves your business.  To become successful, you have to embrace a multi-pronged approach in finances and it involves owner financing, personal debt, sweat equity (effort), fast turnaround, subsidy finance, cash-only approach and low operational costs.

Some of the major companies that started out by bootstrapping include Facebook, IBM, Oracle Corp, eBay, Coca Cola, Cisco Systems among others.

Pros of Bootstrapping 

1. It is affordable – You will be forced to focus on efficiency and this means adopting a lean business principle.
2. Baptism by fire – The fact that you don’t bring in investors with knowledge also means you have to adapt fast to decision making which helps you learn how to run the business fast.
3. Your own boss – You will remain your own boss because you don’t dilute your equity by welcoming wealthy investors. You are able to make quick decisions when need and you are ready to take responsibility when things go wrong. Creative freedom is something that you cannot enjoy when depending on other investors.
4. Faster progress – You will have more motivation to build a brand that lasts long and this is one reason bootstrap startups are more likely to become household names such as Facebook.
5. Full focus – Your attention is on your core business and not on crowd funding and other funding efforts. You are able to concentrate on your books and strategies that will make your business grow.

Bootstrapping Drawbacks

Some of the cons of bootstrapping as a startup include poor cash flow which can hinder growth, lack of experience, higher risks of losses, and more responsibilities, among others.

External Financing for Startups 

For most startups, there is an urgency to grow the business. In most cases, entrepreneurs will have harbored such ideas for years and when they finally come around to building the business, it is all systems go. In such a case, they feel the need to raise funds to finance their operations.

There are many reasons why you should think for external funding as opposed to bootstrapping. Take a look at some of these benefits:

1. Faster growth – One reason why most new ventures struggle in the initial stages is of course lack of enough capital. However, if you seek financial help from an external investor, you will have the funds required to spur faster growth. For instance, you can buy the latest hardware and software to boost operations which in turn helps build your brand in your industry.
2. Wealth of knowledge – Many investors bring in knowledge and experience to your business venture which is something a startup badly needs. The entrepreneurial show Shark Tank is probably the best demonstration of how an investor can boost your business. These investors also have networks in the business world which you can rely on to optimize your business.
3. Lower risk – By sharing investment risks with an external source, you will not be overly exposed to business risks.

Final Thoughts

By giving up some of your equity, you will lose creative freedom and you will not have it easy when it comes to making decisions. Which is better? Bootstrapping or raising capital? It is advisable to bootstrap until you finally have a business profile or a proof of concept. In such a case, you will be in a better negotiating position.  If you are still thinking a better approach for your Startup, don’t hesitate to reach us. We are Startup Specialists and we help you GROW.

Best approach for a Startup. Raise capital or bootstrapping?