For startup entrepreneurs, the question of raising external funds vs bootstrapping is the one about enhancing the risk-reward ratio vs taking on investor obligations at the cost of original business objectives. Money brings an obligation, Nithin Kamath, Founder & CEO of Zerodha, said at the recent edition of FinancialExpress.com’s ‘Manage Your Money’. On the other hand, access to more capital can boost risk taking capability, Sandeep Aggarwal, founder & CEO, Droom Technology, said.
Watch full conversation: Raising Funds vs Bootstrapping Your Startup
Investor money comes with obligations
“As soon as you take money from an investor, you are committed to make their money grow. Now you have to set a target and start chasing it,” Nithin Kamath said. “Once you set a target, you start optimising for the target. In this scenario, you can maybe let go of some of the reasons why you even did the business in the first place,” he added. Nithin Kamath and his brother and Co-Founder Nikhil Kamath have never raised angel or venture capital money for Zerodha – now a $2-billion firm. Taking his personal experience into account while explaining the implications of raising money for startups, Nithin Kamath said that he was better suited to build a bootstrap business.
Multiplying risk-reward ratio with more capital
However, investor money can help entrepreneurs drive more value too with the additional risk tolerance if they have the conviction. “As they say, ‘fortune follows the brave’. That risk-taking ability can translate into a significant increase in the company’s scale, impact, and how it can emerge as a market leader in whatever category they operate,” he said. Sandeep Aggarwal is a rare entrepreneur to have founded two startups in India that became unicorns – Snapdeal and Droom, and raised investor money early on for both the ventures.
Marketing expense vs word of mouth publicity
Nithin Kamath too agreed that not every business could be bootstrapped. “If I am building an e-commerce business where someone else can build it quickly, spend more money marketing, get to users fast, that business has to be built raising capital,” he said. “But in our business, we realised word of mouth was the right way to go about it and I realised not having money as an obligation is going to help.”
Raising capital at the expense of diluting equity control
Sandeep Aggarwal said he feels it is okay to dilute equity control in your business so long as you are contributing and doing the right things – increasing shareholder wealth, creating mass adoption, building formidable scale. “I would rather make 5 per cent of 10 billion, rather than 100 per cent of zero,” he said. “In my view, raising money increases your chances of becoming a category leader. With access to capital, you can have a better cushion to increase your likelihood of doing what you ultimately want to do, which can suffer from legacy issues, friction, inefficiency, or user experiences, among other headwinds.