Every idea does not have the potential to be a unicorn. Neither is there such a need. The success parameter of a startup is not whether it is externally funded.
- By Alok Patania
Bootstrapping vs VC Funding – the age-old debate has no specific answer. Bootstrapping refers to the act of starting a company without seeking external funding. Raising funding, on the other hand, is when you seek out investors (debt or equity) and get them to invest money in your company. There are tons of glitzy success stories of startups accelerating growth with fundraising. At the same time, there have been entrepreneurs who have used bootstrapping as survival means until they got to a steady revenue figure, and then have sought funding. This acted as a proof of concept for them and enabled them to ask for a premium. Some factors that are important in deciding whether fundraising or bootstrapping is the right choice for you are:
- Existence of a strong proof of concept that will lead to a favorable valuation
- Need to accelerate your team’s growth to support your product development
- Product’s reliance on expensive infrastructure
- Types of growth challenges and limitations
Are you a VC fit business?
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Every idea does not have the potential to be a unicorn. Neither is there such a need. The success parameter of a startup is not whether it is externally funded. We have seen startups operating small independent units, catering to their niche audience, being profitable, and scaling.
How is the market that you are operating in reacting to being funded or bootstrapped? For instance, if you’re in a highly competitive “winner takes all market”, this means that you do not have the luxury for slow and steady growth. Scaling up fast and furious is a necessity. This, in all likelihood, means that you won’t be profitable in the near future and need an external boost to afford your growth.
Equity and Dilution Considerations
With VC funding, comes the ask of answerability. At times, the founders have certain goals and means to achieve those goals in their minds. It might also be the case that the founders are so entangled in their own dreams that they are unable to look at things pragmatically which a VC is able to. When you give up equity in your startup, you lose that total control you had over the startup. The moment a VC is onboarded, all major decisions require their consultation in all cases and approval, in most.
There is no equity dilution in bootstrapping– decision making is yours. Even if there are a couple of co-founders, you may have more of a percentage of ownership than founders who go over many series of fundraising. Plus, usually, the co-founders come with a shared vision. The absolute ownership that founders have over their bootstrapped startups allows them to fully dictate the management and future of their companies, achieving what people call a “lifestyle business”.
Unit Economics and Profitability
There is a common saying in the startup backyard – VCs want you to find a way to spend all of the money they provide you with, bootstrapping forces you to focus on making that money. A bootstrapped business does not have the luxury of experimental or thrifty spending. Here, cash flow is king and profitability is God.
Product/Service and customer-centric
Bootstrapped startups can spend 70-80 per cent of their time creating a great offering that customers love, and growing the business itself. This can lead to better decisions and longer user retention. The pride of bootstrapping has its cost – Lesser availability of money to reinvest/ diversify/experiment, slower growth, the personal risk would be a few things to consider.
In our 30+ years of operations, we have seen promising startups fail miserably despite glitzy VC funding. A common trait that we have observed is the imprudence that comes as a result of abundance. Many startups start feeling like kids in the candy shop. We have seen startups spending oodles on glass door offices, purchasing properties (where leasing would have been a wiser choice), overpaying on hiring, etc.
Mentorship/Access to expert help
New age VCs invest in founders, their business models, and most importantly, the marketing of those business models. Money is not the only thing that you get when a VC invests in you. VCs are well connected. When a startup is in a VC portfolio, it has access to various contacts which leads to alliances, strategic partnerships, important hirings, product pivot/diversification. This might be difficult to come by in a bootstrapped environment.
In a way, VC funding comes with less personal risk. For instance, a startup wants to try out a certain sales strategy that requires funds. If this fails, there is no chance of recovery of such funds. In a bootstrapped organization, these funds have to be diverted from existing uses – which in turn, puts existing as well as the new strategy at risk. With VC funding, this can be overcome. There is more space to experiment and with a lesser degree of risk. To conclude, only you can decide which is the right choice for you, based on the above factors. At the end of the day, bootstrapping and funding both have their pros and cons and there is no one size fits all rule.
Alok Patania is the Managing Partner of ProfitBoard Ventures. Views expressed are the author’s own.