Which Type of Financing is Right For Your Startup? The Pros and Cons of Bootstrapping
Having a great idea for a business is one thing. Getting the financial backing to grow, scale and make it a success is quite another.
Most entrepreneurs approach funding in stages, starting by dipping into their own savings, going cap-in-hand to friends and family, taking advantage of government grants, crowdfunding and potentially seeking angel and venture capital.
The best funding option depends on the business, its track record and growth plans. Some companies stay self-funded forever, while others need the capital injection and expertise from outsiders. Getting the right investment, in the right sums at the right time can often make the different between a startup’s success or failure.
Techvibes has put together a list of common investment options for startups, and pros and cons for each. It will cover the following:
- Government grants
- Angel investing
- Equity Crowdfunding
- Venture Capital
Bootstrapping is a term used in startup circles for companies that aim to grow the business using their own money — either from savings, getting a loan or line of credit, or using credit cards — instead of bringing in outside investors. The term stems from the old saying “pull yourself up by your bootstraps,” and reflects the grit and self determination it takes to start your own company.
Most entrepreneurs begin with bootstrapping to prove their business model and get it off the ground. A few examples include Toronto-based fintech Overbond, Vancouver-based digital production firm Thinkingbox, and Toronto-based real estate listing website BuzzBuzzHome.
“We really believed that if we took funding too early we’d be selling ourselves short,” BuzzBuzzHome cofounder Matthew Slutsky told the Globe and Mail.
Some investors remain self-funded, while others eventually need the cash injection to fuel growth and potentially tap into expertise from entrepreneurs and investors who have been in their, um, boots before.
Below are the pros and cons of bootstrapping your business.
You call the shots: “By self-funding, you answer only to yourself,” Chen Levanon, CEO of bootstrapped startup ClicksMob wrote in an article for Women 2.0.“This provides a wonderful ‘foundation of freedom,’ allowing your leadership to set your agenda autonomously, choosing everything from your direction to when to be acquired… to if you want to be acquired at all.” Bootrapping also allows you to preserve value in your business and build it in your own time.
Focus: With other peoples’ money often comes a need to focus on their needs and expectations. When you self-fund the business, you can focus on which direction you want the business to go, and what your customers want — because they’re usually right.
Frugality: “You can’t waste what you don’t have,” says Karl Ulrich, vice dean of entrepreneurship and innovation at the Wharton School of the University of Pennsylvania, notes in this video. The more focus you have on the bottom line in the beginning, the better chance you have of retaining strong margins in future.
Motivation: When your own money is on the line, chances are you’ll work harder, longer and do just about anything to make your business work. The reward can be sweet, Jack Horton, founder and CEO of UK-based Whites Group, wrote in BusinessZone. “Without investors as partners, every ounce of blood, sweat and tears put into a business in order to make it excel, can be realized in profits once the business hits its stride,” Horton says. What’s more, if you sell, that means more profit in your own pocket.
Less money to work with: Assuming you business is good enough to attract investors, you may be missing out on opportunities to scale with an extra cash injection. That includes money to advance research and development, boost marketing efforts or hire top talent.
Smaller network: We’ve all heard the saying, “It’s not what you know, but who you know.” This is especially important for entrepreneurs looking to build their business. By going out and raising money you’re automatically broadening your network. Even if an investor says no, they may turn out to be invaluable advisor to the business, or better yet, they might know other investors willing to bet on your company.
More street cred: Who’s behind your company could be just as important as the product or service you provide. For example, a company like robo-advisor Wealthsimple, may be more attractive to some investors (and consumers) because they’re backed by big-name investors like Joe Canavan and financial services giant Power Financial Corp.
“Not having outside investors may hurt your company’s credibility in the beginning,” says Levanon of ClicksMob. “Who are these new kids on the block and why do they think their product will be better than others in the same space? Backing by well-respected, credible investors gives many potential customers the confidence to buy in. Self-funding may also highlight a company’s lack of resources and business experience.”
Some businesses can’t be bootstrapped, notes Ulrich. He cites examples of drug companies that need to fund research to advance products. Other may never need an outside investor.
For most businesses, Ulrich recommends a hybrid approach.
“Get as far as you can on your own. It’s amazing what an resourceful entrepreneur can do with nights, weekends and a credit card,” Ulrich says. “Once you’re confident you can productively invest capital to grow you business. Then and only then, seek outside investment and hit the gas on marketing for growth.”