One of the fundamental questions that perplexes many startup
founders is whether to raise money through venture funding or to bootstrap
their startup. In short, there is no golden rule that states which method is
the best to grow your company, the solution is dependent upon various factors
such as financial health of the startup, scalability, market need, company’s
vision, etc. This blog explores the merits and demerits of each option: raising
money, and bootstrapping.
Raise money to
accelerate growth
While the answer depends on the type of business and
business model, it's often critical to raise money instead of bootstrapping if
you really need to accelerate growth or invest in product development. For
example, many SAAS businesses require large upfront investment in the product
before they ever make a dime, so raising money is critical for those types of
companies. [1]
Raise money if you
are first to market
If your startup is in a space where you are first to market,
then raising funds to quickly gain majority market share will make it difficult
for others to compete against you. [1]
Raise money if your
business has network effects
Network effects occur when a business becomes more valuable
with each new user. For any business with network effects, there is usually one
major winner (YouTube, LinkedIn, Dropbox), and many obsolete losers who will be
worth next to nothing. In these markets, you should raise as much money as you
can and aim to dominate the market. If you don't, your business will eventually
erode. On the other hand, if you are running a more conventional business
(consulting, retail, business services), then network effects are not as
relevant and you are much better off bootstrapping your company. [1]
Raise money only when
absolutely necessary
It is always tempting for founders to raise money at a high
valuation, but raising more money than you should could cause more harm than
good for an early stage startup. As Paul Graham, co-founder of Y Combinator,
states in his blog post: Venture funding works like gears. A typical startup
goes through several rounds of funding, and at each round you want to take just
enough money to reach the speed where you can shift into the next gear. [2]
Bootstrap to
emphasize on making money, rather than spending it
The fact that bootstrapped companies need a business model
that will produce cash immediately forces you to focus on how to make money,
rather than how to spend it -- which would be your requisite focus with loans
or VC funding. You learn immediately to appreciate your hard-fought-for money
and are more inclined to spend every working hour figuring out how to make more
of it, not spend it. [3]
Bootstrap to remain
in control
Bootstrapping your startup will help you stay in control of
the company’s direction since you won’t be swayed by investors pressurizing you
to execute their exit strategy. Often investors think about their short term
gains through an exit over the long term benefits for the startup.
Bootstrap to stay
focused on the product
Bootstrapping also enables the founders to be focused on the
product rather than trying to raise venture funding which often consumes a lot
of your valuable time. Successful companies are built by launching successful
products and not by successfully raising large amounts of venture capital.
To conclude, I would like to state that knowing how to
bootstrap your company is crucial for any founder as it enables you to focus on
making your company profitable which is of paramount importance for
establishing a successful company. Bootstrapping also allows you to prolong
your runway and burn less investor money. Do you agree with me and think that
founders must know how to bootstrap their company? In which cases do you think
that knowing how to bootstrap is not necessary?
Sources
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