Some founders will self-fund their startup business at the beginning stages, however, most will look to external investment in order to grow and scale.
Both methods of financing startups come with their pros and cons, and that is what we are going to have a look into in this blog.
Let’s start with bootstrapping. Bootstrapping is when a founder uses their own money to fund their business at the beginning. If this is successful, the business’ profit will then be reinvested back into the business. This may be a good option if your business does not need a lot of funding to get started, and this is dependent on the type of business you are, and the costs you incur. If you can afford this as a founder, there may be no real need to seek third-party investment.
However, if you need to look elsewhere for investment, this is when a founder may turn to fundraising. Founders can raise funds from external sources, such as Venture Capitalists, to allow their business to grow. There are different types of funding rounds; starting with seed funding as the very first round, and then moving to Series A, B, C, D, E, etc. The stage of funding you are in indicates what stage of the journey a company is at.
The majority of companies will take on external investment at some point in their journey, in order to grow, scale and then exit in years to come.
So, moving to the pros and cons of bootstrapping vs fundraising:
Pros of bootstrapping
- You have complete control of your financials and company decisions – Founders who decide to bootstrap will have full ownership of their startup, and therefore they do not have to discuss business decisions with external investors. Founders have a lot of responsibility when it comes to business decisions, and therefore they need to be on top of every aspect of the business, in particular financials. Founders can also hire advisors and freelancers when needed without having to ask third parties for permission, therefore leading to greater flexibility when hiring employees.
- Growing at a suitable pace – Rapid growth usually is not the immediate goal for a startup, and this can be an effect of raising external investment. Bootstrapping the startup will allow it to grow at a gradual and steady pace which can be agreed upon by the Founder.
Cons of bootstrapping
- Financial risk – A Founder funding their own company is at risk of failing, as is any startup. If you are putting your own money into the company, there is a chance you may not get it back.
- Growing at a slower pace than expected – Bootstrapped businesses tend to grow at a slower pace because they do not have the funds or resources to scale rapidly. However, this may not necessarily be a bad thing if your aim is to grow slowly and steadily.
Pros of fundraising
- Resources – With the help of external investment, Founders have more money to play with, and the financial risk of their own financials is limited. Financial freedom is created to focus on business interests rather than day-to-day operations, and a little bit of pressure is taken off.
- Rapid and fast growth – Founders with external investment can drive the business forward at a much faster pace. Funding is a good option when there is a short window of market opportunity and a need to quickly compete with large corporations. Investors are also of added value as they can share valuable insights, expertise, and help with business decisions. If you have a high-profile investor onboard, that inevitably adds credibility to your business.
Cons of fundraising
- External control – Major business decisions must be run by stakeholders, decreasing the Founders’ control over the business. If you pick the right investors then you shouldn’t have much trouble. However, in some cases getting things done can take a lot longer than desired.
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