Bootstrapping or Venture Capital: The pros and cons every startup should think about

VC-versus-Boostrapping

The question you need to be asking yourself in the beginning is: “Are you a startup or a small business?”. Is your business there to support your lifestyle as a business owner? Or do you have grand plans to become number one in your sector, or even transform a whole industry, with an international customer base?

As a small business, the related passion, pride and excitement making something you are interested in (not forgetting the responsibility you have to provide an income from your passion project) make it worthwhile.

If you don’t know the answers to the above or aren’t sure what the future means to bootstrap or seek out venture capital, here are some pros and cons:

Bootstrapping

Be yourself: If you have worked for a big corporate, then you will know sometimes you have to grin and bear it with less than ideal colleagues or even that crazy manager you must work with.

Working for yourself can be great if it’s a lifestyle you want. Let’s say you have a young family and want to be home to put the kids to bed, a side passion for a sport or other hobby. Working in a small business for yourself is ideal for this arrangement.

Assuming you have an income to live on, don’t forget that at the beginning you could be doing everything yourself. You may have to spend a large proportion of your time, preparing quotations, invoices, payment reminders, web design, marketing and everything else apart from the business you set-up.

Innovation: Innovation often comes about as a result of serendipitous research. Sometimes it is incremental but rarely breakthrough. Bootstrapping yourself in a small team can afford many mistakes, and It’s not often you can add this to the top line, only showing a negative for the costs incurred. This process of discovery and learning can be instrumental in providing customers with new features and products.

Finances: If you’re working to a tight budget, finances will be at the front of mind. You need to make it work, and quickly to sustain the business on a positive footing that you enjoy some of the profits as well as re-invest for growth.

If you think your business is suitably scalable by an exponential factor, then venture capital may be the way forward.

Some examples of successful bootstrapped businesses include MailChimp, the email newsletter software; Lynda, the training video producer subsequently purchased by LinkedIn for $1.5 billion.

Venture Capital

Can provide you with the mentor-ship and potential connections and the accelerator for you to reap the rewards of scaling your business idea much earlier than when alone.

If your ten-year exit plan is to sell for €100 million, it’s likely you won’t do this without venture capital.

Investors want their returns and may typically look at 8-10x their investment. Capital is not given away lightly. You and your team will need to know how to pitch, investing in the marketing for a slide deck and grooming your presentation skills as well as the business plan with key milestones for growth. Preparing for VC funding is a substantial time and cash investment.

Control: You no longer control the business but assuming you have aligned your interests with your new partners and your forecasts were reasonably accurate it could be a great partnership.

You are only a number and if that number is not providing a return, expect some pressured meetings.

Investors have an agenda, and they may not be the same as yours. Managing this friction can be challenging.

Connections: Sometimes it doesn’t matter how good your business idea is, having the right connections sometimes counts. The right VC partner may have the right connections such as a shared industry board team who can make introductions.

Experience: A good venture capital team will advise on going to market and elevating your brand to become the number one in your industry.

Legendary venture capital successes include Uber, Snapchat and Instagram.

Summary:

Bootstrapping and venture capital have their pros and cons. The business world is made up of thousands of small businesses. Small isn’t bad.

If you have some massive ideas for a successful startup, you will most likely need an injection of capital.

Ask yourself: “Can you cope with the pressures of the expected returns of an external investor? Are you confident in your business model? Can your new team ultimately assist in springboarding your startup idea to success? Are you in business for the lifestyle element to provide a regular income and the freedom to go your own way?”

Maybe you have a set timeline based on where you are now and where you will be in 1, 3, 5 or 10 years? There are no right answers here. Only you can answer them, but venture capital and bootstrapping are viable means of growing your startup.