How do you decide if your startup is ready for a round of investment, or if it should bootstrap?
Bootstrapping is basically doing your best to build your business with your own resources, from scratch. Venture capital funding is when you are selling your idea to an investor in exchange for ownership equity in the startup.
The term bootstrapping comes from the legend of Baron Münchhausen. In the story, the Baron managed to pull himself out of the water with the help of his own bootstraps.
The central idea behind bootstrapping in business strategy is to borrow minimal funds or no capital at all.
Bootstrapping is considered to be very effective because interest costs are kept to a minimum, since the company borrows very little capital – if ever borrowed. Often, however, founders, friends and families give their own money to the startup in exchange of some interest or some participation in the startup equity.
Microsoft, Apple and Dell are all examples of companies that were bootstrapped by their founders.
As the tech industry grows and creates solutions for all aspects of our lives, and as capital becomes more available, the cost of technology is dropping and what used to take a lot of time, funds, human resources and energy to be built can now be set up in the blink of an eye.
However although there is more capital and technology available, there are also a lot more entrepreneurs battling for funding.
Considering all of this when choosing between bootstrapping and raising a seed funding round in the ever more competitive venture capital space, as an entrepreneur you should ask yourself and your team five basic questions:
- How much control do you want to exercise over your own company?
If keeping control of your operation is very important to you, then give up on the idea of looking for an investor and look at bootstrapping. You and your co-founders will be the only decision-makers.
If you decide to look for an investor for your startup, you will have to give them some equity in return for the funds invested. Expect to have many meetings with them to discuss rebuilding strategy and roadmaps. If you are not such a fan of long meetings, you might be better off being your own guide and opting for bootstrapping.
- What is your growth strategy?
Do you want steady, organic growth or do you need to compete quickly within a small window of opportunity? In the case your company is dealing with a tech solution, chances are that the industry you are trying to enter has very intense dynamics, and speed is an integral part of all your competitors’ strategies. How are you going to be one step ahead of the competition if they have 400 people working hard on similar products and you only have 10? You need cash to stay in the race and keep advancing.
Creativity can be affected when you have a lot of funds at your disposal, as your team will not be so ingenious to find solutions as they might be with fewer resources. However, if you apply austerity to your spending and to your startup departments, it can give bring you the best of both worlds – of bootstrapping and of seed funding.
- What knowledge and skills are needed to grow your business and make it stable?
Smart money can be very important for expanding your business when you consider that experienced investors can bring a lot more than funds to the table. Investors usually had a professional career before they began to invest and have been successful in their fields. They may bring a lot of needed networking, advice, and resources to the table, along with the funding you need.
However, in case you want to rely on your own team’s skill set, and are willing to trade knowledge and experience for more autonomy and independence, bootstrapping is the best choice – unless you have to go after investment because of the development speed of your industry.
- Are you expecting a monthly return from the beginning?
With bootstrapping no one can rest assured that there will always be a fixed revenue, and much less certain is a fixed income. As most of your cash reserves and cash flow will have to be reinvested, there won’t be much left for you for many months to come – and in some months nothing at all. And most people cannot deal emotionally with this roller coaster.
When you have seed investment it is easier to obtain some fixed remuneration as part of the deal and part of the invested money, but you will need of course to reach the agreed milestones with your investor. The salary may be limited – but you will have the security of a monthly payment, if that is what you are looking for.
- Last but not least: is your product venture capital scale material?
Even without external investment, you can build a great business operation. And yes, many companies show evidence that you can bootstrap your way to the top, building a healthy and stable company.
However, if you want or need to raise money, your product should match three characteristics:
- Asset > Business > Product: Most of the time, investors are searching for fast growth, and short to medium term, high return investments. Thus, startups with long-term assets are more valuable. Make sure you are building a business, not only a product. The asset generated must be more than the business, and the business must be bigger than the product it has launched.
- 10x return: Is your company able to turn €1 in €10 in a foreseeable future? If not, are you able to turn €1 in €5? What is your multiplication potential? In order to set up conditions for a business that will attract venture capital, you need to create a scale value that outperforms traditional investments and returns.
- Velocity: How fast can you grow your business operation? Investors will try to estimate your future growth based on your past performance. So the faster you grow, the better your forecasts tend to be.
A big part of your startup’s success depends on strategy. Are you able to make the right moves and decisions with the right timing? You must know your co-founders, team, product and business model very well. Your self-awareness will help you to make the decision between bootstrapping or seed investment.