Bootstrapping vs Fundraising: Which Is Better?
Bootstrapping vs fundraising: which is better? If you’re starting a business, you may be wondering whether it’s better to go the traditional route of seeking out investors and fundraising or to bootstrap your company.
There are advantages and disadvantages to both approaches, but ultimately, we believe that bootstrapping your business is the better option for most entrepreneurs. Let’s look at bootstrapping vs fundraising side by side.
Bootstrapping vs fundraising
For many startup founders, a round of VC funding provides immediate cash plus validation of their entrepreneurial success. However, this doesn’t necessarily mean that VC funding is always the best path.
Andrew Beebe, a venture capitalist at Obvious Ventures was impressed by the small startup that recently made a pitch to his firm. The founders of the startup were looking for an investment to help them hire people and develop their idea. They were already selling their product and making revenue through an e-commerce site that they had quickly built.
Beebe states, “That’s very distinct from someone coming in at seed stage with a plan, a deck, and an interesting team.” I might also fund them. But this company is getting a higher valuation because there’s much less risk.”
The founders had already braved the market before seeking early-stage funding and were rewarded with better deal terms.
Do you raise money immediately so you can build your team and invest in your idea? Or do you wait to raise capital and then bootstrap — finance yourself through sales — until you have secured some cash and then later sell a portion of your company in return for venture capital?
It is difficult to start a business. Beebe, who co-founded two tech startups before becoming a VC, says that you should consider your pain threshold.
Sometimes entrepreneurs are forced to seek venture financing because they cannot afford to go without a paycheck for months. Or perhaps their idea requires a substantial upfront investment to get it off the ground.
If you are able to manage it, bootstrapping can be a good option. at least until you have a prototype of your idea to show potential investors.
Bootstrapping is not only a good approach for niche businesses. Atlassian, Github, Wayfair, Squarespace, Spanx, and Patagonia are among the companies that have adopted some form of bootstrapping on their way to achieving mega-success.
Benefits of bootstrapping
1. Hold on to a larger share of your company
The quicker you raise money for your startup, the more you will be penalized in equity and dilution. If you can rely on bootstrap financing for a short time, you will likely retain a larger portion of your company when investors come in.
Scott Dettmer, a Silicon Valley lawyer who has been helping startups since the 1980s, says that If you can delay raising venture capital, it will allow you to raise money on more attractive terms. A company without revenue might be valued at just a few million dollars, while one with early traction might be valued closer to $10 million. This could result in a larger infusion of capital and founders keeping more of their company. By delaying VC funding, startups can gain an advantage in negotiations and potentially secure better terms for themselves.
The importance of early-stage revenue cannot be understated. Even a small difference in revenue can have a big impact on a company’s future success. diluting equity early on can magnify the effects down the line, so it’s important to be mindful of these things from the start.
2. Expand fundraising options with better terms
If you’re waiting to see traction and revenue before seeking investment, you’re doing the right thing. This will increase interest from potential investors, as Beebe points out: “If someone is trying to raise $200,000 with just a napkin and a napkin,” they’re not likely to get funded. “But if they reach a point where they can and should raise $2 million and they have some meat on their bones, that’s our sweet spot.”
Bootstrapping may also offer better terms than just pricing. In exchange for funding, you may have to give up a certain number of board seats. The party who has the upper hand in terms of sheet negotiations that determine liquidation preference and conversion mechanics is usually the one with the most power or control in the situation.
You can invest the time to instill good habits, and then raise funds once they are a part of your company’s culture. Waiting can help you ensure that you have a product-market fit before you rush to make market dominance.
There are practical reasons to raise funds before that point. For example, you may need money in your bank account. If you don’t have capital, it’s difficult to start a business. It’s impossible to predict how long it will take to find a product-market fit or get to profitability. To cover costs along the way, you’ll need a safety net of money.