The first thing any startup needs to get off the ground is capital. There are multitude of options available, but which one works for you depends on many factors. Bootstrapping vs venture capital are the two options that are the most contemplated. We are sure you have seen many online debates on bootstrapping vs. venture capital, but deciding on one can be tricky. Therefore, we put together a simple approach to determine what might suit you and your startup.
We are 21BY72, an angel investment network working to bridge the gap between startups, investors, and industry experts. We have conducted three successful Global Startup Summits dedicated to global exposure to the Indian startup ecosystem. We have worked with many startups and entrepreneurs to learn what works in the startup world. We will discuss the pros and cons and share some factors that influence the choice to help you decide which of these startup funding strategies is suitable for your startup growth.
What is Bootstrapping for a Startup?
The word bootstrapping originated in the 19th century (source). It refers to completing a task without the assistance of others. Then it was used in the
business world to describe the process of beginning your own business without the assistance of an external finance source. Therefore, bootstrapped startups use private funds, startup revenue, and subsidiary funds. Zerodha, Wingify, and Kayako are well-known bootstrapped startups in India.
Let’s look at some pros and cons of bootstrapping strategies for startups.
Bootstrapping Advantages
● Ownership: You are the sole owner of your startup with 100% equity.
● Authority control: You have complete control of operations and decision-making without external influence.
● Encourages innovative thinking: Due to limited resources, entrepreneurs develop creative ideas to handle operations and tackle problems.
Bootstrapping Disadvantages
● Limited funds: There is a cap on the funds raised for the startup from private sources like personal funds, friends and family, and more.
● High risk: The risk of losing personal funds is much higher and can put psychological pressure on the entrepreneurs.
● Opportunity cost is high: When you opt out of bootstrapping for a startup, you have restrictions on securing and distributing the resources, leading to missing some growth opportunities.
What is Venture Capital for Startups?
Venture capital is among the most popular funding models for startups. It is the funds raised from financial institutions providing startup funds in return for equity shares. While multiple equity-based startup funding options exist, venture capital firms are the risk-takers investing significant amounts for the startup growth. The goal of venture capital for startups is to scale the business, boost the operations, and help the startup expand its market.
Let’s look at some benefits of venture capital for startups:
VC Advantages
● Sufficient funding: The VCs offer enough funds for the startup to scale its operation and grow its market presence.
● Expert guidance: Venture capitalists provide industry experts to help startups make efficient decisions and get the best of the market trends.
● Sharing risk: Venture capital firms share the risk of operating the business as they take the equity shares.
VC Disadvantage
● Sharing the equity: The venture capital dilutes equity shares, leading to reduced control and profits for the entrepreneurs.
● Performance pressure: Venture capital firms often pressure startups to perform and earn higher profits.
● Influence on operation management: Venture capitalists significantly influence operations and decision-making.
Bootstrapping vs Venture Capital: How to choose between the two?
While both of these funding models for startup funding have unique pros and cons, there are a few factors to help you determine which is suitable for you. Following are a few of the most critical factors you must consider when debating bootstrapping vs. the venture capital model for your startup.
-
Ownership: Are you willing to give up equity shares?
Do you want sole ownership of your innovative idea and the startup? Or are you willing to give up some portion of equity shares for significant funds? You need to opt for one path. Thus, bootstrapping for startups is ideal for those who want complete business ownership, and venture capital is perfect for those who can manage equity dilution for significant capital.
-
Growth scale: Do you want a rapid or steady growth rate?
Funds are crucial for the startup’s growth. Therefore, when you opt for bootstrapping, you can access limited funds and resources, leading to a steady but often slow growth rate. However, with venture capital, you have significant funds to boost your startup growth. Choose whether you want rapid growth or steady based on the competition and market opportunity.
-
Decision-making: Would you rather be autonomous or dependent?
One decision can tilt the scales of your startup’s success or failure. So, efficient decision-making is crucial for startups. In bootstrapped startups, the
entrepreneurs are the only ones responsible for making the final call and are thus autonomous to do as they see fit. On the contrary, venture capital firms significantly influence the decision-making process. Therefore, the startups depend on the funding firms to make the final call. Understand the nature of your startup and whether you can afford such dependency on a third party.
-
Finances: Would you use personal funds or raise them from external sources?
Financial constraints are the most common issue faced by startups. You must decide between bootstrapping or raising venture capital for a startup.
Bootstrapping is good if you have a low initial cost and a scalable business model to earn rapid revenue. However, venture capital might be a better choice if you need to spend significantly on R&D and in the growth stage.
-
Resources: Do you want to source it yourself or with investors’ help?
Gathering the necessary resources can be tricky. Bootstrapping limits access to resources, while venture capital gives you easy access to resources. Therefore, consider if limited resources work for you or if you need the support of venture capital firms.
Conclusion
There are many alternative funding sources for startups; however, bootstrapping and venture capital confuse entrepreneurs the most. The debate
of bootstrapping vs. venture capital has been going on for ages. Bootstrapping for a startup gives full ownership to the owner with decision-making control and promotes innovative thinking.
However, it limits the startup’s funds, resources, and growth rate. On the other hand, venture capital boosts startup growth rates with the help of expert guidance. However, equity dilution and influence on the decision-making process are critical factors one should consider before choosing VC. Common factors impacting the entrepreneur’s startup funding strategies are equity dilution, finance restraint, resource access, growth rate, and influence on decision-making.
FAQs
1. What’s the difference between venture capital and bootstrapping?
Venture capital involves raising funds from investors in exchange for equity in your startup, offering rapid growth potential but often reducing founder control. Bootstrapping, on the other hand, relies on personal savings or business-generated revenue to fund operations. While bootstrapping retains full ownership and decision-making, it may limit growth due to fewer resources. The two choices depend on your growth aspirations, willingness to share equity, and resource availability. Both approaches have their merits based on the startup’s vision and financial needs.
2. What are the popular startup funding options?
Startups have several funding options to explore based on their stage and goals. Bootstrapping, angel investors, venture capital, crowdfunding, and government grants are common. Bootstrapping is ideal for retaining full ownership, while angel investors and venture capitalists provide growth capital in exchange for equity. Crowdfunding offers an alternative, which is raising small amounts from many individuals. Government grants often come with no equity loss but have specific eligibility requirements. Each option has unique pros and cons that the startups should consider before creating startup funding strategies.
How to attract venture capital firms for your startup?
To attract venture capital firms, startups must showcase a strong business model, market potential, and scalability. Create a compelling pitch deck
highlighting your unique value proposition, financial projections, and growth strategy. Networking is key to startup growth, so attend industry events and seek introductions through mutual connections. Demonstrating traction, such as customer acquisition or revenue growth, builds credibility. Additionally, align with venture firms specializing in your sector to increase your chances of securing investment. Clear communication and a robust business plan are crucial to gaining VC interest.
3. What happens in bootstrapped startups?
Bootstrapped startups use personal funds, savings, or reinvested profits without external funding. Founders maintain full ownership and decision-making authority, allowing them to align the business with their vision. However, limited resources may slow growth and restrict the ability to
scale quickly. Bootstrapped startups often focus on lean operations, prioritizing profitability over rapid expansion. The approach fosters discipline,
resourcefulness, and a deep understanding of the business. Successful bootstrapping requires careful financial management, strategic planning, and a long-term commitment to sustainable growth
