Bootstrapping Vs Raising investment
When it comes to raising capital for your business, no two fundraising stories are the same. There are many factors to consider when deciding which route you should take when it comes to determining your start-up’s financial decisions.
The type of funding you choose to pursue can rely on a variety of things. In this article we’re going to explore both bootstrapping and acquiring angel/ VC investment, and how you can determine which avenue is best for your business.
1. Timing
The timing behind your start-up funding journey could make or break your investment rounds.
You don’t want to approach the investor’s table too soon as you want to show that you have bared some skin in the game by displaying your core responsibilities. However, there are a few points to consider as to why it’s a good idea to raise early and fast.
From a completely practical point of view, you need some cash flow to assist with early start-up costs. If you are a particularly young founder, or find it very hard to balance building your business with a part- time job, you might not have access to enough capital or savings to bootstrap your way at the beginning.
There is already a lot of uncertainty involved when trying to determine a product- market fit without worrying about when the next round of funds will enter your account. Also, approaching investors early could help uncover different perspectives and questions that can make you more prepared for your market launch.
One key advantage of raising early is that the access to capital can allow your business to be the first to market, helping you beat your competitors and becoming the leader of your sector.
2. Equity and key decision makers
One of the most obvious benefits of bootstrapping is not having to worry about ownership dilution.
For example, if an investor provides capital in exchange with 15% of your company, the rest of the founding team’s ownership gets diluted by 15%- whether you want to distribute this equally or not can be factored by a number of reasons.
You can calculate whether or not this dilution is worth it by estimating whether that 15% stake produces a greater value (monetary or otherwise) than what you would hypothetically have to ‘give up’.
When you’re giving an investor or a VC firm a seat at the table it’s important to understand that you’re not only accepting their capital, but their decision-making contributions as well.
An investor will usually provide insight onto hiring/firing decisions, marketing methods and product feedback.
Ensure that you’re not just choosing an investor due to how much money they can bring to your venture, but someone’s voice who you’re excited to onboard onto the team.
3. Projected expenses
Once you have finally completed a successful funding round, it’s so easy to think that the capital you’ve raised is not from your own pocket and to spend it however you like.
Oh how wrong you are…
You have to constantly remind yourself that this money should be treated like your own and whilst experimentation with different strategies is good, not to go too overboard with your costs.
Keeping long term profit goals at the forefront of your mind can be a useful way to curb start-up expenses at the beginning of your journey,
4. Projected revenue
Chances are, if a VC firm has a stake in your company they’re going to want to cash out relatively early in order to yield their much-anticipated returns. On average, you can expect this to happen between 7–10 years after the first funding round-of course there are always exceptions.
What this means for your business is that in order to secure that investment in the first place, you need to prove that the investor’s target return can be secured by the timeframe they had in mind. Hence your company now has a target growth rate for the next couple of years
A lot of start-ups have found that this perceived ‘deadline’ adds unnecessary pressure to their already stressful start-up journeys. However, many people like the type of accountability that this creates as it acts as a good motivator and company management tool.
Whether you are at the very beginning of your fund raising journey, or several years into generating revenue, there are many reasons behind wanting to secure investment.
Hopefully, having read an outline to the possible advantages and disadvantages of both self- funding and raising investment, you now have a clearer idea on how to assess which avenue is best for the stage your company is currently at.
If you’re still unsure as to how to raise capital for your start-up, let me know and we can book some time to discuss the best avenue for you!
