Starting a Business: Bootstrapping versus Venture Capital, Part I

Last week, I met with an entrepreneur who had put together a business plan and had started to think about the question of funding. She posed the perennial financing question to me: “Should I consider seed money from a venture capital firm or should I bootstrap and do this on my own?" She was confused and wanted advice from a seasoned professional as a recent women’s entrepreneurial conference she attended held a panel discussion where everyone told the audience they should do it on their own and not depend on VCs. 

My response was, as it always is, "It depends and I'm not sure there is one rule of thumb for everyone.”

There really isn’t one solution for starting a company. It depends on your personal financial situation; your ultimate goals for your new company; and whether or not you are doing this for the first time and could benefit from strategic help and an extensive business network.

Benefits of Bootstrapping:

• You own most of the shares and thus benefit the most in a sale or IPO.

• You can prove out concept before even considering VC funding and you would likely get a higher valuation, and thus preserve more of your equity.

• If you are planning to build a business that is more “lifestyle”—no planned exit over the next 3 to 5 years with reliance on the value of equity, but rather a nice income-generating business— bootstrapping makes a lot of sense.  Some business plans that aim to generate less than $100M annual revenue after five years are also less likely attractive to VC firms. (Look out for a future blog post on what VC firms generally look for in an investment.)

• Bootstrapping makes you very disciplined with your spending and your business priorities. I have seen other companies raise too much money too fast and they end up making poor decisions for the company in the long term.

Downsides of Bootstrapping:

• Bootstrapping can be hard financially since you will likely not receive any income from the business for a while. To help the business grow, you want to reinvest the earnings.  Families with a partner that has a stable income or folks who have other sources of income may not need to worry about this.

• Scaling the business can be challenging. Raising VC money earlier on can help provide support for additional resources and marketing/sales to help the business grow more rapidly.

• Unless you’ve got a great network, it is hard to make the time to continue to expand your contacts while at the same time running your new business's day-to-day operations.

To be continued in my next post…

If you're an entrepreneur who has already struggled with these decisions, please feel free to add other pros and cons to bootstrapping and raising venture capital funding by leaving a comment!

Cheers,

Sheila

Comments

[gaic]

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[Jeff Paul]

Well the most hard part of starting a business is to arrange funds , some time if your don't have good pr then it can even take ages to gather funds.