Bootstrapping vs Fundraising: Which is Better For You?
Capital is one of the most important resources that helps you take your startup from idea to execution. Now, whether you should choose external fundraising or bootstrapping, largely depends on your long-term goals. To clear the air on capital, let's first understand the difference between bootstrapping and fundraising.
Bootstrapping is the practice of utilizing one’s existing resources, instead of using finance raised from external parties to start a company.
On the other hand, fundraising is the process of reaching out to potential investors, such as venture capitalists, angel investors, and friends, to invest in your startup in exchange for equity.
Which way should you go?
Here are some questions that can help you choose which is a better alternative for your venture:
- How much controlling power do you want to have over your own business?
As a founder, if you wish to keep 100% control over your operations, then raising funds from investors might not be the right choice. You might want to consider bootstrapping your startup.
In fundraising, you'll have to give the investors some percentage of the equity in exchange for the money they will invest in your company. This means you do not own 100% of the company. Once you have raised funds, your investors might want to weigh in on all business decisions, diluting your control power.
- What is the growth rate that you are aiming for?
Fundraising gives you access to a larger resource pool and guidance of seasoned investors. This accelerates the growth of your startup. A bootstrapped startup, however, has fewer resources, resulting in a slower growth rate.
You might also want to think about the market you are trying to enter. Is it a fast-paced industry and do you have many competitors that you need to outpace?
If time is of the essence, then you might need to fundraise to break into the market quickly.
But also keep in mind creativity improves under a scarcity of resources. While money may solve a lot of problems, a limited resource pool can push you to use your resources more efficiently.
- How much ROI are you expecting from the beginning?
When bootstrapping, you are unlikely to earn a steady paycheck in the beginning. To keep your venture afloat initially, you will have to reinvest most of what you make.
On the other hand, when you have some seed investment, the initial salary will be limited, but at least you'll have the assurance of a monthly paycheck. The cash flow undoubtedly depends on your startup meeting the pre-set targets set by the investors. However, you always have the security and safety net of having some capital available in times of need.
- Do you need financial assistance or do you need help in other aspects as well?
If you are confident about building your startup yourself and can start with your own resources then forget about everything else and bootstrap. But, if you need more than just money, then think of getting investors on board because they can add value in many ways.
Investors can provide you with knowledge and experience in various business fields and help you gain access to an influential network, experienced people in the industry, and a reputation that will help you grow your startup at an accelerated pace.
To bootstrap or fundraise ultimately depends on the founder and their needs. No one answer is objectively better or worse than the other; the bottom line is that it all depends on financial goals, growth strategy, and financing options.
Having said it all, we'd like to mention that it is possible to raise funds later in your business's journey, so evaluate your current business needs and work out a strategy that helps you right now.