I know what you’re thinking: not another blog about funding a startup. Just kidding. Anybody at the beginning of their entrepreneurial journey knows this is a key question when it comes to starting and scaling their business. We are going to identify some key startup business tips to help get your business off the ground successfully.
Although there are a number of different routes, two main methods stand out, standing in stark contrast to one another: bootstrapping and venture capital.
In this article, we’ll explore the differences, the benefits of each method, and how to determine which route is the right one for you and your business.
What is Bootstrapping?
Bootstrapping means building your company from the ground up, with zero outside investments. Some of our favorite founder stories start with bootstrapping and eventually lead to the much-coveted “unicorn” status. Think Spanx, whose founder, Sara Blakely started in 2000 with $5,000 of her personal savings. Twelve years later, Spanx was valued at over $1 billion – and of course, Blakely still owns 100% of the company.
According to Investopedia, studies have shown that nearly 80% of all startup operations are funded by the founders’ personal finances, with startup costs averaging around $10,000. While this means that your company may be dependent on your first few sales to get off the ground, bootstrapping also allows founders to retain total control of their company.
What are the Benefits of Bootstrapping?
If you’ve got a regular job (or a good amount in savings), and you’re comfortable investing your own cash and/or assets into the business, then bootstrapping can allow you to focus more on creating a strong product-market fit. Since a bootstrapped business’ entire existence depends on being profitable in order to reinvest and scale, there’s a better likelihood that cash will be spent conservatively, on sure-bet opportunities, rather than experimentation. And there’s more of an incentive to stay in tune with the customer’s wants and needs, allowing you to leverage those direct learnings in order to build an authentic brand that customers will love and laud.
What are the Disadvantages of Bootstrapping?
The most obvious disadvantage of bootstrapping is feeling cash-strapped. As noted, you’ll likely depend on your first sales in order to reinvest and grow your business. When it’s time to scale, unless you shift to angel or VC funding, you’ll likely end up digging into your own credit. The risk of failure is much more personal if you’re bootstrapping.
And speaking of “personal”, bootstrapping your startup can take a toll on your stress levels, as you find yourself working longer hours, at a faster pace than you may be comfortable with, in order to maintain healthy profitability. You’ll have to find clever and creative ways to solve problems and meet your customers’ needs.
Why Bootstrap Your Business Now?
Despite the pressure of self-funding your business, there’s less risk than ever. With more low-cost and free tools to help you build a foundation, you don’t have to worry that your entire life is on the line in case of failure.
While you may need to pay for a domain, creating a website is easier and more cost-effective than ever, with simple drag and drop builders like Wix and Squarespace. If you’re starting out in eCommerce, you can use Shopify to power your website for as little as $29 per month. And for any business offering customer support, there are powerful low-cost options for chat, like Freshdesk, which sports unlimited chatbots and chat capabilities for just $59 per month. Even business phone costs are lower than ever with tools like Tresta, a virtual phone system that provides unlimited calling and business texting from the smartphone you’re already using for just $15 per user monthly.
What is Venture Capital?
Depending on the type of business you’re in, venture capital can be a useful form of financing your startup. When you receive venture capital (VC) investments, the risk lies more with the investor – whether they are successful investors, investment banks, or another financial partner. The main point of consideration is the loss of equity. When you accept a VC investment, you’re also accepting a partner in your business – which can have its advantages and disadvantages.
Take the case of Jay Reno, founder of Feather, a furniture rental business straight out of NYC. It took bootstrapping, plus investments from the accelerator program Y Combinator, before Reno turned to VC investments. Now the 4-city operation is looking to grow with over $70 million in funding. During their initial seed funding, $8 million came in from Spark Capital, a firm that had already found success in the space with an early investment in Wayfair.
So although there is new pressure on Reno and Feather to scale, there are also new resources for industry connections and partnerships. When it comes to venture capital, choosing the right partners who see your vision and appreciate the opportunity, is an essential element to success.
What are the Benefits of Venture Capital?
Just like in the case of Feather, venture capital raised can also bring in new expertise, better opportunities for networking, and resources that can help to fuel growth. Since you’re choosing to give up equity in your company, there is likely no obligation to repay loans. (In some cases with VC’s, a conditional loan may need to be repaid. These are the types of deals you’ll often see Kevin O’Leary offer up in the Shark Tank.) You’re allowing your financing partner to take a risk, just as you benefit from fast cash to fund growth.
In an instance like Feather, there may be substantial costs to grow your business – in this case, inventory. Jay Reno needed to purchase furniture in order to rent it out – and as we all know, furniture isn’t cheap – so the funds he brought in through venture capital have allowed him to grow his inventory and expand much more quickly than he ever could have, had he chosen to continue bootstrapping.
What are the Disadvantages of Venture Capital?
As we’ve alluded to, the primary disadvantage of taking a venture capital investment is the loss of control. You are no longer the primary decision maker for your company, as investors become involved. And once you have the finances, it’s imperative they’re spent. This doesn’t always lead to higher profitability. In fact, in many cases, even though the cash infusion allows your company to scale more rapidly, it also reduces profitability.
More people are becoming skeptical of the process over time, as stories of very unprofitable VC-financed companies like Uber and Lyft – not to mention WeWork – infiltrate the news. And, while your valuation may increase each time you enter a new round of funding, seeking venture capital can be an arduous process and a major time-suck. After developing your proposal, you’ll end up sitting through meeting after meeting to secure funding – if you find an interested party at all. There’s a term for this – the venture capital treadmill. Once you’re on the VC treadmill, you’ll spend more and more time seeking new investments to appease your previous investors.
Why Seek Venture Capital Financing Now?
If you’re in the early stages of launching your business, it can be difficult to secure venture capital, but that doesn’t make it a lost cause. Some of the biggest businesses in the world have been funded by VC’s, including companies like Facebook, Google, Dropbox, and Alibaba. It’s clear that this can be an incredible financial strategy that can ramp up your ability to scale quickly and deeply penetrate the market, as long as you’re willing to share equity and control.
So Which Route Should you Take?
It’s completely dependent on your business and your growth strategy. Early on, you’re going to have to make a choice. While raising VC may seem like a sexier option to some, many companies just don’t need it. For instance, software firms have very low costs to start up, so it may not make sense to seek venture capital investments unless or until you’ve hit a roof and need the funds to scale. There are a number of other options to help fund your startup, including seeking investments from friends and family, small business loans, and crowd-funding. But at the end of the day, only you will know what’s right for your business.
To learn more about Feather and hear the full story from Jay Reno, check out the BiggerPockets Business podcast.