How to fund and grow your startup: Bootstrapping vs External Capital
I bootstrap whenever I can and for as long as I can…very seldom do I give in and succumb to outside funding. Not that the outside funding is evil, it’s not…it’s just that it interferes with my personal freedom, which to me is sacred…in fact, it’s the pinnacle of personal success I strive for my whole life and don’t want to relinquish it ever!
If you’re an aspiring entrepreneur who’s about to embark on an exciting but bumpy entrepreneurial journey, then – among many other important things – you ought to think about how are you going to fund your startup, particularly in the early days or months…pre-revenue phase?
The good news is that contrary to what most aspiring entrepreneurs may think, the investment funds are readily available to passionate entrepreneurs who can demonstrate the need for their product or a service along with individual poise, know-how and ability to execute on their winning idea.
Do you qualify for the funds?
But wait, do you really want to go down this route?
Before you decide, let’s have a look at a several funding options available to you when staring a business…
Yes, this is my personal favorite and for a simple reason…I get to be my own boss and have no one to answer to…well, except my invaluable clients I’m fully indebted to and responsible for.
So, if you desire to become a self-reliant individual and in control of your own life, time and money, then you too should consider bootstrapping option for your startup.
But what exactly is the bootstrapping and how to apply it to your startup?
Simply put, bootstrapping means funding your startup with your own money. Sure, this may seem preposterous and perhaps ‘impossible’ for you – depending on the nature of your startup and funding requirements – but, it’s an option available to all entrepreneurs whose startups aren’t capital intensive.
For example, if you a lawyer, accountant, graphic designer, web developer, ghost-writer, project manager etc. and want to set up a business to offer professional services to your target audience, then you can get away without external funding…your setup investment and operational expenses would be minimal.
However, if you’re planning to start a business which requires a considerable upfront investment e.g. manufacturing or production plant, online platform etc. then bootstrapping option may not be the most viable and you may be forced to seek external funding.
I say ‘may’ because I’ve built the state-of-the-art freelancing platform by bootstrapping. Clearly, there were times when my partner and I were thinking about going to investors and seeking external funds but have decided against it…every time.
In hindsight, should we have gone to investors and raised funds, we would have been able to achieve our objectives a lot faster and be way ahead of where we are today but the question is at what price? That’s right, there’s usually a hefty price you have to pay in exchange for external funds…so be mindful of that.
- Family and Friends
In case bootstrapping is no longer an option for you due to capital intensive nature of your startup, your next best bet would be to go to your ‘inner circle’ or those who know and love you the most…family and close friends.
While this option is the least expensive or risky of all external funding options, be very prudent as mixing business with family or friends could easily lead to catastrophe and no one wants to see that happen.
Be very transparent with your family or friends who are willing to land you the money for your startup. Make sure to articulate all the risks associate with them investing their savings into your startup. At an early stage, your startup is unproven business at best and could either succeed or fail just the same…like many others that came before.
Let them know what they are getting themselves into. This way should you fail and lose their money, you may still be able to keep the relationships intact and the love of your family and friends.
- Accelerators and Incubators
On the back of startup frenzy over the last decade, with new startups popping up daily like wild mushrooms, startup accelerators and incubators have also been on the rise due to a high demand for their services.
Startup accelerators and incubators are organizations which strive to help entrepreneurs and their startups grow and succeed. They do so by providing aspiring startups much needed support in the form of workspace, training, mentoring, networking, seed funding etc. As such, accelerators and incubators are great vehicles for entrepreneurs to grow their startups in the early stage.
While accelerators and incubators are often used interchangeably, there are few notable differences between them.
Accelerators are for profit organizations run by business savvy investors and serial entrepreneurs who are chiefly profit driven. Therefore, accelerators usually have a very stringent selection criteria when selecting early stage startups to mentor and provide support to…not everyone is welcome to join.
Accelerators look for startups with a huge potential for growth and success…startups that could make it big in fairly short time. This is because accelerators take fair bit of equity share from startups in exchange for mentoring and other services they provide. Equity shares varies from one accelerator to the next and it can be anywhere between 3% to 20%.
Incubators on the other hand are typically non-profit organizations funded by the government entities and often times have academic affiliation. Unlike accelerators which have clearly defined aggressive program timelines – usually few months from start to finish – incubators are more relaxed in that regard hence, allow for slower, more organic startup growth which could last a few years.
Either way, accelerators and incubators are two funding and growth options worth looking at when starting your business.
- Angel Investors
Angel investors or angels are individual investors who have surplus of disposable income which of all investment vehicles they prefer to invest in promising startups in exchange for a piece of the action.
Typically, angel investors are wealthy individuals with net worth exceeding $1 million dollars and annual income of $250K or more. They are known for calculated risk appetite and ability to hedge their ‘bets’ or investments across multiple startups.
Angel investors typically invest early on in a startup life – seed round – and invest modest amounts, anywhere between $25K – $250K, of course there are exemptions to this rule when angels fork over even more funds.
Due to inherent risk associated with investment in pre-revenue, unproven startup which could go boom or bust, angel investors usually look for clearly defined lucrative exit strategy, acquisition or an IPO. They want to get rewarded for their risk taking…and rightfully so.
Angel investors also take ownership equity share or a convertible debt in exchange for their investment. The ownership equity share could be anywhere between 10% and 50% depending on the level or risk associated with investment and angel’s involvement in a startup. The greater the risk and more involvement from angels the higher the equity share.
Beware of angel investors, for if you decide to go down this route, be mentally prepared to relinquish a fair bit of control. You’ll be expected to report your startup’s performance on regular basis – monthly and quarterly – to angel investors and discuss strategy and any of your plans with them before you implement and execute them.
Yup, relinquishing control is one of the downsides of angel investing but there’s simply no other way around it…once angels have their money invested in your startup, they have as much say about it as you do.
- Venture Capitalists
Venture capitalists (VC) are institutional investors who usually work in teams with other VCs and invest pooled funds into promising startups or existing businesses that need additional capital for expansion and growth.
VCs have an appetite for risk in exchange for which they seek hefty returns e.g. 25% – 50% along with considerable ownership equity stake in anticipation of the future payout e.g. startup exit, acquisition, IPO etc.
Venture capitalists invest larger sums than angel investors, typically $500K or higher and often times in tens of millions of dollars in subsequent funding rounds e.g. series A, B, C etc. if the startup demonstrates its ability to grow and earn revenue or has a proprietary technology of sorts which has intrinsic value which is expected to grow steady.
VCs do all of this in anticipation of huge ten-fold returns or higher at the time of the exit they usually drive to. Of course, VCs often lose their investment but given their uncanny ability to manage investment portfolios through hedging, once it’s all said and done, most VCs come out on top…so don’t worry much about them.
Venture capitalists are business savvy and very shrewd investors who value their time and money more than others which is why VC funding option is among the most expensive…guaranteed to cost you dearly.
If you fancy a dance with a VCs be mentally prepared to relinquish much of the control of your startup but be strong and gutsy to protect it in case they seek to take controlling interest, which they offer do. Either way, you’ll have a new ‘partner’ who will be very demanding and most likely going to interfere in all aspects of your business.
Wrapping it up
In life and business alike, there’s no such thing as free dinner…don’t count on it. Instead, be informed…know what’s possible and what’s not…what makes sense and what doesn’t.
As an entrepreneur, you’ve got to be resourceful and street smart…know your options at all times and be able to select the most viable one, given the nature of your startup and the circumstances that surround you.
So, if until now you’ve not started your business but have been thinking about it long and hard, I’d say it’s time you do so…take the leap of faith. I mean, if you’ve got an idea, know with certainty that you have an entrepreneurial DNA and now you’ve learned about how to fund your startup, what could possibly be stopping you?
Author: Dzenan Skulj, a Co-Founder and CEO at Parttimerz. He’s a serial entrepreneur and student of life. Utterly passionate about and strong proponent of entrepreneurship, startups, freelancing and self-development, which he regularly blogs about on his personal blog dzenanskulj.com. Dzenan also actively mentors entrepreneurs on their entrepreneurial journey.