To Bootstrap or not to Bootstrap? That is not the question…
Tags: Revenue Sharing, Funding, Startup, Entrepreneurship, Venture Capital

Regardless of deciding to raise venture capital, a savvy entrepreneur should always be bootstrapping. Too many entrepreneurs have the goal of raising venture capital, rather than the goal of a viable business. Raising Venture Capital is easy if you can answer one question — how are you going to turn $1 of invested capital into $10? The decision to raise outside investment should be predicated on how fast you want to scale and if taking on money is worth the growth. That being said, here are 10 things things to think about when choosing to raise outside capital or to keep bootstrapping:

1. Ownership and Control

When you raise outside capital, you are selling ownership of your company. Investors are buying that ownership, and you as the owner or seller control that process. Consider whom you’re bringing into that ownership pool, as ownership rights usually mean voting or decision rights. This can be valuable, as you’re hopefully including some outside expertise in your decision making, but it can also be negative as you’re giving others the ability to assume control of your business.

“When you have VC funding, you have to realize that not only are you giving up control of your company’s profit and future earnings, you are also giving up control over your decision making and even your ability to pivot and change directions. This can be a dangerous thing to give up, especially if your investors are able to hamper a pivot or your decision making to the point you end up missing out on an opportunity to change or save your business. Losing the ability to make pivots is huge and one of the negatives of having investors. Make sure you trust your investor’s decision making ability and track record before you sign on to help prevent this.” Stacy Caprio, Accelerated Growth Marketing

2. Financial Risk

Starting a business is incredibly risky. According to the Small Business Administration (SBA), some 25% of businesses fail the first year. Bootstrapping elevates the financial risk you face as a founder as you’re capitalizing the business personally. Bringing in outside capital elevates the magnitude of financial risk, but lowers your personal financial risk.

3. Survival

Running out of cash is the #2 reason startups fail, according to CB insights. If you raise VC funding, you extend your runway by orders of magnitude. As a founder, it is important to understand the distinction that raising venture capital is not to extend your runway, but to grow your business and revenue. If you’re raising capital to extend your runway, you need to re-think your business plan and you’re unlikely to receive intelligent outside capital.

4. Scrappiness and Creativity

To be a successful entrepreneur you have to be scrappy. When your back is against the wall and you’re low on funds, how you fight your way out will determine if you’re successful. I’ve seen a number of funded entrepreneurs forget the scrappiness needed to be successful and resort to throwing money at problems. Funded companies have this luxury, but throwing money at problems rarely is the most efficient process. Bootstrapped entrepreneurs practice these skills every day and you need to continue to be this diligent, even if you raise outside capital.

According to Donna Fenn, author of Upstarts: How GenY Entrepreneurs are Rocking the World of Business and 8 Ways You Can Profit From Their Success, “Bootstrapping keeps you lean and focused, teaches you how to allocate resources creatively and prevents you from being wasteful or taking anything for granted. These are skills and traits that make great entrepreneurs.” Corl wholeheartedly agrees.

“I have started a number of companies, primarily bootstrapped. I’ve always thought of my customers as my first investors, if they’re not interested, I don’t have a real business. That being said, raising capital helps with growth, so once I have a clear customer acquisition strategy, I learnt to leverage debt solutions so I could grow and keep control of my business. I’ve been sharing these tips with my network and that was the motivation behind Richie Lending. You have to understand the debt funding process and realize that there is a middle layer that collects a lot of fees, which drives up the price on the debt market.” Ermek Rysbek Uulu, Richie Lending

5. Product Development

Product development timing is always an interesting conversation with an entrepreneur. Corl is a big fan of Reid Hoffman’s school of thought, where you should be pushing a product as soon as viably possible, and that you should be a bit embarrassed by the quality of your first product. Not that it is a poor product, but you should be getting something to market as soon as possible to determine market fit. For more nuggets of wisdom, we recommend Reid’s podcast, Masters of Scale.

This thinking is in line with entrepreneurs who bootstrap. Their first investors are their customers. You can’t wait to perfect everything when you don’t have a runway. This is much better thinking than some venture funded companies who have the “Field of Dreams” mindset in regards to product development — build it and they will come.

6. Time

Efficiency of money and time is the most important skill set required of an entrepreneur. It’s hard to allocate time properly when everything needed to be completed yesterday and you have hundreds of things you could be working on. Raising outside capital is a time commitment. Time that could be spent on your business.

In mine and my networks experience (unless you choose Corl’s expedited revenue sharing process) you will need 3–9 months and between 10–25 hours per week in order to close a venture round. This includes preparation, strategy, outreach, due diligence, closing. That is a lot of time and resources spent away from running the day to day operations and growth of the business. This must be considered.

“We started our wealth management and exit planning firm two years ago. We started it with zero capital and a network. Living on our personal savings for the last two years we have been able to build an income base into the six figures. We are not reinvesting every dollar back in to continue our climb with the goal to replace our pre-startup income by the end of 2019. Furthermore, we have zero debt and are completely funded through our positive cash flow. While this is not the norm for any business we were fortunate that our product strategy, market message, and digital outreach has been well received. We have considered acquiring debt to expand the firm but we believe we can grow more methodically through organic growth as our brand continues to expand throughout the business owner community. Additionally, we are working on our social media strategy by focusing on developing targeted ads and other messaging strategies to lower our acquisition costs to less than $25 per introduction. The worst part about “bootstrapping it” is the lack of resources to hire the right people who can help scale the business. Early on you wear multiple hats and only when you reach critical mass, and targeted revenue goals, can you afford to hire someone. Unfortunately when that time comes one tends to want to fill a seat fast to relieve some of the day to day pressures of running a company. In cases like this the business owner runs the risk of not hiring the right person which leads to time, energy, and money being wasted. If I were to do it all over again I would still have bootstrapped it for a defined period of time. However I would have also designed a plan to add VC capital once our strategy was tested and our market was appropriately primed.” Jonathan Peyton, Horizon Ridge Wealth Management

7. Strategic Capital

There are a lot of great investors out there whom have the ability to provide a number of network effects and strategic insights to your company. Finding these great investors is difficult, but when done properly, they can provide the direction and connections required to 10x your growth and help close your rounds.

In the entrepreneur world, there is ‘smart money’ and ‘dumb money’. Smart money is hard to find, but entirely invaluable. An article in the Journal of Finance proved that a venture capitalists on-site involvement with their portfolio companies led to an increase in (1) innovation and (2) the likelihood of a successful exit.

“There is capital, then there is strategic capital. Strategic capital provides relational, intellectual and experience-based advantages that are difficult for founders to find on their own. VC’s that have experience running companies, industry knowledge and connections can be the difference between success and failure.” Nat Clarkson, CFV Ventures

8. Scaling

Lots of people talk about scaling and growth hacking. Very few actually practice real scaling techniques. The reality is that optimal scaling includes capital. When you have product market fit and a proven way to reach customers, accelerating your customer acquisition through capital can get you to targets much faster than bootstrapping. If you’re not sure you have product market fit or a proven way to reach customers, you should not/will not raise venture capital.

9. Future funding/paths to exit.

Venture rounds are excellent ways to drive growth/increase valuations of your company. The same ‘smart money’ investors that you’ve found for your previous round are the same champions of your company that will help with future funding rounds and outlining paths to exit… because if there’s one thing a venture capitalist likes, it’s a successful exit.

Venture capital is a practice of networking and the best have the ability to close out your rounds if they believe you’re executing on your goals.

10. Other sources of capital

What? I’m a technology company looking for capital to grow. Banks don’t fund me, mom and dad aren’t giving you any more money. How else am I going to raise money beside venture capital and angels?

There are a growing number of options available depending on your company and geographic location.

Crowdfunding — Ever more popular with recent changes to securities laws. Crowdfunding is a great way to prove product market fit by getting your potential customers or the crowd to contribute to your company’s growth. There are a number of platforms that vary in type of crowdfunding and costs.

Small Business Funders — Ranging from Merchant Cash Advances to unsecured debt lenders, you have a number of funders that are expanding to the startup space.

Revenue Sharing — Investors that provide upfront capital for a share in your future revenue. Non-dilutive and aligned incentives for growth, revenue share providers are an increasingly popular approach to early stage funding.

Each option is different and cost/benefit analysis should be done depending on your business and what you’re looking to achieve. Short term debt or revenue sharing instruments can be extremely beneficial to keeping ownership while driving growth. These options do not provide the same level of assistance that potential ‘smart money’ investors can provide, so value will need to be weighed accordingly.