You’ve come up with a brilliant idea for a product or business – now what? Although coming up with the idea may have been difficult, there is another roadblock ahead, how to make that product or business come to life. While you may try to immediately seek funds for your venture, angel investors or venture capitalist will be curious to see if you yourself have invested in your own brilliant idea. Or, let’s say that you have the funds to get the business started yourself, how will this affect your financial stability and impact you and your family personally?
When it comes to money, one of the most important decisions many entrepreneurs will face is whether to “bootstrap” by investing their own funds and resources into the new venture or raise funds. If you choose to bootstrap, your business becomes a large allocation of your existing financial capital which can affect liquidity and risk. If you choose to raise funds, you are giving up part of your idea and business in exchange for financial stability. Obviously both of these paths come with their respective pros and cons.
By approaching the funding decision as you would an investment decision, it can be easier to evaluate the risks each route possesses and how they impact your personal risk appetite and capacity. Some of the key factors to evaluate include ownership, access to capital and the revenue model.
Risk Factor 1: Money Drives the Ownership and Operation
Raising funds is never easy; however, recent funding for U.S. startups fell 25 % from the previous quarter, marking the largest quarterly decline since the dot-com bust. Money is never free, but in the startup world it increasingly comes with more strings attached.
If you do indeed raise funds, it is also important to stay realistic. While it does potentially bring stability and may afford you a salary, you are not just given a large check to spend freely. In most cases, you are given an overall commitment and then paid in installments after reaching certain milestones in your business. Having a clear explanation of terms and powers can help, but ultimately when its not 100% your investment, you are at least partially beholden to someone.
Conversely, bootstrapping allows you to remain in control, retain ownership of your company, and dream while managing the rate of growth. This removes the potentially onerous and inorganic process of having to report to and run everything by board members, abiding by their timeline and worrying about deliverables rather than building the core of the business.
Prolific venture investor Ben Narasin famously said, “Money is like air to a startup. If you can’t convince a single person other than yourself to invest in your idea, why should you invest your own time and money?” So, even if you are already extremely wealthy and can afford to bootstrap, it may still be a good idea to raise capital. This way other people can help stress test and vet the idea, and you are diversifying some of your risk on the off-chance things never take-off.
Risk Factor 2: Money Drives Behavior
Whether bootstrapping or raising capital, as a founder you must consider your own financial picture. If you are wealthy and could easily bounce back from an unsuccessful startup, this may impact your overall business model and potentially your day to day vs. someone who is in their early 20s with no savings. Consider the worst-case scenario. If the company fails, how will that impact you and your family? Do you have enough liquidity or diversity to serve as a safety net? Certain things you need to take into consideration are your existing financial health, access to liquidity and alternate streams of income like spousal or family financial support, income from real estate, inheritance or sale of a previous company.
Your business also needs to stay liquid. Pad the runway estimate with some cushion as technology development and customer acquisition can often take longer than expected. In addition, plan potential pivots as you don’t know what you will learn from the market. What are things that you would quickly ramp up if you were outperforming expectations and wanted to allocate more capital vs. what are things that could quickly be cut or downsized if need be?
Risk Factor 3: Money is driven by how you make money
Equally import to consider in this entire debate is the question of how this money is going to help you make more money? Ultimately, the right approach can depend on what kind of business you plan to build and how the company will make money.
If your business will start generating revenue and profit immediately – you may not need to raise capital to prove the concept or develop the infrastructure (technology, space, etc). Instead it may be worth starting out by bootstrapping, assuming you have the liquidity, and saving potential capital raise for future growth. If your business is something completely innovative that needs a longer runway to iterate, get regulatory approval, or engineer/develop, bootstrapping may not be appropriate.
Thus arises the age-old question, To B(ootstrap) Or Not To Be? And remember, no matter what path you decided to take, be sure to take your time and plan ahead, and plan for the unexpected.