Funding Vs. Bootstrapping: Which is Better for Your Startup?
Sourcing finance for growth plans is a huge part of running a startup. There are many stages and steps involved in getting a brand-new business off the ground. From that initial inspiration, to developing a sound concept, planning, staffing, marketing, and launching. But hard cash underpins everything a startup founder does and can dream of doing.
Securing the funds your new business will need is as much a part of setting it up as investing time in ecommerce website development and other practicalities. Like setting up your website, too, making a choice on funding requires a thorough understanding of your business and its needs.
There are two main types of funding for startups; funding from an outside source—an organization or business—and what is known as bootstrapping—in other words funding the business with your own money.
Let’s look at both options, and find out whether funding or bootstrapping is the right choice for your startup.
Funding v Bootstrapping: What’s the Difference?
Before we look at the differences, let’s establish one thing funding and bootstrapping have in common. Whether you’re seeking the support of an outside organization, or are planning on using your own money, you will need a sound business plan.
Yes, even if you’re going to remortgage your house, delve into savings, or get a loan from a family member, you should be as sure as you can be that your startup is a solid, potentially lucrative, and well planned business.
Just as an outside investor would want to see the potential and projected returns on an investment, you shouldn’t risk either your own finances or those of a friend or loved one without the exact same information.
The biggest difference between funding and bootstrapping is in who carries the risk. With bootstrapping, you’re risking your own finances, whereas with funding, the external party is taking the risk in investing their money in your startup.
To counter the risk involved in either option, you need to have confidence in your startup and have carefully costed and projected how much you’ll need.
Another difference is in how much control you as an entrepreneur have over your business finances.
With bootstrapping, nobody is going to say no, or set conditions or even targets, but outside funding will most definitely come with some strings attached. You will also most likely have to make repayments to a set schedule.
Funding can also offer your startup larger amounts of money. Having a bigger cash injection can help your business grow more quickly. How fast you can grow your business is particularly important when scaling a managed service provider business.
Bootstrapping on the other hand, can mean a tighter budget. The money has come from your own personal pot, and you may have to eek it out and grow your startup more gradually.
Bootstrapping, the Pros and Cons
Let’s take a closer look at the advantages and disadvantages of bootstrapping to finance your startup:
You get to call the shots. It sounds obvious, but it’s worth remembering that if you’re spending your money, and it’s your business, you get to make all the big decisions.
This degree of freedom, without having to please anyone else, or be accountable, may be very important to you. In fact, it might be why you’ve opted to set up your own business in the first place.
You might be more careful about what you spend. If the money is your own personal funds or money that comes from a personal loan, you’ll be less willing to get carried away with spending it.
You can take bigger risks, too. If you’re risking your own money, and there’s nobody but you and your team to have a say, you can be more experimental, creative, and take the risks you judge to be worth it. This can be incredibly liberating to your entrepreneurial spirit, and may, afterall, be the reason you have opted for a startup.
Higher personal risk is a factor to consider with bootstrapping. Many entrepreneurs take out loans or use business credit cards to set up and grow their startups. This can put their personal financial stability in jeopardy, and is something some startup founders are unwilling to do.
Bootstrapping can also mean personal sacrifice in terms of free time, home life, and standard of living. When you’re investing your own money, and are making all the decisions yourself, it can mean that you experience more stress and work harder.
Investors who provide outside funding can also have an input into the business in terms of offering advice and expertise. Bootstrapping means managing without this, and this can be tough.
Having to make a smaller budget stretch is also a hallmark of bootstrapping, unless you’re personally wealthy. Managing with less capital can mean scaling back ambitions and making slower growth.
When Bootstrapping is the Right Choice
Bootstrapping is a good fit for many startups. It’s a matter of making the right choice, and, as with choosing OnlyDomains ai domain names it really depends on your startup identity and ambitions.
If your startup isn’t going to require a big investment of cash, raising money from investors may be more work and more pressure than you need. Some businesses need work, ideas, and time to set up rather than money to hire staff, or purchase stock, real estate, or equipment.
Equally, if your startup is not a particularly unique idea, an investor might be less inclined to fund you. Bootstrapping is probably the better way to go in this scenario. It could also be that the money you generate as you begin to trade is enough to finance the business.
Funding, the Pros and Cons
If you decide to go down the road of seeking outside funding, there are various choices.
Just as getting the right financial services software for your startup is crucial, deciding if you would be better off attracting an angel investor, getting help from venture capitalists, or applying for a business grant, is important. But whichever source you opt for, the pros and cons of funding need to be considered:
One advantage of having an investor onboard, is that they can offer advice, share contacts, and pass on networking opportunities.
Business knowledge and experience is always worth having on board, whether it’s to advise on selecting the right business phone or marketing a new business. It’s an advantage of outside funding that bootstrapping can’t offer.
Along with cash and expertise, having outside investment can also raise the reputation and image of your startup. The validation from an investor, who believed in your startup enough to inject it with cash, can be a fantastic boost for a new business.
Funding generally injects more money into the business than bootstrapping can. This means that expansion plans and growth targets can be realized much faster and more easily.
There are obviously some disadvantages of outside funding. There is accountability to investors, and there are conditions to the financial help you receive. It could also be that you have to sacrifice some equity in order to gain the funding, and therefore lose a little control of your business.
It can be a lengthy and complicated process to gain investment. It can mean a big investment of time, polishing and preparing a sound business plan and providing evidence that your business is going to hit the ground running.
Investors may put you under pressure to reach certain financial targets within a fixed timeframe. This can mean sacrificing some of your plans in order to drive profits, perhaps more quickly and less organically than your entrepreneurial instincts would like.
When Funding is the Right Choice
Funding can be the right choice if the opportunities and restrictions it represents align with your business. Maybe you have a plan to build a mobile pipeline game event, or ambitions to launch in several countries. Whatever the direction you want to take your startup, financial backers can be a real boost.
If your business idea is particularly different or unique, you will be much more likely to hook investors. Likewise, seeking funding may be the best option if you need to make rapid inroads into a market, due to the nature of your business.
Some businesses are very cash hungry, in terms of getting them off the ground. Most of us would be hard pushed to raise enough capital for a business like this, just from bootstrapping.
Another reason for opting for funding is that you’re confident you can earn back the investment quickly, and free yourself from the conditions of the funding and input of the investors.
Know Your Startup
Being open is the best approach when considering ways to finance your business. Being receptive to new ideas might lead you to take advantage of the latest AI augmented software or be creative in how you gather the right team or promote your business. But as well as being open minded, you also need to truly know your startup.
Whether you choose bootstrapping or funding will depend on all the factors we have considered. But properly knowing your business plan, your style of business, your ambitions and even considering your own personality as an entrepreneur are really important.
There is no right answer when considering funding vs bootstrapping, there is only the right fit for your startup and your ambitions.