Bootstrapping vs Funding: Where is the Grass Greener?
Bootstrapping vs Funding;
Finally, you’ve decided to start your own business!
*Crowd whistles* *applause*
Let’s hear it for YOU!
But you know it’s no joke, right?
Starting a business has never been an easy task. There are all sorts of difficulties that you have to face such as making the right business model, coming up with a product or service that offers value and most of all WHERE TO GET THE SEED MONEY.
No matter how good your business plan/product/service is, you always need money for this endeavor.
There are two approaches that can help you fund your startups: Bootstrapping vs Funding.
In this piece, we’ll dive deep into both these concepts. Let’s find out, Bootstrapping vs funding, which strategy should you go for?
But first, let’s understand what both these terms stand for.
Let’s say you’re starting a business using your own money and/or taking out a loan from the bank. Such an approach, where you’re not selling your business’s equity in exchange for funding/investment is known as bootstrapping.
In bootstrapping, you use every resource you have such as time, effort and savings, at your disposal to make your startup work.
This is not limited to the time of kicking things off for the business only. Later on, if you are using the business’s revenue to expand then that also falls under bootstrapping.
Furthermore, if you’re partnering up with someone and starting a business and following the same revenue re-investment model for growth and expansion then that also comes within the scope of bootstrapping.
Needless to say, bootstrapping (while it’s extremely difficult) is a highly rewarding strategy, provided you’re able to pull it off in the right manner.
Budget constraints and issues with cashflow are quite common when you’re using this strategy. However, it is still one of the most popular strategies being used today.
Mainly, bootstrapping goes through two stages:
Stage one usually starts with accumulation of the seed money. Normally, this seed money consists of your life long savings and/or taking a loan from friends/family or a financial institution.
This capital helps initiate your product development or the necessary tools your business needs to provide a service (if it’s a service providing business).
The second stage starts when your business starts making sales and generating revenue. Now, the founders are focused on generating enough cash/money to sustain the business operations in a smooth manner.
The second stage is an ongoing process because founders tend to re-invest a chunk of their revenues/profits back into the business to help it grow and expand.
The concept of bootstrapping will become clearer with a real-life example
Example of Bootstrapping: AirBnB
The idea of starting Airbnb, formerly known as Airbedandbreakfast.com, came to Joe Gebbia, Brain Chesky and Nathan Blecharcyzk in September 2007.
Joe and Brain wanted to start a company but they weren’t sure about the details. Brain had quit his job in Los Angeles and was moving to San Francisco to work on a business idea with Joe, which they hadn’t yet figured out.
During around that same time, there was an Industrial Design conference, which they both wanted to attend and when Joe decided to get the passes from the conference’s website, it showed clearly that the hotels in the area had no rooms available.
This is when it HIT Joe, what if he could rent out a small space in his own apartment with an air mattress and offer the guests with breakfast and even help them get around the city. Joe wanted this to be more than just a place to crash. He wanted to give a complete experience to the guests, which included everything other than the conference such as showing guests the city, cooking for them and guiding them to all the best spots in the city.
Upon discussing the idea with Brain, who had no more than a $1000 at that point, they both decided that they were going to go for it. And Airbedandbreakfast was conceived.
So, they built a simple website to let their customers know who they were and offered a place to sleep with all the other services, in just $80 per night.
The idea was initially focused on renting their own place out and specifically in times of such conferences, which took up all the hotel rooms.
Long story short, the two partners got in touch with Nathan so that they could upgrade their website.
With no money, grinding constantly and using every resource at their disposal, Joe, Brain and Nate somehow made everything work even with all the odds stacked against them.
Imagine having numerous credit cards and funding your startup with them until they’re all maxed out. That’s what happened with Joe, Brain and Nate.
Today Airbnb has changed the hospitality industry and has become a business that values over $30 billion. But this could never have happened if the co-founders did not bootstrap the business for more than two years, after which their business took off.
As Guy Raz in his book “How I Built This” writes; “They bootstrapped the business for two solid years, through website rebuilds, business model pivots, press inquiries, photo shoots, credit card debts, and mountains of ramen. “Cereal too,” Joe would be quick to add. At first, they bootstrapped because they wanted to, because it was the smart thing to do. Then they bootstrapped it because they had to, because it was the only thing to do.”
Pros and Cons of Bootstrapping
Bootstrapping allows you to keep the ownership of your business/company. Even in case of a partnership, you may end up with a relatively larger share of equity/ownership of a business. Since, you are not injecting external money in the business to fund it, you maintain control of your company’s ownership.
Steer in the Direction of Your Choice
When you accept funding from sources other than yourself or your partners, you not only lose ownership of the business but this also brings in other stake holders into the mix. This results in external pressure and you become responsible for taking care of the investor’s interests as well. This may also lead to a change in the direction of the company.
Source of Motivation
Starting something from scratch and making it work is not a small feat. However, for some entrepreneurs, this is the only thing that is driving them forward. The sense of accomplishment of creating something valuable is extremely motivating.
Helps You Focus on Things that Really Matter
When you’re bootstrapping, you understand that your resources are very limited. Therefore, most entrepreneurs focus on the core business and aim to get only the “must have” resources for the company. Budget constraints, painful as they may be, allow you to focus on making a business model/plan and a product/service that can help your company make money.
Low Probability of Survival
Most bootstrapping businesses/startups have cashflow problems. Most of the times they don’t have enough cashflow to get things done that are critical for the survival of the business. This can result in an increasing chance of failure.
Difficulty in Growth
Founders and co-founders are highly motivated by the idea of growing their business. However, growing and expanding mostly means to inject cash in the business, which bootstrap startups often fall short of. Therefore, growth, even though it’s possible, may be very slow and difficult to achieve.
Increased Burden of Work
Budget constraints often result the founders or co-founders into a non-stop grind. Since, hiring enough resources isn’t possible in most bootstrapping cases, each person in the company if often dealing with high workloads.
Cannot Hire Experts
Having less money may not pose as big of a threat as not having expert level help available to run your business, which is also one reason why almost 80% startups end up failing. People with expertise can allow you to bring exceptional results in a small amount of time. But, since bootstrapping comes hand-in-hand with empty pockets therefore, hiring expert help becomes almost impossible.
But there is a bonus tip for you in the next paragraph for hiring experts.
How staff Augmentation Help in bootstrapping
Staff Augmentation is a cost-effective approach to working with an augmented team of professionals that augments the potential of your business operations. Since starting a business is no cakewalk, and you are going to experience budget constraints, staff augmentation is an option that can help businesses save cost on hiring an in-house team that could cost more.
Not just that, staff augmentation is scalable. That means, if you do not have the need for more people, you can cut down the number or hire more if the task is more urgent. you need only pay for the services of the number of members hired while having complete control over the work done in the hours you are paying for the services. in other words, it is a win-win situation for businesses, as they get to work with experts in the industry without having to spend a lot of time or a fortune hiring them.
On the other, a funded startup is a business where you (the founder or co-founders) of the startup choose to raise funds for your company by selling the company’s equity to the investors.
There are different methods for financing your startups and some of the most popular ones are as follows:
Types of Funding
Angel investors are rich and wealthy people, who are focused on investing their personal wealth to fund small businesses/startups in exchange for equity.
Venture capitalists finance startups/businesses from their investment funds, especially raised by their limited partners for this purpose. Most venture capitalist firms are not only known to finance startups but also mentor them. And, yes, they also fund startups in exchange for equity in businesses/startups.
Most businesses/companies tend to go public to raise funds in exchange for their equity. Companies float their shares in the stock markets and each share refers to a certain percentage of ownership in the company.
However, going public for a company isn’t easy. There are many pre-requisites and conditions that companies need to fulfill before they are allowed by Govt. authorities to go public.
Startups normally are not able to go public right of the bat. But they do have the option to do so once they fulfil all the conditions necessary for going public.
Crowd funding is probably the best way to raise funds for a startup because this helps founders/co-founders to raise money without diluting their ownership.
The way it works is that startups ask for funds by asking a large number of people (general public) for donations. The purpose of the donation is specified in the appeal.
Usually crowd funding method is used for a short period of time such as a few months.
Example of Funded Startup: Flipkart
Binny and Sachin Bansal came up with an idea for e-commerce business in 2007. They started their online shopping website with only books back in the day.
The founders continuously had to grind for the first eleven years. However, Flipkart’s luck changed in 2018, when they got their first funding from the Guptas (founders of the Helion Venture). Soon after an American investment company Tiger Global Management also injected $10 million.
Flipkart continued to grow exponentially in the next few years thanks to a variety of investors that took an interest in the business. Eventually, in 2018 Walmart bought the company in 2018 for a substantial amount and currently Flipkart owns over 80% of the Indian e-commerce market share.
Reports show that Flipkart received a total of over $12 billion as funds. By the end of 2021, Flipkart was evaluated to have a total worth of more than $37 billion.
Pros and Cons of Funding
Access to Seed Money
With a funding approach, startups have access to seed money. They can depend on this cash to develop, market/advertise their products and sustain the business.
With money in your pocket, you can easily hire expert help for your startups/businesses. And, since experts don’t come cheap, only a funding approach can help your startups/businesses here.
Get to Market Fast
When you have the required funds for development, marketing, hiring experts and running smooth and efficient business operations, you can use all this to your advantage and get to market fast. Having access to large amount of funds allows your startups to gain a competitive edge (provided you use them the right way).
Grow Your Business
Scaling your operations and growing your business/startup quickly becomes easier/possible with access to a large sum of funds.
When you raise funds from external sources such as an angel investor or a venture capitalist firm, you must understand that anyone funding your startup is doing so with an interest of having something in return. The most basic thing an external source or investor usually goes for is a share in the ownership of the business/startup. Your own equity dilutes when you inject external funds into your business/startup.
External Pressure & Control Over Direction
Raising funds from external sources also costs founders/co-founders with their level of control on the business/startup daily operation management. Moreover, it can also result in a change in the overall direction of your business/startup.
Increased Resource Wastage
There a long process involved when external funding comes into the picture. Documentation and agreements may take up a lot of time. Moreover, most startups also tend to focus too much on things that may be “nice to have” in their startup rather than aiming to work with only “must have” resources. This may and usually does result in resources of the business being wasted.
Where is the Grass Greener?
As far as answering this question goes, what you need to understand is that bootstrapping is an amazing approach however, it can only get your startup so far.
The grass is definitely greener when you have a large sum of funding because that helps your business/startup to become huge. But, it’s not that simple. Having an angel investor fund your business means that you are losing ownership of your business.
So, it’s not exactly about where the grass greener but in fact, it’s more about when you should inject “other people’s money” in your startup/business.
It’s always a good idea to keep things balanced and keep control of a startup that you’ve fought tooth and nail to create from scratch. Therefore, you should first focus on getting your startup on the road to success because this will allow you to get a larger sum of money from the investors in exchange for comparatively less equity than if your startup isn’t doing so well in the market.