Starting a new company will force you to make big decisions on an almost daily basis. One of your first important decisions will involve funding. Should you seek external funding, or rely on your own personal capital? Bootstrap funding typically refers to a situation where the founders of a company rely on their own personal funds, or use the proceeds from the company to continue growing their business. VC funding, on the other hand, refers to a situation where the founders seek outside funding sources, typically from venture capitalists.
Which is better? It largely depends on the resources available to you, the speed at which you hope to scale, and the amount of control you plan to maintain. There are a lot of things to consider when you embark on a new business venture, and funding is one of the most significant issues you’ll encounter. Here are some points to consider, along with advice from experienced business leaders across industries.
“A benefit to using your own funds to grow your business is that you will ultimately maintain more control over your venture. When you partner with outside funders you’ll spend a lot of time running ideas by them, plotting out comprehensive business plans, and making changes according to their needs. This can be helpful in certain industries, but for many businesses just starting out, it’s better to stay nimble and have the freedom to try out different strategies quickly and without first seeking approval from your funders.” – Raul Porto, Owner and President of Porto’s Bakery
“One of the advantages of VC funding is that venture capitalists can provide businesses with useful networking opportunities such as finding new hires, new clients and business partnerships. This can help businesses save the time and energy it would otherwise take to find these kinds of opportunities on their own.” – Amber Theurer, Chief Marketing Officer of ivee
“If you rely on your own funding, be prepared for slower growth and fewer initial opportunities. This may or may not be a good thing, depending on your goals for the company. Some business leaders prefer to take a slower-growth approach when starting out, to really develop their product and find their niche. Others want to hit the ground running and scale quickly. Depending on how you plan to scale, seeking outside funding may be the right choice for you. Outside funding will likely bring more opportunities at the outset, including a larger network to work with, and the ability to hire quickly.” – Michael Fischer, Founder of Elite HRT
Sign of Trustworthiness
“When a company is backed by a reputable VC fund, that signals to others that the company has good prospects. VC funders won’t invest in a company that doesn’t have a solid foundation and business plan; they’re investing in you because they think your company has a bright future. It’s ultimately a sign of trustworthiness, and can create some buzz around your company. When you choose to partner with a VC fund, you’ll essentially gain a seal of approval, and that often will lead to more interest and more opportunities.” – William Schumacher, Founder and CEO of Uprising Foods
Think of Your Needs
“When funded by a venture capitalist, you have more opportunities to grow quickly. Venture capitalists have a wide network that you are able to draw from gaining brand exposure. Bootstrapping has limited resources with slow growth, but you are in complete control of your business and assets. The funding is up to what you are in need of at the moment.” – Brandon Adcock, Co-Founder and CEO of Nugenix
“If you decide to seek VC funding, be prepared to spend a lot of time building relationships and drafting proposals. There are a lot of benefits to VC funding, but it does take a significant amount of time at the outset. That’s time you might have otherwise spent growing your business or working on your product. If you do decide to go that route, be realistic about the amount of time it will take to line up outside funding, and utilize your network to make connections.” – Adam Reed, CEO of Crown and Paw
Consider Your Risk Tolerance
“There are risks for both types of funding, but if you invest a significant portion of your own capital you are probably taking on a lot more personal risk than if you sought outside funding. Depending on the way you structure your agreements, outside funding will typically carry less personal risk if the business venture is unsuccessful. Assess your personal risk tolerance, as well as the VC fund’s own risk tolerance. There are risks associated with seeking VC funding too – sometimes funders will push founders to make risky moves because they have a higher overall risk tolerance and are more resilient if the venture fails.” – Fred Gerantabee, Chief Experience Officer of Readers.com
Access to Expertise
“One benefit of partnering with a VC fund is that they bring a wide variety of expertise to the table. Not only will they have an extensive network that you can tap into, they can be great partners when it comes to growing your business brand. If you don’t have a lot of experience growing a business, there will be a lot of unexpected hurdles to deal with. Having an experienced fund on your side can be very helpful.” – Nicholas Vasiliou, CEO of BioHealth Nutrition
Potential for Growth
“When deciding whether to partner with a VC fund or take the bootstrap route, it’s important to consider the growth potential for your company. VC funding is good if your business venture can scale quickly, and is in an industry where there is a lot of competition. You’ll probably need outside funding to scale and invest in the type of marketing necessary to stand out in a crowded field. For other businesses, a grassroots approach may be better, especially if you’ve already gained a strong following. In those situations, partnering with a VC fund could just slow you down and force you to make decisions that won’t sit well with your customer base.” – Mike Clare, CEO of Mood Health
Ability to Pivot
“While VC funds come with a lot of advantages, keep in mind that they will likely want to have more control over your business decisions. A lot of businesses benefit from having this type of oversight, but for some it may be a difficult adjustment if you’re used to having more control. When you are self-funded, you can pivot quickly and change your strategy without having to stop and run your decisions by your funders. The ability to pivot quickly can be an asset in some industries, especially if the landscape changes quickly and you have a strong sense of where you want to go.” – Ryan Brown, Integrated Marketing Director of Kenra Professional
Focus on Product and Customers
“Bootstrapped startup founders can spend 100% of their time creating a great product that customers love, and growing the business itself. VC-backed startup founders, instead, need to split their time between working on their actual business and impressing, updating, negotiating with, and meeting with investors. Focusing all your time in the business means you are much more connected with what’s going on and with your customers. This can lead to better decisions and longer user retention. At the early stages of a startup, moreover, a sole focus on the business and customers can mean reaching an ideal product-market fit faster, validating the idea, before getting tied to a product that’s doomed to fail.” – Rich Clominson, Founder of Failory
Control and Time Allocation
“Bootstrapping gives you complete control of your company and direction. You can experiment, fail fast, repeat. There isn’t anyone questioning you except yourself. You won’t need to work on business plans and spreadsheets each time to convince the board about your hunch. You can rather spend that time on making your hunch work. With bootstrapping, you have your entire focus on the product and its success. Your key resources aren’t loaded with too much administrative overhead. The fundraising process, furthermore, can take away a considerable amount of founders’ bandwidth, possibly 10 to 20 man months of effort per round of fundraising.” – Pala Kuppusamy, Financial Consultant at Toptal
There’s a lot to consider when deciding how you’ll fund your new business venture. Both VC and bootstrap funding come with pros and cons, and the right choice will depend on personal and industry factors. Take time to weigh the decision carefully, and remember that you can adjust your strategy if things change. Companies that start out on a bootstrapped budget don’t have to stay that way forever. You’ve done the hard work of designing a business plan and building something that you’re proud of – finding the right funding mechanism will help guide where you go next.