Bootstrapping or Venture Capital: Which Path Should Founders Take?
It depends on the goals of the founder.
Bootstrapping and venture capital are two polar opposites in terms of funding in the start-up ecosystem. They are also both incredibly popular methods among start-up founders.
Bootstrapping is the practice of founders self-financing their businesses or investing their own funds in their ventures. It is starting a business from scratch without attracting investment or with little/minimal external assistance.
It is founders’ being creative about their source of financing their businesses, and it is touted that the majority of start-ups are bootstrapped.
Pros of Bootstrapping
- Founders maintain complete control of the business.
- They are not answerable to investors.
- Founders can focus on profitability.
- Founders can build their businesses at their own pace.
Cons of Bootstrapping
- The business faces limited growth potential.
- It is also limited in its access to resources.
- This could also mean a longer time to market its products/services.
- There is a higher risk.
Venture capital, on the other hand, is money provided by an outside investor to finance a new, growing, or troubled business. It is usually invested in exchange for an equity stake in the business.
Venture capital is not a loan. It is a form of financing that investors provide to start-ups and small businesses believed to have long-term, growth potential. The funds typically come from investment banks, well-off investors and other financial institutions. Along with money, venture capital can also come as technical or managerial expertise.
Pros of Venture Capital
- The business will possess a rapid growth potential.
- It would have access to resources and expertise.
- There would be a significant decrease in its period to market its products/services.
- Lower risk factor involved.
Cons of Venture Capital
- Founders would lose control of their businesses.
- Founders would be under pressure to achieve high growth targets.
- Founders would be answerable to investors.
- The risk of dilution in the business will exist.
Having laid out the ups and downs involving these two popular financing options, choosing a path for any start-up to take would depend on the type of venture, the founder’s goals, and resources.
Bootstrapping suits those founders who want control and plan to focus on profitability while building steadily. Venture capital is perfect for those desiring rapid growth, scalability, and access to expertise.
Success in either path depends on execution, market timing, and a solid plan.
Bootstrapping requires discipline and a long-term vision for growth. Whereas venture capital demands a clear path to profitability and a well-articulated plan for growth.
In order to decide between bootstrapping or venture capital, here are some elements to consider:
- The founder’s goals.
- The business model and market potential
- Scalability of the idea/technology
- Competition and market timing
- Availability of resources and expertise.
In the end, the best option to adopt is the one which aligns with the founder’s goals. Some ventures have bootstrapped their way to incredible success while others accomplished the same feat with venture capital.
No one size fits all founders, and with careful consideration and execution, both paths can lead to success.
This article by Eunice Ajim first appeared as a LinkedIn Carousel. She is the founding partner at Ajim Capital, an early-stage fund proving start-ups in Africa with financing.
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