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What Funding is Best for My Startup: Bootstrap or Venture Capital?
When it comes to funding a business, there are several options you can choose from, but two of the most common are to bootstrap or to find venture capital (VC). The two are very different approaches and can often be used in conjunction with one another to take a startup from one stage to the next. However, the type of funding route you choose will entirely depend on the type of business you have, the amount of money you have available, and your access to VC investment opportunities.
First, the difference between the two.
When you bootstrap your startup, you’re following in the footsteps of a saying that originated sometime in the 1900s. It comes from the saying ‘to pull yourself up by your bootstraps’ which means ‘to improve your quality of life without any support’. It’s defined by single-minded startup development that’s not reliant on anyone else for funding or growth—only you, the entrepreneur.
When you look for VC support for your startup, you’re looking to use private equity and financing that’s offered by investors to companies that they believe have potential. The type of investor and the shape of this investment can vary. Investors can be banks, well-off individuals, financial institutions, limited partnerships or any combination thereof, and they provide funding in exchange for equity. However, not all forms of VC are financial—you can also get technical support or managerial expertise as part of this investment role.
Bootstrapping and venture capital are very different approaches and each ask entirely different things of the entrepreneur. The list below unpacks some of the most important considerations that you need to make in order to choose between a bootstrapping or VC or a combination of the two.
“I’ll be very honest, this is my fourth startup and I wasn’t planning to do another, it’s hard.”
– Osvaldo Spadano, Founder and CEO of Akoova
1. Independent decision making
When it comes to deciding which direction your business should go in, what markets to enter, what products to develop, which people to hire, and what salaries to pay, bootstrapping gives you complete independence. As your own primary investor, you get to make every decision on your own. On the flip side, VC investment is more exacting as your investors will expect a measure of control and influence within your business as they’ve put their money into your vision.
Choosing between the two can come down to this very important point because some people want the control while others want the growth.
2. A single-minded focus
When it comes to VC investment, you will need to be prepared for a very different approach to business. With a VC on board, you will have to meet with your investors, focus on growth, and maintain solid relationships with the right people. This may sound like a drawback, but the value of VC lies in how it adds credibility to your business and the connections that your investor can help you make. You just need to make sure that you build a strong relationship with your VC to avoid unnecessary misunderstandings around the future of the business and to manage the balance between investor demands and your own vision.
Bootstrapping, of course, means that you can focus on whichever part of the business you most want to expand, grow or change. You can put profit at the heart of your business; you can manage your spend how you want; and you can put your customers at the heart of every interaction. These last two factors can sometimes get lost in a VC-funded startup as entrepreneurs are torn between so many different responsibilities and directives.
3. Support and connections,
When you bootstrap, you’re at your own financial mercy. You have little funding to reinvest into your business at first and you’re going to have to compromise on profit levels. Another downside of bootstrapping is that it can limit your competitive advantage as a result of this limited funding—you can’t try out new markets or experiment with new products or scale your workforce at speed. You may also find it more difficult to make the right connections and get specialized support compared with those who have opted for the VC route.
VC funding may come with terms and conditions, but it does also come with street cred, expert help, connections and instant networks. It’s in your VC’s best interests to connect you to the right people and make sure you’re getting all the right attention, so they’ll put time and effort into helping you build networks of your own.
4. The personal risk
There is no guarantee that any startup will succeed; many fail regardless of how they were funded. While there are many factors that influence a startup’s success story, there is less risk to personal funding and savings if the business goes through a VC. When you bootstrap, you may be using personal funds or savings to get your company off the ground so if it fails, you will lose all that money. VC gives you more financial freedom to fail, but the type of investment and agreement will influence how the failure will hit your bottom line.
That said, both methods of building a business are proven with many companies standing tall on their boots and many equally rising to prominence through VC. The choice often comes down to the personal expectations of the entrepreneur and the type of business they want to build. There’s no wrong answer and there is no reason why a company can’t turn to VC after a bootstrap start to kickstart its next phase of growth. The choice, as they say, is yours…
AWS Editorial Team
The AWS Startups Content Marketing Team collaborates with startups of all sizes and across all sectors to deliver exceptional content that educates, entertains, and inspires.
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