Bootstrapping Vs Raising Funds
In every startup founders’ path comes a point where he has to choose between bootstrapping vs raising funds. It has to be a very thoughtful decision, since; there is no chance of coming back from the later one. There is no one-perfect-solution to this problem and what decides the best for your startups are the two questions you need to ask yourself before you decide on bootstrapping vs raising funds.
Before coming to the “Two questions you need to ask yourself before you raise funds” please allow me to break few, close-to-heart believes and faiths with a hammer of the critical view on the topic. No abuses to the founders. Most often, funding is taken as the proxy for success, and celebrated with all pomp and shows across all media channels including tech media. The founders are honored as war heroes who have nailed it, and the cheque from a VC is their certification for being the worthy son of the family who brought glory to them. This article is solely dedicated to my fellow founders who are being misled by the media and public in general on this issue. Sometimes many of us get so much fantasized by funding that we start chasing fund rather than a sustainable business model.
The paper rich founders of highly valued companies are constantly compromising something to get this glory and lifetime achievement award from the VCs and that is the invaluable control on the company. I am not against raising funds in any way, except going for it blindly and just for the sake of it. Yes, there are both pros and cons of raising funds. Raising capital if it is not required with a cherry topping of wrong timing has only cons no pros.
So coming on to the two questions you need to ask yourself before deciding bootstrapping vs raising funds:
“Do I actually need funding in exchange for my liberty to take decisions?”
What does losing your control on the company mean? Well! A lot. Considering the fact that the investor has not acted in kindness by putting his money in your venture, he wants a return and has an exit plan.We have already discussed how founders go on loosing equity with each round of investment. On the surface, it might seem that the intentions of founders and funders are the same but on diving deeper you may find it is not.
- They have different aims. While you may like to make long term plans for your company, the investor might ask you to follow the path promising a quick return on investment, remember the exit plan? They want you to channelize your efforts in making the business, which delivers time-bound returns or exit option for investors, against your focus on building a great company, which could need taking one step at a time. This is a big case to ponder before taking decision to go for funding.
- Hey, funder! Here is your nose I found in my sh*t- Be prepared to submit the ugliest part of your business reports to your VC. From the hiring of employees to taking any trivial decision for your business, you may find investors interfering. That could be the most annoying and disturbing thing.
- Ego clashes- the very famous Housing.com case could be cited as the best example here. Investors can actually dethrone you in the worst case.
- After making all the compromises for growing on investor’s money, do mind that only 10% of startups that get VC funding succeed.
There are some very good examples of bootstrapped companies in India who are doing quite well for a long time. Zoho, a software product company has successfully bootstrapped for 19 long years. Despite getting numerous offers from VCs the company continued the bootstrapping path. There are many such examples like Indus Net Technologies, Wingify, etc., which are never mentioned by tech media and goes unnoticed by startup enthusiast like us.
“Is it the right time to raise funds or shall I wait?”
Since a lot of substance is at stake, if you go for funding, the decision for bootstrapping vs raising funds has to be a very thoughtful one. Not to forget, funds are just the means to achieve ends and not an end in itself. After listening to all the gyan mentioned above, if you still feel you cannot do without funding or funding could actually accelerate your growth with a rocket’s speed then you should go for it. After all, we all are chasing growth.
Many a time it becomes the need of the hour to get funding.
- It might become difficult to survive when your savings are drying fast, when your competitors are hiring better talent, and acquiring customers at a much faster rate, or if your business is capital intensive. This is still not an exhaustive list of circumstances when VCs might look like a savior or maybe this is the reason angel investors are called so.
- Apart from money they do bring guidance, objectivity, networking, credibility, to the venture.
- Guidance: VCs are hearing and evaluating a number of pitches every day. Most of them are themselves entrepreneur. They do keep an eagle’s eye to pinpoint your mistakes and redirect you to the correct path.
- Objectivity: Many a times we become myopic and dogmatic about our venture, which is emotionally very close. VCs bring an outsider’s perspective and thus more objectivity.
- Networking: If your investor is a highly networked person you may see your things sledding easily.
- Credibility: Not just you become able to provide a better solution to your customers with the raised funding; there is also a perceptional acceptance among customers and clients.
- Hiring: This is the trickiest part for any new entrepreneur. Investors may help you with their experience of recruiting employees or from their network.
- Putting aside all the side effects of getting investors money, you could be the lucky one to have some of the best investors on the board who keep a long term vision and guides you throughout your venturing journey as a guide, mentor, and a friend.
- There is a correlation between the amount of money raised and the company’s value at an exit, suggesting that raising money does indeed generate more value.
I would suggest you to go for funding when it becomes imperative, stretch your limits till you set up an initial culture for your startup. The initial few years are the most important ones for a company when it builds its founding team, culture, validates its business model. Losing control at this moment could be detrimental if the investor pressurizes the startup to grow or perish (since the investor has invested in the company with a different aim.) Like for example, Jan koum and his co-founder built the app WhatsApp themselves since they both were programmers, and bootstrapped for a long time. It was also because of the fact that their business model was profitable since inception as they were charging $0.99, a one-time download fee. Another reason that would go in favour of raising money later is your company’s valuation. Since you have proved your mettle with a validated business model, you can have an upper hand while negotiating equity percentage with investors. Similarly, QuickHeal an IT security solution provided raised funds in 2010 after 15 years of bootstrapping, Cardekho, an auto portal raised funds after bootstrapping for 5 long years.
You not only have to be cash flow positive but should be net profitable. The cash burn rate has to be less than your earning rate. Although Lean Startup method is advised for all stratupeneurs, but bootstrappers should closely follow the concept. Thus, the optimum solution prescribed for bootstrapping vs raising funds is to stretch your limits of self funding to the maximum. in the mean while try to build a self sustainable business model and delay raising funds as far as you can. Raise funds only when it is imperative and inevitable.