To raise or not to raise? Financing is a widely discussed topic in the startup community and it seems like everybody has a different opinion on whether you should raise money and the best way to do it.
There are many stories of companies closing a funding round, often combined with sky high valuations. Of course, it is a great achievement to raise capital. After all, it’s proof people outside of your immediate family believe in you and your product or service.
However, at some point, investors will want something in return. For this, and other reasons, it can often be a good, and viable option, to build your business with your personal finances first.
Did you know that TechCrunch, one of the most widely read tech websites was fully bootstrapped for six years before it was acquired? When AOL purchased TechCrunch in 2010 for $25 million, co-founder Michael Arrington still owned about 85% of his bootstrapped company.
Behance, an online platform where creative professionals showcase and discover creative work, was bootstrapped for six years, too, before the founders raised $6.5 million. There are many more examples of companies that successfully bootstrapped their business for the first several years.
Reasons to Bootstrap
Firstly, the most important reason to bootstrap is to remain independent. When you raise outside capital, investors will get a say in major company decisions. You have a responsibility to them to take their wishes into account.
In contrast, when you finance your business, you have no obligations, of that kind, to anyone. You keep full ownership of your company, maybe along with co-founders or via paying back a loan.
Moreover, building a company with little capital requires you to be efficient with resources. You’ll have to consider every purchase and be creative. A mindset like this will help you navigate your entrepreneurial life.
Your time as a business owner is limited, whether you choose to exit, or involuntarily close your doors down the road. So, why not spend it building your business, instead of finding investors?
Raising capital is a time and resource intensive activity. It might keep you from focusing on the most important thing: your company. Moreover, investors are interested in entrepreneurs who are passionate about business and entrepreneurship, not money.
Raise Capital When …
Bootstrapping, as you know, entails the biggest implied risk—your personal finances. In case your business fails, you don’t only lose your company, but also the money in the bank. For most fledgling entrepreneurs, that is a huge risk.
When you attract multiple investors, they spread the risk and invest a portion of the total funding amount, leaving them with relatively little risk on the table.
Even though many Internet businesses can be built fairly easy with less capital, some business ideas need a larger initial capital infusion to be realized. Think of a physical store – like opening a restaurant, or developing a disruptive software or pharmaceutical product.
Unless you have an enormous savings account, you’ll need external capital to get your business off the ground.
Finally, more money usually allows you to achieve more in less time. Hire more people, go to market with a larger marketing budget, etc. and more investment can help you grow your company quicker, which is harder to achieve with less capital.
Bootstrapping definitely tests the capabilities of a founder. However, as a company keeps growing, external cash is needed to achieve goals, and raising capital becomes less risky for both investors and the founders.
To raise or not to raise? That is the startup question on every founder’s mind and, ultimately, the answer is, “It depends.”
This article has been edited and condensed.
Daisy de Vries is the Marketing & Communication manager at Equidam, an online value management tool for small businesses. Her passions are startups, writing and technologies. Keep investors up-to-date in a consistent and efficient way with the Equidam valuation report. The report gives a clear overview of the performance of your company and enables you and your capital providers to understand and manage the value of your business. Connect with @equidamtweets on Twitter.
© YFS Magazine. All Rights Reserved. Copying prohibited. All material is protected by U.S. and international copyright laws. Unauthorized reproduction or distribution of this material is prohibited. Sharing of this material under Attribution-NonCommercial-NoDerivatives 4.0 International terms, listed here, is permitted.