Venture Capital Vs Bootstrapping
As a company owner, there may come a time when you consider taking on outside investment to accelerate operations, hopefully resulting in more profit and fulfilling all your business goals. If you are a start-up founder, then you must be wondering which type of capital funding you should go for.
To help you make the right decision, we will discuss some benefits and drawbacks of venture capital and bootstrapping your company. This will help you make the right decision for your start-up.
About bootstrapping
Bootstrapping refers to starting a company without outside funding. Bootstrapping is a great way to start a business because it allows you to focus on building a strong team and creating a product that customers want. You can also get feedback from your early users which will help you improve the product before launching it to a larger audience.
Advantages of Bootstrapping
Profit oriented
If you are just starting a business, then you must be familiar with the importance of cash flow. Truth be told, it is one of the most important things that the business needs to control when it is just taking its first steps. When you choose to bootstrap, then you will be forced to be conservative with your money. You will be pushed to just focus on business profits.
Importance towards customers
Bootstrapping definitely helps you effectively if you are a beginner and at the early stages of a startup. This is mainly because it helps you to connect better with your customers since they are your lifeline.
If your clients are not happy, you have nothing to fall back to. So, talking to your customers will help you make better business decisions. Your products and services will be improved. This way, you will also be able to have longer user retention.
Disadvantages of Bootstrapping
Not enough to reinvest
If you decide to bootstrap your company, you have to know that you mainly have to rely on resources and personal savings or debt capital in order to get things going for your business.
When your business starts growing and earning the desired profit, then you will generate higher earnings. However, your retained profit will not be more than what a VC can provide instead. There will not be enough funds to reinvest in new products or new acquisitions in this option.
A slow rate of growth
Unlike VC-backed businesses, bootstrapped companies will not be able to use expensive technology, achieve faster production processes, and acquire other firms. This is because they have less money to reinvest.
As a result, a bootstrapped business will have a slower growth rate than a VC-backed business. Besides, you will also be limited in terms of visibility as well if you choose to bootstrap over VC.
Risks involved
If you opt for VC investment then you do not have to worry about having sufficient money to invest. In the case of bootstrapping, there is also a chance to lose a huge chunk of invested capital if something goes wrong. Thus, the risks of loosing your own money are higher if you choose to bootstrap.
Advantages of Venture capital
Related article: What is Venture Capital?
Faster and proper growth rate
The major goal of venture capital is to help a business to grow faster so that the investors can successfully get a return on their investment in a short period of time. These VC investors will help a company to grow by providing the needed help.
This help may be provided in the form of launching a new feature or product, acquiring the latest technology, hiring a skilled and experienced workforce, and much more. If you are in need of capital to make your business shine, then it will be best to consider going for VC as this option can provide you the means you are after. Whether it is money or experience.
Less personal risk
With bootstrapping there is the risk of losing your own money. You do not have to face this risk if you acquire venture capital. So, you will get a lot of freedom and peace of mind at the same time.
Also, when you consider acquiring venture capital for your startup, you do not have to repay the investment made if your business shuts down.
Extra credibility
If you choose the VC option, you will have a chance to grow your business and make a mark in the associated market. Your potential customers and investors will feel secure dealing with your business which is showing clear signs of improvement and growth. As a result, you will earn extra credibility compared to the bootstrapping path.
Expert advice and help
With venture capital, you can get additional benefits as well. For example, receiving expert advice and help. So, if you have a new startup that is looking for capital you should definitely consider VC as it will help you to tackle your business operations better.
VC founders are known for having many contacts and providing the needed information that can help you in several ways. From new fruitful partnerships to new customers.
Bottom line
These are some advantages and disadvantages of choosing to bootstrap or use venture capital to grow your company. Whatever works well for you is determined by the nature of your start-up and your objectives.