Venture Capital Vs Bootstrapping
Every company owner mulls about taking on outside investment to accelerate operations to draw in more profit and to fulfill all its 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 so you can make the right decision for your start-up.
Bootstrapping refers to starting a company without outside funding. This means that you don’t have to pay for office space, employees, marketing, etc.
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
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. If you choose to bootstrap, then you will be guided to be conservative with your money completely. You will be pushed to just focus on business profits. One of the goals of bootstrapping is to help you make money.
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 than other types of capital funding available for you. There are many benefits of showing importance towards the customers. It will help you to make better business decisions. Your products and/or services will be improved. You will be able to also have longer user retention.
Disadvantages of Bootstrapping
Not enough to reinvest
If you decide to choose the bootstrapping path, then 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 will start growing and earn the desired profit, then you will get higher amounts of retained 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, the ones that choose bootstrapping will not be able to use expensive technology, achieve faster production processes, and acquire other firms because of low levels of money to reinvest. As a result, a business going for bootstrapping 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 bootstrapping over VC.
If you go for the VC option then you do not have to worry about losing all your money as the money is from others. In the case of bootstrapping, there is a chance to lose a huge chunk of invested capital if something goes wrong. Thus, it can be said that you will not get total freedom if you choose bootstrapping.
Advantages of Venture capital
Related article: What is Venture Capital?
Faster and proper growth rate
The major goal of venture capital is helping a business to grow faster so that the investors can successfully get back their investment that too in a short period of time. These VC investors/founders will help you to grow by providing the needed help to launch a new feature or product, acquire the latest technology, hire a skilled and experienced workforce, and much more. If you are in need of a ton of capital to make your business shine, then it will be best to consider going for VC as this option can provide you the huge amount you are after.
Less personal risk
With bootstrapping there is the risk of losing your own money. You do not have to face this risk if you go for the venture capital option. So, you will get a lot of freedom and peace of mind at the same time. If you consider equity for your startup, then you do not have to repay the amount if your business shuts down. The bootstrapping way is mainly a bank loan. If your business fails, then you have to repay the lost amount plus interest.
If you go for the VC option then you have a chance to grow your business which will help your business to 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, your products and features will become trendy that will allow you to fulfill your business goals. Going for the VC option will help you to earn extra credibility than the bootstrapping path.
Expert advice and help
Besides getting your dream amount of capital, with venture capital you can get additional benefits as well like 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 knowing a lot of contacts and providing the needed information that can help you out in several ways from new fruitful partnerships to lead to new customers.
These were 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.