June 21, 2023
#BackToBasics
When contemplating starting a new venture, how you’ll finance it is probably high on the agenda.
One popular approach to startup fundraising is bootstrapping, where Founders use their own money to self-fund their startup.
In this article, we explore bootstrapping and how it compares to other methods of startup financing, namely private equity, bank loans, and crowdfunding.
By understanding the pros and cons of each financing option, entrepreneurs can make informed decisions about which financing method best fits their startup.
What is startup bootstrapping?
Bootstrapping is a funding mechanism whereby founders finance their startup with their own money (including credit cards).
Strategy for bootstrapped startups revolves around minimising costs and maximising resources. This is often achieved by adhering to the following principles:
- Sweat equity: Contribution of an individual’s time, effort, skills, and expertise in exchange for equity ownership or shares.
- Lean startup: An iterative approach to entrepreneurship that emphasises rapid experimentation, customer feedback, and continuous learning to build successful and sustainable businesses.
- Quick inventory turnover: The efficient and rapid movement of goods or products in and out of a company’s inventory, minimising holding costs and maximising sales opportunities.
However, it’s important to note that bootstrapped startups are not prohibited from seeking external funding later. On the contrary, bootstrapped businesses are highly desirable to investors because of their lean mentality, intellectual capital, and focus on sustainable growth.
Now let’s compare bootstrapping to other common funding mechanisms.
Bootstrapping Vs Fundraising.
Fundraising involves raising funds from investors who contribute capital in exchange for equity. Fundraising is typically suited to ‘blue ocean’ startups with high growth potential.
Unlike bootstrapping, fundraising involves giving up ownership (equity) and control to investor(s). The ground work required to raise funds is substantial, whether or not the startup ultimately receives funding. Those that are successful must repeat the process further down the line for the next fundraising round.
In summary, fundraising brings expertise, networks, and resources to accelerate growth and scale the business. However, founders must consider the trade-off between capital injection and relinquishing control and ownership of their idea.
Bootstrapping Vs Business Loans.
Business loans involve borrowing money from a financial institution and repaying it over time with interest. These loans are better suited to startups who are trading and can demonstrate a solid business plan, assets, and credit history. Early-stage startups considering a business loan will need to rely on the credit scores of their Founder(s) in order to be considered.
Unlike bootstrapping, business loans often require a personal guarantee, for example, your house. You will also need to complete a business plan.
Overall, business loans provide the advantage of immediate access to capital. However, founders should carefully assess their ability to meet loan repayment and the consequences of defaulting on the loan.
Bootstrapping Vs Crowdfunding:
Crowdfunding allows startups to raise capital from members of the public, typically through online platforms like Indiegogo. Startups pitch their idea, and individuals back them by purchasing pre-orders or equity.
Unlike bootstrapping, the development of an idea hinges on the success of the crowdfunding campaign. If the startup team delivers a lukewarm pitch, they might never have the opportunity for a second attempt. And the startup will still have to find the money to fund their initial crowdfunding campaign too.
On balance, crowdfunding is a make-or-break approach to fundraising accessible to all. However, founders should carefully consider whether their fundraising goal is achievable through crowdfunding.
Bottom Line.
The choice of financing for a startup is a crucial decision that can significantly impact its trajectory.
Bootstrapping offers the advantage of retaining complete control and ownership, along with a lean and resourceful approach to growth. However, it may not be suitable for all startups, particularly those in highly competitive markets or those requiring significant upfront investment.
Fundraising, business loans, and crowdfunding provide alternative options with their own trade-offs. Ultimately, entrepreneurs must carefully consider their startup’s specific needs, projected timeline, market conditions, and personal circumstances when determining the most appropriate financing strategy to fuel their entrepreneurial journey.
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