Growing a startup from an idea into a profitable, scalable business is hard work, with several crucial decisions along the way. Throughout the lifespan of a business the founder will be required to decide on everything from branding to organisational structure.
One of the most important decisions a founder will face at the ideation and development stage is whether to bootstrap or attempt to raise capital investment.
This choice provides a financial ‘runway’ that will shape the framework of your organisation.
Before we delve into the complex considerations that should factor into your ultimate decision, let’s start with the basics: what are bootstrapping and capital investment?
Bootstrapping vs. capital investment
Bootstrapping is a form of funding where founders of a company contribute all initial money and effort, maintaining their startup. This is done purely through their own injected capital and any revenue generated by the business itself.
Capital investment, on the other hand, is the polar opposite. Capital investment grows a startup through funding from external sources, usually in return for equity. Companies that offer capital investment commonly provide perks such as exposure, mentorship, or access to a workspace as well.
Advantages of capital investment
- Increased capacity for growth: One of the key elements for successful startups is the high speed of innovation and iteration. This quality allows startups to outperform competitors and respond to shifting market dynamics. Capital investors provide resources that allow companies to undergo development and expansion rapidly, which makes it more likely that their product will succeed.
- Greater available resources: Successful products require polished features and compelling marketing campaigns, which are expensive investments for founders. Capital investments allow companies to justify these costs. In turn, marketing campaigns increase exposure and feature developments create a more complex and robust product.
- Long runway: Even with an amazing product that people love, many startups still fail simply due to the short length of their ‘runway’ — the amount of time and expenditure available for investment before funding runs out. Capital investment lengthens this runway and makes it less likely that a great product will sink due to unpayable costs.
- Access to mentorship/perks: Investment firms often provide perks such as mentorship, coworking spaces, or connections. Each of these can be invaluable for a small company without many resources or exposure.
- Increased recognition and credibility: Investment may provide immediate resources for a startup, but it also acts as a form of social proof. Any company worth investing in is likely to have a sound business model and a team that delivers results. This recognition can be important for startups during their growth phase. It grants them credibility and leverage when interacting with potential partners, sponsors and customers.
Advantages of bootstrapping
- Increased control and ownership: The acceptance of external capital typically comes with the loss of ownership and control. Investors often take equity as payment and influence the direction of the startup they have invested in. By bootstrapping a company, founders can avoid making concessions, maintain creative freedom and increase their share of the profits if the startup is successful.
- Forces organisational efficiency: With external funding in place, companies can operate below margin for an extended period of time. For example, ride-sharing company Uber posted losses of US$1.8 billion in 2018. However, with this freedom comes a significant danger. By beginning as a bootstrapped operation, founders are forced to create a business model which is both as efficient as possible and proven to work — attributes which are essential for long-term success.
- Allows focus on the business: Attracting capital investment is incredibly labour intensive. From determining the company’s pathway to profitability, to constructing pitch decks, to making the right connections in the sector, there’s a lot to do. Even after receiving support, significant time will have to be spent communicating with the investor to align your visions, all of which will siphon effort away from the core business. By bootstrapping a startup, you can focus on the most important elements of building a startup — profitability, scalability, and repeatability — right from the beginning.
- Lack of resources forces innovation: Despite the seemingly inextricable association between innovation and entrepreneurship, founders who take easy pathways in business can fall into patterns of behaviour and decision-making that can cripple innovative culture. “We don’t have the capacity or bandwidth for something like that” is a common excuse most founders trot out when they’re presented with an innovative idea. By bootstrapping processes, employees of a startup are forced to innovate around the lack of funding, fostering ideas and solutions that they would have been unlikely to come up with otherwise, and which are often both efficient and practical.
So which is right for you, bootstrapping or capital investment?
Like most complex entrepreneurial decisions, the choice between bootstrapping and attracting capital investment is different for everyone. Each startup has a unique product-market fit, business plan and vision. To find what’s right for you, there are several questions to ask yourself to guide you in your decision.
How expensive is your product to prototype and develop?
Many ideas — particularly those in the tech sector — require significant investment to build out. This means the startup built around an idea must have access to a lot of capital right from the beginning. Unless the founders have enough credit to back development themselves, this can necessitate capital investment, as the product would be infeasible to produce without support.
Where will you spend any investment? How will it impact your revenue?
Founders should meditate upon the necessity of investment and determine whether their company can function without external support. If this is the case, the choice between bootstrapping and capital investment should come down to a question of revenue and ownership. Will the resources provided dramatically increase revenue in a way that could not be achieved otherwise? Is this worth giving up a share in a company that may potentially be a lot more profitable in the future? This line of questioning will also help reveal the optimal business plan for a startup, allowing founders to approach investors with a concrete (and more compelling) action plan.
Do I have a plan if something goes wrong?
A large part of bootstrapping a startup successfully is managing risk and planning for the worst. If avoiding external investment means a single failure will jeopardise the entire company, the founders should decide whether that risk is high enough to justify pursuing outside forms of capital.
A deep understanding of your startup is key
An analysis of some of the most successful startups in the world highlights the wide disparity in the funding approaches taken. Companies such as Facebook, Apple and Microsoft all began by bootstrapping, often while working in low-quality conditions for no pay. On the other hand, many modern ‘unicorn companies’ — startups valued at more than a billion dollars — began by attracting capital investment like WeWork and Stripe. As with most things in entrepreneurship, success is not the product of following a set formula, but rather making decisions based on a deep and intimate knowledge of your company, your product and your market.