August 5, 2019 | Aiman Hamdouna - Hatch Quarter
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 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.
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.
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.
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.
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.
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.
Aiman Hamdouna is the Director of Hatch Quarter , a co-working space and startup incubator for international entrepreneurs. He is also Co-founder of Mo Works Creative Agency, a creative agency that is leading the way in design, digital and emerging technology. As a leader in the Victorian startup community, his global mindset has proven invaluable in his role within the industry, and he has learnt more than a few secrets about what it takes to be an entrepreneur along the way.