There are many ways to turn an idea into a thriving business. One thing is certain, though: you'll need cash to develop a product and then to drive awareness and demand in the market.
Even though the obsession with venture capital funding dominates the startup world, it’s not right for every startup. There are risks and tradeoffs founders have to consider, which vary depending on a number of factors — even pursuing venture capital has an opportunity cost.
With so many options for raising growth capital, savvy founders — particularly serial entrepreneurs — spend time assessing the optimal funding and financing solutions at different stages throughout their growth journeys that align with their goals and maximize success.
There’s also the option of not raising any equity at all and limiting your liabilities, which means good, old-fashioned bootstrapping!
Do you want aggressive growth accompanied by loss of ownership and control, directed toward an eventual exit? Or do you want slower, organic growth that requires sacrifice but allows you to keep full ownership and control for as long as you want to run the business?
The question of whether to bootstrap or raise equity comes down to what kind of company you want to build and how you want to build it.
We compare these two startup funding paths below so you can make the best decision for your new business.
When It's Best to Raise Equity
Raising equity allows you to grow quickly and aggressively. You can make big, bold moves and pursue objectives that will catapult your company ahead. You’ll have the resources to invest in the marketing and sales personnel you need to solidify and broaden your audience.
Raising equity requires you to turn over a portion of ownership — often a substantial portion — to your investors. And that comes with considerable costs, both in terms of dollars you ultimately lose at exit and in control over your business until that exit.
Once the investors own part of your company, the clock starts ticking and they can advise and/or dictate how you do things to ensure your business decisions are likely to maximize returns. While your business will have the resources to grow faster, you still have to account for your creditors having a vested interest in how your company performs, with a watchful eye on the exit.
The need for an exit is a particular feature of equity financing: Your investors will need some way to get their money out of the company, which may require you to sell the company or take it public. If you aren’t interested in this trajectory for your company, think twice about raising equity.
When It's Best to Bootstrap a Startup
Bootstrapping allows you to maintain full involvement, control, and ownership of your venture as it grows organically at your preferred pace. You can make decisions knowing that you and your team are the only stakeholders, enjoying freedom from outside oversight. Veteran entrepreneurs who have bootstrapped and raised VC say this can actually reduce stress when building a new business.
Because you’re not borrowing money to bootstrap, you don’t need to earmark a certain amount of your revenue to repay debts or make sure ROI is high enough to create the exit your investors want. You can plow all of the money you make right back into the business, capitalizing on every last dollar you’ve earned to make the business better.
Of course bootstrapping means you have less cash to work with, so you’re limited in what type of projects you can tackle at any given time, and you have to manage your cash burn and runway very effectively. In other words, bootstrapping can limit the scale and speed of your company’s growth. Making ends meet as your company stretches for each new milestone will require a considerable sacrifice of your own sweat equity, especially in your early growth stages.
As your bootstrapped company gains traction, however, it will get easier and easier to maintain and grow. And because you have no investors requiring an exit, you get to decide when you make a play to accelerate growth and how you execute that strategy, which can have big payoff!
Case Study: BloomNation receives $11 billion Series B funding after using non-dilutive revenue-based financing to grow 50% year over year.
Equity vs. Bootstrapping: The Funding Decision Is Yours
Despite the ubiquitous stories of startups growing through VC fundraising, it’s not unheard of for a founder to refuse a VC funding offer, as CEO Marc Visent of Knowify did. He decided to grow the project management software company on his own terms and maintain all the equity for his team.
Of course many other startups decide equity is the right solution and pursue it with phenomenal results, too.
Ultimately, the decision to bootstrap or raise equity is about what you want. Ask yourself:
What kind of business do you want to run?
How do you want your experience of running a startup to feel?
How long do you want to run the business?
Are you in it for the work or for the money?
Did you know you can quickly compare debt and equity funding options to see how much that equity will really cost you?
Only you have the answer that’s right for you and your company.