There are many ways to create a successful business. Even though the obsession with venture capital funding dominates the SaaS community, it’s not right for every venture. There are many ways to raise capital beyond equity funding, including bank loans and crowdfunding. But there’s also the option of not raising any equity or going into debt at all — that means good, old-fashioned bootstrapping.
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.
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?
When 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 — sometimes a substantial portion — to your investors. As such, it comes with considerable costs, both in terms of dollars you ultimately lose at exit and in a reduction of your control over your business.
Once the investors own part of your company they can advise and/or dictate how you do things to ensure your business decisions are likely to maximize returns. So while your business will have more resources to work with and can grow faster, you have to account for your creditors having a vested interest in how your company performs, with an 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 to Bootstrap
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 a freedom from outside oversight that can reduce the stress of building a 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 in an organic manner.
Of course not taking equity means you have less funding to work with, so you’re limited in what type of projects you can tackle at any given time. This is why bootstrapping limits your company’s potential growth, and making ends meet as your company stretches for each new milestone will require considerable sacrifice. You are likely to invest a lot of your own money in the project and work very long hours, especially a first.
However, as your bootstrapped company gains traction after the initial startup phase, it will get easier and easier to maintain and grow. And because you have no investors requiring an exit, you can continue working on — and being supported by — your company for as long as you would like.
Equity vs. Bootstrapping: The Decision Is Yours
Despite the single-minded focus on VC among software startups, it’s not unheard of 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.
If you’re an avid reader of The Startup Finance Blog, we’ve offered plenty of advice about raising equity and about bootstrapping. Additionally, Tomasz Tunguz, a VC at Redpoint, provides this handy basic financial model in a spreadsheet that lets you compare the difference between equity and bootstrapping.
Ultimately, however, it’s all about what you want. 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?
Only you can find the answer that’s right for your company.
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