Starting a new business, developing your idea, and looking for product-market fit makes for an exciting time that presents many potential avenues and lots of choices to be made. Getting funding for your startup is no different. It is no secret that starting a business requires a fair bit of funds and obtaining said funds can be difficult. Some prefer to use their own money so that they can be completely in charge of their business, and some want to collaborate with experienced business people for advice and guidance.
Whichever route you choose to take, funding is essential for the launch of your startup. There are multiple ways to achieve this funding, but we will just be looking at investment – as an umbrella term – and bootstrapping.
What is investment
Usually, investment in a startup is made by people or organisations that have money that they would like to see a return on. The catch, however, is of course that while the startup gains the advantage of being guided by the investors, you must never lose sight of the fact that the investor expects a value increase on the initial amount that they invested into the startup.
Some even say that opting for investment is like giving your business away and that some of your freedom is lost due to the investors’ role in the decision-making process. This does not have to be the case but can certainly happen and should be kept in mind. Still, with investment comes the invaluable benefit of great advice, as the investor connected to your startup will also be invested in seeing your business succeed.
What is bootstrapping
According to Investopedia, bootstrapping can be defined as: “… building a company from the ground up with nothing but personal savings, and with luck, the cash coming in from the first sales.” What makes bootstrapping more challenging is that the business growth can be a bit slow to pick up momentum. To start a business, a fair bit of capital is often needed.
However, when you stick to bootstrapping, you will be completely in charge of your startup. There will be no one waiting for a return on investment, giving you room to breathe. In some cases, bootstrapping your own venture may lead to even more motivation and focus, as you are gambling with your own money.
The pros of investment
1. It is not a loan
One of the major positives of receiving external funding is that you are not expected to pay back the money that was invested in your startup. This means that should your business fail, you will have no losses and there will be no loans that should be paid back unless agreed otherwise.
2. You don’t need a good credit score
When receiving an investment, you do not have to have a good credit score. Yes sure, investors would like to see a business forecast and a business model, but they will usually not be looking at your personal credit history to see if you will be able to manage your finances well. This is a pro to those who are still young and have not even started to make use of credit yet.
3. Gained expertise
What comes along with the investor’s money? Their advice and connections. This is even more valuable to the success of your business as it allows you to tap into their expertise at any time. They will gladly offer it, most of the time, as they also want to see your business grow and succeed – usually for their own investment purposes, but it still helps you out in the end.
The cons of investment
1. You don’t get all of the profit
When onboarding investors, they plan to make a return on their investment, meaning that they also want a cut of the pie. Sure, they helped you out in the start, but business is business and they have invested for a return. Remember that some investors are ‘pros’ doing only investing as a way to earn an income.
2. There are higher stakes
Receiving money from an investor can be a blessing and a lifeboat, but when they invest in your startup they see potential. This means that as a startup your stakes are much higher and the investor expects you to succeed. After all, it isn’t a good feeling to lose someone else’s money, now is it?
3. You don’t have complete control
Because investors want you to succeed, they might offer to be part of your advisory committee and your board. This will allow them to have oversight of all key decision making for the future of the business, and also ensure that you also make enough profit to secure a return on their investment.
The pros of bootstrapping
1. Complete ownership of your startup
As a bootstrapper, you are the only one in charge of your business. Because you invested all of your time and money into your startup, you will be the one to have the final say. There is no one looking to make a return on their investment. You get to be the captain of your ship.
2. You get to keep your business
Unlike with bank loans where when your business does not make any profit you might find yourself unable to make the loan payments, with an external investment you get to keep it. It might be a stressful situation for you as a business owner, but there is no external pressure from a third party for you to make specific payments at specific intervals. .
3. A sense of accomplishment
When your business succeeds as a bootstrapper, then you have the right to say: “I did it all on my own”. It brings that sense of accomplishment to any owner when they are able to build a business from the ground up.
The cons of bootstrapping
1. You won’t receive expert advice
Unlike receiving investment, you do not gain outside insight. You have to go and seek advice from experts and possibly pay for it. This can make decision making harder as you have no external input, after all, you don’t know what you don’t know. Especially because any advisor you make use of may or may not know your business that well.
2. Staying organised can be difficult
Because you don’t have a panel of investors, you might find it difficult to stay organised. This is especially true if you do not have the initial capital to hire administrative staff to help with keeping things organised. That means that you have to handle the financials, the marketing, and the customer service.
3. Growth can be stunted
When you do not have a large injection of capital at the beginning or at specific growth stages of your business, it can stunt your growth. When you have to rely on sales to ensure that all of your dues are met and sales are slow, then gaining capital might take longer and improvement can be delayed.
Which one is best for your startup?
In the end, it all comes back to you. As a business owner or someone with a great idea for a startup, you need to decide which option would work best for you. It is a good idea to weigh up all of the pros and cons for each option and see which appeals to you the most.
The best part of being a business owner is that you have the freedom to choose an option that makes you happy. If you would prefer that someone shares their expertise with you 24/7, then the investment might be the way to go. But, if you want to fly solo and make all of the decisions and have complete control, bootstrapping might be more suitable for you.
At Velvet, we strive to create a community of startup owners where we exchange advice on investment and help startups receive funding. To be part of the Velvet community, have a look at our website and see how we can help you improve your startup.