The question whether a startup founder, new to the scene of business, should opt for raising funds or if he should choose to bootstrap, has been a heavily discussed topic for years.
What should one choose? Diving into this matter alone and working several jobs in order to be able to raise a business using personal investments exclusively, sure sounds exciting and fulfilling! However, it is quite risky as well. On the other hand, searching for investors who are willing to provide the needed support needed for opening a startup, might seem like an easier path but also has its downside.
Let us take a look at these keywords and see the pros and cons of each, to help you determine which is most likely an effective option for your startup
What is Bootstrapping?
In the business world, bootstrapping means starting a business with either very little money or no money at all. It especially means getting your startup going without the help of venture capital or an angel investment.
Basically, bootstrapping is using your own money or the money you earn from customers and putting it right back into your startup.
Let’s look at the advantages and disadvantages of bootstrapping your startup.
Advantage of Bootstrapping
- Instead of using your time to hunt down an investment, you can focus more on the business itself
- You are able to control your company completely, without pressure and input from outside investors
- Since you don’t have an excess of money when bootstrapping your business, you tend to spend wisely and learn to manage your company’s money more efficiently. Learning this type of financial discipline can prove beneficial in the future, even when your company finally gains excess capital.
- Your business will become more customer-focused since all money is coming from customers instead of investors.
- The owner gets to take home a bigger piece of the pie in the event of a company exit instead of having to share it with investors.
- Forces unconventional thinking and innovation
Disadvantages of Bootstrapping
- Since bootstrapping entrepreneurs use their own personal assets to get their business going, they are more at risk of ending up in a lot of debt if the business fails.
- It typically takes a much longer time to grow a company without an investment, which could mean that you will not be earning any money for quite a while.
- Not all business ventures can be bootstrapped; especially if the business will need a large amount of capital to get started.
- Your business can fail if product development and marketing don’t become efficient quickly.
- Competitors with a better financial standing have a better chance to push you out of the market before you even get a chance to get your business up and running, with strategies such as out staffing and better marketing.
Raising money from investors sure looks like an easier option to get your startup up and running but surely has its pros and cons
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- Having high-profile investors involved can help give your new business more credibility.
- Raising funding with venture capitals can provide you with a source of financing that can easily help make a more rapid growth possible for your business.
- Investors can often come along with resources, contacts and useful information that can help to make your business scale at a very fast pace with a short time.
- Investors can also help you think more tactically about growing your business more successfully, especially since they have experience building businesses.
- You don’t have to repay the money that is invested; although, you will have to give up some equity or shares in your company.
- When raising funds, you also have to agree to certain restrictions with the investors on things such as how much you will pay yourself, how involved you can be with other companies, and how much equity you will have to give up to your investors.
- You usually have to give up a large percentage of ownership equity in exchange for venture capital funding. This gives investors a huge say in your business; which could give them the power to influence the direction of the company as well as put you under greater scrutiny in your duties and earnings.
- Venture capitalist and investors in Ghana are sparse and can often be difficult to find and obtain.
- Most of the business owners who apply for venture capital funding are going to be turned down. This may be due to the fact that most investors tend to be very selective on aspects of a potential investment, such as the specific technologies, industries, geographic areas or potential rates of return of the investment.
- You are more likely to be less disciplined financially since it is someone else’s money at risk versus your own.
No matter if you decide to bootstrap your business or use venture capital funding, there are going to be some advantages and disadvantages to doing either one.
The key is to weigh those advantages and disadvantages and then decide which financial strategy best aligns with you and the success of your new business venture.
Kindly share which of the options you have used so far in getting your startup business going, and comment your