When entrepreneurs and small business owners start out with establishing their product or brand they often contemplate raising an angel or venture funding round to help turn their ideas into reality. There are numerous success stories of start-ups accelerating growth due to fundraising but there are also some cases of fundraising failures.
On the other hand, there are also a large number of entrepreneurs choosing the bootstrap way of establishing their business. Their aim is to reach a sizeable revenue figure and then seek funding. At that stage, it is easier to convince investors of their revenue and business model as they hold a strong record of numbers.
So the question is: Should you bootstrap your startup or go for VC funding?
There are several factors the one must consider while deciding between fundraising and bootstrapping. Mainly – uniqueness of your product/offering, the dynamics of your market, growth opportunities, challenges and limitations. There are typically five stages of venture capital funding although they might somewhat vary from financing to financing.
1.The first stage is the seed stage – that is when the company is a little more than just an idea and, has its prototype ready to attract additional investors.
2. The second stage is the startup stage– it is when you have a devised business plan and start with advertising and marketing your product to potential customers.
3. The third stage is the emerging stage – when the company finally earns some profit!
4. The fourth stage is the expansion stage – where the company is seeking for exponential growth and needs additional funding to keep up with the demands. Funding in this stage gives great market exposure and helps grow the business even further.
5. The final stage is the bridge stage – funding obtained here is typically used to support activities like mergers, acquisitions, or IPOs.
In some ways, bootstrapping a startup can feel safer – or at least more comfortable. It promotes a more slow-and-steady growth for your business. Without the pressures of investors, you’re able to develop your product to your vision, and on your timetable. And of course, you maintain 100% ownership.
VC deals also come with stipulations and restrictions in composition of the start-up’s management team, employee salary and other factors. Furthermore, with the VC firm literally invested in the company’s success, all business operations will be under constant scrutiny. One should consider all the merits and demerits before taking the big step.
But after a point, by taking funding, you aren’t just accepting money, but you are gaining the expertise of people who have been in this game for a long time. And that can be very beneficial for your business.
Along with ensuring that you are getting involved with the right kind of people and that your business is at a reasonable scale, timing of raising funds is also very crucial for the growth of the company.
But keep in mind: the best time to ask for funding is before you need it. Once you’re really desperate for more cash on hand, it’s likely too late to go to a VC firm. So as you’re weighing your options, do it from a place of financial flexibility.