I presume you have a bomb start-up idea up your sleeves, and you are almost there to make an exceptional change to society! But as a start-up owner, one aspect of the business that might still give you semi sleepless nights could be funding. When you want to do something big, you also need a bigger support in form of capital, manpower, and technological investments depending on the business needs. When it comes to funding a start-up, there are mostly two common ways to do it, one is Bootstrap funding, and the second one is venture capital funding.
We will look at the difference between both these funding mechanisms and also put some insights regarding the pros and cons of both funding types.
- Bootstrap Funding-
Bootstrapping a start-up primarily means not getting any external capital funding for the business and growing the business with the owner’s savings and revenue for the operational and expansion of the business.
You must be wondering how the term Bootstrap came into existence? There is a small story behind the nomenclature. Once a great person of Baron Munchhausen used his bootstraps to pull himself out of the water.
From the business perspective, the whole idea of bootstrap funding is to minimize the amount of borrowing for any start-up. One of the biggest advantages of bootstrapping a start-up is that it gives the business a lot of independence in making decisions for the firm.
- Funded Venture-
Funded venture is another mechanism of financing a start-up and it is different from bootstrap in a lot of ways. In a funded start-up, the capital requirements of the firm are initially looked up by an investor or a group of investors who are interested in the idea of your start-up and also look forward to getting a share of the profit of your business. Here, the prime focus as a start-up should be to sell your ideas to the investor in return for capital investment.
There are two ways in which a funded venture start-up can operate-
- Angel Investors- Angel investors are those people who have a profitable business of their own and they invest their own money into businesses or start-ups that look promising for growth.
- Venture Capitalists- Venture capitalists are also investors who invest their money into the start-up but they have more ownership on the decision-making of the company.
WHEN IS THE RIGHT TIME TO FUND A START-UP?
It is not a cakewalk to decide on how to choose the right way to finance your start-up. There are a lot of underlying factors that should be considered before you choose which path to go for. As a start-up, you can ask these questions before deciding on when and how you can fund your start-up.
- Where do you see your business 5 and 10 years from the present? If the focus of the business is to grow rather than innovating, then maybe a funded venture is a better way for you. But if your start-up is keener on innovating new products or services in the future, then you can take the risk and try bootstrapping the business.
- What are your return expectations from the business? In case a start-up is bootstrapped, a major chunk of the revenue will be injected back into the business and probably in the early stage, you won’t even make salary out of your own business. But involving an external investor will make sure that a salary is paid, even if it is lower initially.
- What skills and knowledge do you wish to have in your venture? If you are already someone who specialises in the domain of your business, then maybe you do not need a lot of extra experience to run a successful business. Say, for example, if a person having 20 years of experience in IT opens a start-up in the same domain, then that person is well informed about the hard skills that are required to run the business. But, if your skills are limited, then an investor along with his money will also come with a lot of experience and knowledge which will be incremental for the growth if your business.
KNOWING THE PROS AND CONS OF BOOTSTRAPPING AND FUNDED VENTURE-
- It comes with a lot of personal risk-taking.
- Bootstrapping is not the most practical option for businesses requiring heavy investment.
- The growth of the business will be slow
- The biggest drawback is the limitations in decision making in the firm
- A lot of restrictions get imposed in terms of equity and payments
- It can lead to undervaluation of the assets in order to sell the equity in a hurry
To sum it up, the following visual gives a clear distinction about the various pros and cons of both the funding mechanism.
|Bootstrapping||– full decision-making freedom and control over the company||– reinvesting profits earned;|
|– founder(s) own little money, but in hand;||– slow growth;|
|– full focus on business and the product;||– not every business can be bootstrapped;|
|– spending money wisely.||– competitors with better funding have a better chance in the market.|
|Investment Funding||– taking external support to grow;||– misunderstandings between founders and investors;|
|– high-profile investor gives extra credibility to a venture;||– loss of control over the company;|
|– faster growth;||– various restrictions about payments,equity, involvement in decision-making;|
|– huge skills and experience pool available;||– founders own a smaller portion of a bigger pie;|
|– no need to repay money invested (only with equity)||– less financial discipline|