Fund Raising Issues: Bootstrapping vs External Funding

Advertisements

As a young and emerging startup, there’s always a looming question on the table, “How are you going to fund your venture?”. Fortunately, this is a binary question. One can either bootstrap it or get external funding. A report by consulting firm HexGn states that, Indian startups got nearly $ 10.14 Billion in funding last year.

Bootstrapping

Bootstrapping refers to starting a company with money that is in hand, i.e. without external funding. External funding refers to starting a company with money that is given by others like investors. For instance, venture capitalists may invest in the company in return for a certain percentage of equity.

Even though the purpose of the company may remain the same, it is important to look at the nitty gritty. The goal, capacity for growth, control, exit timing – all of these need to be considered before one wishes to fund their venture.

External Funding

Companies may have plans for expansion and growth after receiving external funding. Companies may do some of the following post receiving funding:

  • Creating a Minimum Viable Product
  • Foraying into new demographies
  • Developing new softwares
  • Hiring personnel
  • Streamlining the data process
  • Offering attractive perks for employees

Companies may also wish to look at the capacity for growth. As a bootstrapped company, with restricted means and resources, it can be challenging to attain a higher growth rate. However, as a funded company with more means, it will be easier to gain traction. Again, resources are just a means to the end. There are several variables within these resources that can help get that high growth, like hiring a good website designer or the efficient usage of the funds.

Founders may wish to keep full control of the company. This is especially useful for making decisions as it gives the founders the flexibility and freedom to do what they think is the best. However, once the company get external funding, they need to give the investors an equity in exchange. Sometimes, they might just want a royalty with that equity too – this may hamper plans that aren’t a part of the original map. The company will have to contact the investors before making decisions.

Lastly, exit timing refers to whether the founders wish to scale up the company and be in it for the long term. At other times, they may wish to get great growth revenue and sell the company to a bigger one. That way, they can exit after getting their share of return.

However, all of these aforementioned factors affect each company differently. Companies belonging to the tech and e-commerce domain prefer to be bootstrapped. This is so because their cost of starting is relatively lesser and usually does not involve tangible assets. Bootstrapping may also work in case of serial entrepreneurs, who have proved themselves capable before and can do it again.

Successfully Bootstrapped Companies

A few successful bootstrapped companies include Zerodha, Dell, Facebook, Apple, and GitHub. As one can see, these are mostly tech companies which have little to no initial capital cost. Later on, these companies may raise funds to grow better but they start off with humble beginnings.

Companies which involve physical assets might want to get external funding. Here, the cost of procuring raw materials is higher. Moreover, one also gets access to the network of that VC company, which allows them to grow and gain better insights. There will be relatively fewer cash flow issues due to more money. However, contrary to more money, founders may lack financial discipline because of that easy money from the investors.

At the end of the day, the decision of funding the company lies in the founder’s hands. Some may prefer to bootstrap it whereas others may wish to part with equity to get the funding.



Categories: Investment Basics, Most Read: 2021-09 (September), Op-Ed

Tags: , , , ,

Leave a Reply

%%footer%%