In investment funding for startups, one of the very first and most important decisions a founder will make is how to finance their startup. Do you self-fund, or have you pursued outside investment capital? Unfortunately, that’s not a straight-forward question, there is no single answer. Both have unique advantages and potential downsides. When it comes to investment capital for startups, understanding the realities of bootstrapping vs. outside capital will be critical to your success.
What is Bootstrapping?
Bootstrapping is the process of starting and growing a new business with little or no outside investment. Founders utilize their own funds, funds from the business itself, or family and friends’ investments.
Benefits of Bootstrapping:
100% Ownership: You own 100% of your company. The agility and decision-making power affordances to founders every day is priceless.
Frugal Mindset: Few resources compel you to run operations in a lean way, take creative risk, and spend efficiently
No Expectations from Investors: Because there are no investors loaning you money, you do not have to commit to aggressive growth metrics to hit or quickly prepare for exits.
Organic Growth: You grow organically and slowly based on product-market fit and real customer validation.
Drawbacks of Bootstrapping:
Limited Capital: Growth is limited (usually) to personal or earned capital.
Slower Growth: The company can miss strategic opportunities because without capital to spend, you cannot scale quickly, hire quickly, or market quickly.
Founder Burnout: Having too much to try and control without a team to collaborate with, additionally without an advisor; just more room for founder burnout.
What is Funded Growth?
Investment funding for startups typically means getting money from angel investors, venture capitalists, crowdfunding sites, or crowdfunding accelerator providers. These sources lend money in the form of equity, convertible debt, or profits in the future.
Advantages of External Funding:
This investment funding for startups allows scalabilty, thus you can spend money on people, product, selling it, and infrastructure
Market credibility – leverage from known investors and brand recognition and new networks, and support people
Leveraging expertise and mentorship – investors will usually give helpful advice in experience, domain, strategy, and connections.
Buffer for Mistakes: With funding, startups can accommodate some experimentation without jeopardizing survival.
Disadvantages of External Funding:
Loss of Control: Giving up equity means you are also sharing decision-making and accountability with outside stakeholders.
Pressure to Succeed: Investors want returns, usually on a timeline, creating anxiety and pushing strategies.
Dilution: Multi-round financings result in a gradual, yet significant, erosion of founder ownership.
Complicated Legal Structures: Fundraising is accompanied by compliance, term sheets, and legal obligations.
When Do You Bootstrap?
You Have Low Upfront Costs: If your company doesn’t need much capital to start, bootstrapping will work.
You Want Complete Control: When you want to work on your terms without interference from others.
You’re Building a Lifestyle Business: Bootstrapping is ideal for businesses looking to develop stable revenue without the goal of hyper-growth.
You Have Existing Domain Knowledge or Customers: If you already have domain knowledge or customers, bootstrapping may be less risky for you.
When Should You Raise Investment Capital?
You Need to Move Fast: If you are in a competitive industry, getting investment funding for startups early allows you to scale quickly and assemble market share.
You Have a Scalable Business: If your product can grow exponentially (e.g., SaaS, marketplace), venture capitalists will be lining up for your attention.
You Need Heavy Infrastructure: For hardware, logistics, or technology-intensive products, capital is necessary.
You’re Open to Sharing Ownership: When you care less about control and more about collaboration and mentorship, funding is a good option.
Examples
Bootstrapped Companies: Mailchimp is the most famous example of a bootstrapped company; it grew to over $800 million in revenue before being acquired by Intuit.
Funded Companies: These are equally well-known. Companies like Uber, Airbnb, and Stripe needed funding to grow quickly, and did so through multiple funding rounds that engaged capital but also strategic resources.
Hybrid Funding Models: Best of Both Worlds?
Some startups are bootstrapped, and when they have enough traction, they raise some money. This “bootstrapped-then-funded” approach can give founders the ability to:
- Leverage more when negotiating with investors
- Retain more equity%
- Use user data to validate product market fit
Final Thoughts
Ultimately, whether to bootstrap or accept investment capital is a function of your priority, sector, risk tolerance, and values as a business owner. There is not a singular option that is “better” when it comes to investment funding for startups. The “better” option is what is best for you.
Take the time to consider your resources, ability to scale, and vision for the future. Whether you’re growing slowly and steadily or racing to the next funding milestone, intentionality and clarity will craft your success.
