Starting and running a company is not easy or cheap. You have options for funding – the most common of which are Venture Capital (VC) Fundraising or Bootstrapping (bankrolling yourself). Both have their pro’s, con’s, payouts, and drawbacks – and this post is here to give you a high level overview of what to think about when making the decision.
Venture Capital Fundraising
Let’s start with the most common way tech startups are funded today – VC Fundraising. You see the headlines on TechCrunch, Crunchbase, and Axios all the time: XYZ closes $400 billion dollar Series A on a $3 trillion valuation in a round led by ABC VC to change the way we cook potatoes.
The numbers get bigger, the markets get wider, and more VC’s pop up with humungous funds dedicated to the most obscure products every day. Let’s dive in to some pro’s and cons:
Pro’s of VC Fundraising
Cash Money – The most obvious pro is you’ve got cash money to spend. How you spend it is up to you, your co-founders, and your Board which likely consists of at least one of the people that gave you the money to spend. Few things offer greater peace of mind than knowing you don’t have to scrape together money for payroll, marketing expenses, or even food.
Faster Growth – Now you have the money to hire, hire, hire your team and grow, grow grow your numbers. That’s what everyone wants, right? The growth curve, up and to the right making the company ripe for acquisition or an IPO in the next 3-5 years. Hire that 40 person salesforce, get that VP of Marketing, get that agency on retainer to do all of your social media! Make it happen.
Connections – The best VC’s come with connections – to great vendors, other VC’s, consultants, and potential customers from their portfolio. When deciding on what VC to go with, don’t just opt for more money. Connections matter, and you want to leverage their connections to your advantage.
Con’s of VC Fundraising
Giving up Equity – When you take VC funding, you’re trading money for equity in your company. That means you, your co-founders and employees are no longer 100% owners of your thriving potato farming business. ABC VC owns 20%, and any future round of funding you raise will give up more equity in the company.
Dilution – This relates to giving up equity. Dilution means that with each round, your stake in the company gets smaller and smaller. What was once 100% yours, now comes down less than 5%.
Giving up Control – Remember how you became an entrepreneur to be your own boss, and not to answer to THE MAN/WOMAN? Well, with VC funding – you now have a boss – your investors, shareholders, and Board of Directors. Big company decisions must be run by your board, and ultimately, you’re doing what you can to please them. This includes your hiring plan, your choice in VP’s and C levels at your company, and what product you place most of your effort in.
You Can Lose Your Company – It happens way more often than reported. CEO’s and founders of companies get ousted from their roles for a variety of reasons – from the lack of performance, to differing viewpoints with the board. Your job is not safe, and you can lose the company you built from the ground up.
Bootstrapping means bankrolling your own business – with your own money, money from friends and family, or bank loans with which you pay interest. Some of the most successful companies (in history, really) are bootstrapped and still run by the family that originally founded it.
Pro’s of Bootstrapping
You’re in Control – You don’t have outside investors with their own motives. This company belongs to you, and those you started the company with – and you decide what you build and well, and who you hire. It’s your way or the highway, boss.
The Payout is Yours – When your company becomes wildly successful and exits into an acquisition or an IPO, the payout belongs entirely to you, your co-founders, employees, and whoever else has stock in your company. So instead of getting diluted from $100 million to $100,000 – you’re seeing the fruits of your labor on exit.
Con’s of Bootstrapping
Lack of Cash Money – Unless you just came off an extremely well paying job, have passive income from investments, have a massive savings account, or come from family money – chances are your budget is a little tighter. When you’re bootstrapping, you’ve got to pinch your pennies and squeeze every last drop out of what you’re putting in. You can’t hire or buy as liberally.
Slower Growth – Bootstrapped companies statistically have a slower growth curve. That’s because the goal of a bootstrapped company is growth by revenue – not just growth by numbers. You have to be cash flow positive to make this a successful business, and that can take a much longer time when you don’t have $100 million of VC cash in the bank.
Higher Risk – You’re not spending other people’s money here. It’s YOUR money that you’re spending. You can lose all of your savings trying to make a floundering company fly.
You’re Responsible for Connections – This doesn’t mean that you don’t have any connections. People will help you, but you will be lacking that ‘warm intro’ you get from VC’s to other companies that can help you.
Let Us Help
This is a very high level overview, and there are many more pro’s and con’s when deciding between raising VC funds or bootstrapping your business. Ultimately, the decision is based on what your goals are, and what is important to you as a founder.
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This post is not legal advice, and does not establish any attorney client privilege between Law Office of K.S. Kader, PLLC and you, the reader.