For many entrepreneurs, the choice between bootstrapping and taking on equity investors is a tough one, and understandably so. Each method has its advantages and disadvantages, but ultimately it will depend on what’s best for your business. Before you decide, it’s important to consider the advantages and disadvantages of each approach.
Advantages of Bootstrapping Your Company
One of the biggest advantages of bootstrapping your business is that you don’t have to give up equity in the business in order to grow it. You can stay in control of every aspect of the business, which means you’ll be able to make decisions based on what is best for the business without the approval of anyone else. This can be a huge benefit if the investors don’t have the same goals as the business owner. It can also be frustrating if you have shareholders who don’t share your vision for the company.
Another benefit of bootstrapping your business is that it will force you to focus on profitability. Many companies that rely on investor capital to grow their business can de-prioritize the profitability of the business. But, unless you have a large savings account for yourself, most bootstrappers don’t have the luxury of losing money quarter after quarter and year after year.
Disadvantages of Bootstrapping Your Company
The main disadvantage of bootstrapping your business is that it can take a lot longer to grow than it would if you had invested the money elsewhere. If you choose not to take on investors, you’ll have to fund all of the capital needs yourself. This may come in the form of deferring or reducing your own paycheck or even contributing more money (i.e., your savings) into the business. Obviously, this is generally a greater risk to the founder and requires greater consideration to the business and the growth plan. It also requires significant patience and persistence if you want to achieve success.
Advantages to Taking on outside Investment
Typically, taking on investors means bringing in additional capital to help grow your business. This can be the right play if your business requires significant capital expenses (e.g., expensive equipment and machinery) or large up front development costs (e.g., hiring software engineers to build your product). Likewise, it can be the right play if, after the minimum viable product has been created, to ramp up sales and marketing to distribute the product to a wider market. An immediate injection of capital can help achieve these goals quicker.
Sometimes, taking the investment can also come with an added benefit by gaining access to expertise, industries, and other resources that can help you take your startup to the next level. You may hear this referred to as “smart money”.
Disadvantages to Taking Investment
It’s important to understand that accepting investments (particularly equity investments) will also mean giving up some control over the company. You will no longer have complete control of the company and its finances, and you’ll owe duties to your new investors as well. Likewise, you’ll also have to give up some equity in the company’s enterprise value (i.e., share the enterprise value with your investors).
Likewise, in many cases, when a company takes on investors, growth is often the most important factor and profitability falls further down the list (at least in the short-run). But, eventually, the business is going to have to be profitable in order for investors to get their money back.
Which is better?
Bootstrapping is not better or worse than the raising money. They are merely two different strategies to reach different intended outcomes or goals. The goals and outcomes that you are trying to achieve will likely dictate which is a better strategy to pursue. For example, if you want to have 100% control and grow organically (using profits and, likely, slower than if you had investment), then you’ll likely lean towards a bootstrapping strategy. If, in order to reach your goals, you need to grow revenue by 50% year over year, that’s likely going to require significant capital and may necessitate outside investors to fill that capital gap.
If you’re having trouble deciding on how to grow your business, call us- we can help. (720) 306-1001 or email firstname.lastname@example.org.