Capital Raise versus Bootstrapping: What’s Right for Your Business?
BY: MATT SHEALY ON SUNDAY, FEBRUARY 10, 2019
You’ve thought of an exciting business, found a great target audience and maybe even started to bring your business to life, but taking your small business to the next level will likely require additional funding.
Most entrepreneurs face two options to get additional capital: capital raises and bootstrapping. Both options have advantages and disadvantages and learning more about both can help you understand which is best for your business.
Capital Raise - Bringing In Outside Funds
A capital raise involves getting additional funds from a 3rd party. In an exchange for the additional cash, the third party gets some ownership of the business. There are many ways to obtain capital funding from third parties.
First, Banks can offer loans to small businesses. Banks traditionally require a clear track record of success and a blueprint for how additional funds will be spent. This is a good options for businesses that have some traction and a history of paying bills back.
For newer, unproven businesses, angel investors may be a good options. Angel investors are individuals with business experience who provide funds and advice to small businesses in exchange for partial ownership. Investors can help provide guidance and direction for a new company and often serve as business mentors.
When you raise money for a company, it can buy you more time to try ideas, find customers or tweak your product. Depending on how much capital you raise, you may be able to operate the business at a loss or break-even for a few months or a few years. Raising capital can also be a good idea if you have a brand new company and want to capitalize on the market. Raising funds can help you get your product out to customers faster and prevent competition from beating you to market. Some of the largest companies in the world raised capital when they were just starting including Uber, Ebay and PayPal.
In general, capital raises are a great option for businesses with immediate funding needs or those that would like the guidance of an investor. Raising capital allows for fast expansion and the ability to try new products or marketing.
Bootstrapping - Funding On Your Own
If you don’t want to take out a loan, or have to answer to investors when it comes to your new business, bootstrapping is an attractive option. Bootstrapping is a funding term that means that the business owner is funding the business with his or her own money or with the money that the company is making. In essence, bootstrapping means not taking any outside funds.
Bootstrapping is a great option for business owner who want total freedom in decision-making. While it can be a scary thought to take on that much responsibility, bootstrapping can excite the right type of founder. There are no investors to answer to, no board members to appease, no control or voting power struggles which can bog down or ultimately destroy a company. Without having to worry about outside opinions, the company can focus on the team and the clients. Funding a company this way can also motivate employees as they often get some ownership of bootstrapped companies and realize that their success could lead to the company being profitable.
Bootstrapping is a reasonable option for businesses that don’t need a lot of inventory or other startup costs. There is additional pressure to turn the company profitable, than going the capital raise route, but it can pay off. With no investors to pay off, if the business is successful, the sole owner can reap all the financial rewards.
Bootstrapping does have challenges as during the early stages, one bad week or month, can cause the business to go under. Entrepreneurs who rely on bootstrapping as a new business strategy must be prepared to work on a shoestring budget, often for several years.