Bootstrapping Vs Venture Capital
A recurring issue for an entrepreneur is whether or not they should seek outside funding to help them develop faster. This usually refers to venture capital. Granted, this is a major choice that might decide the company's success or failure, as well as have a significant influence on the founder's financial share upon leaving.
Fortunately, it's not an all-or-nothing choice. You can bootstrap a firm to get it to the point of viability, then invest in it to develop it and put it on a path to long-term profitability.
The fact is that once you take on venture financing, the business should expect to expand quickly. Your investors have one objective: to get a high-value exit in a short amount of time, which implies you must be in a firm that can develop rapidly. In a high-growth market, your company must be able to significantly outperform its competitors, or swiftly devour market share in a moderately growing industry.
Internal things to consider while choosing between bootstrapping and funding
Here are some things to think about when determining whether to bootstrap or seek outside capital for your SaaS company:
· Your objective
· Exit or not?
· Possibility of expansion
· Time Management
· Dilution and equity
· Monetary resources
· The Most Important Factor Is Revenue Potential
Are you striving for the moon and beyond, or are you establishing a long-term steady developing business? Your choice to bootstrap or seek outside finance is influenced by the aim you're pursuing. The objective of most bootstrapped businesses is to become profitable. Funded businesses, on the other hand, are more likely to go for maximum revenue growth and ultimately become market leaders.
Exit or not?
First and foremost, consider if your long-term goal is to expand your SaaS firm indefinitely or to depart in a few years. If you're aiming for the former, bootstrapping is a solid choice; if you're aiming for the latter, seeking VC money to expand quicker may be the appropriate match, since VCs often invest with a 3 to 10-year exit in mind.
Possibilities for expansion
Next, consider the kind of development you wish to attain. Obviously, bootstrapping a business implies operating with fewer resources, which means you'll have to settle for a slower pace of development. If you're backed by a VC, on the other hand, you'll be able to scale and develop traction much faster. Both can, without a doubt, score well on the Rule of 40. (However, others claim that being sponsored leads to a lack of financial discipline, which means you won't make the most of your money as you would if you were bootstrapped.) (Think about it!)
Next, assuming you bootstrap your firm, you have a lot more flexibility when it comes to the freedom and control of the proprietors. You are allowed to move a project, objective, or milestone ahead or backwards – no one will question you. When you're funded, however, your timelines are more structured and rigid, and there's less room for last-minute changes.
When you're backed by a venture capitalist, your ability to pivot is likewise limited. When you take investment, your firm is no longer 100 per cent yours, and you'll need to meet with your investors and get their approval before pivoting, pursuing a new business model, or doing anything that isn't part of the original strategy. If you've bootstrapped your business, you can pivot and make whatever adjustments you choose.
Of fact, the great majority of businesses lie somewhere in between these two extremes, leaving you with a decision to make. So, what should you think about it?
Bootstrapping your business provides you with ultimate control over its direction. You may explore, fail quickly, and try again. You are the only one who is questioning you. You won't have to keep working on business plans and spreadsheets to persuade the board of directors of your intuition. You may use that time to put your hypothesis into action. Bootstrapping allows you to concentrate entirely on the product and its success. Your most important resources aren't overburdened with paperwork. Furthermore, the fundraising process may consume a significant amount of time from founders, perhaps 10 to 20 man-months for every round of funding.
Dilution and Equity
Bootstrapping permits you to keep your precious equity until you're ready to sell it for a good price since you've established commercial traction and a track record. It's simple to raise money when you don't need it, according to popular opinion.
Also, if the founders and team lack sufficient expertise or experience in funding and/or the market, bootstrapping may be your only option. Last but not least, market mood is a consideration. When markets are difficult to raise money in, even worthy businesses may face an uphill struggle. Bootstrapping is a clever way to get through the bad times on your own cash, with the intention of seeking funds later when the market conditions are favorable.
Financial resources are constantly taken into account. The majority of bootstrapped businesses are cash-strapped. They may perceive an opportunity for expansion, but they often lack the means to hire additional engineers, hire more salesmen, or increase marketing.
Venture capital investors, on the other hand, usually always have (or have access to) more cash to invest in a fast-growing firm. There will always be enough of gas to pour on the flames if your firm is on fire. They may even reject to join in later fundraising rounds if you aren't developing as quickly as projected.
The Most Important Factor Is Revenue Potential
Revenue potential emerges as a significant signal for determining whether or not your firm need capital to expand quickly. If the potential is strong and you're an early participant, you should be aware that the opportunity will almost certainly draw additional rivals. The need for speed will be critical, and acquiring external funds will be the gasoline for the fire.
Higher revenue potential is a more agreeable tradeoff for yielding equity to investors, since values are mostly dependent on revenue multiples, ensuring that the founders' ownership percentages are still profitable down the road.
Once the product has been demonstrated and a clear route to scalability has been established, revenue potential becomes obvious. Because the capital intensive efforts necessary to do so—such as marketing, sales, support, and expansion—can be daunting/impossible for the firm to finance via its own reserves, it is ripe for investment to speed growth.
What options do we have?
A Hybrid Approach
So, what do the majority of businesses do? Because there are so many advantages and disadvantages to both bootstrapping and venture capital, most businesses use a hybrid strategy. Many early-stage businesses rely on early adopters to help them flesh out their products, find the ideal markets, and fine-tune their marketing. They significantly modify their risk profile as a result, allowing them to attract investors at lower levels of dilution.
In fact, if your company is already on its way to self-sustainability, you may be able to attract smaller angel investors willing to accept lower returns in order to help you get there, allowing you to bootstrap once sustainability is achieved and the company is generating cash that can be reinvested.
Consideration of All Factors
Clearly, there's a lot to consider when it comes to expanding your business. As previously said, certain businesses will fall neatly into a category or market dynamic that clearly indicates whether they should bootstrap or venture. Other firms will benefit from a hybrid model that uses venture financing only after they have reached a particular level of maturity and growth.
In every situation, entrepreneurs must assess the level of ownership and independence they seek against the financial resources they'll need to support their company's development over a broad range of possible outcomes.