Bootstrap vs Venture Capital: How to Play the Startup Game

When you’re determined to be your own boss, you need to start a business. Is it a business that makes outerwear from natural materials? A firm that specializes in white label SEO programs? A restaurant that caters to niche appetites?

No matter what kind of company you plan on establishing, you’re going to need funds to get it off the ground. Your most realistic options are bootstrapping the money yourself or approaching a venture capitalist. Understanding the risk and reward that each option carries could help you determine which one is better suited to your business and personality.

Pros and Cons of Bootstrapping

Bootstrapping is the term for raising the capital for a business or project entirely on your own. The common source of this capital is the business owner’s personal savings, sometimes augmented by loans and similar lines of credit.

The median capital for start-ups is approximately $10,000. Although if you’re cautious, you may want a larger amount so that you’ll have a safety cushion.

Bootstrapping offers you the following pros and cons:

• Pro: Total Ownership. Because you raised the capital on your own, you have complete ownership over your business. You’ll have a much larger cut of the profits than if you had asked other people for the capital. Even if you have co-founders, you will make more than if you shared equity with investors.
• Con: Acquiring Additional Funds is Difficult. About 90 percent of all startups fail, and running out of funding is just one reason. Without further cash injections, you’ll have to rely entirely on your company’s capacity to generate revenue. Even a couple of rough months can tank your startup, particularly if you’re trying to breach into a crowded market. Without investors, you may have to drain your savings or take out loans to secure more money to run the business.
• Pro: Complete Control. Without investors, you and your co-founders are in complete control over how to run your business. Other people may not share the same values that you do, or have the same motivations that fuel your ambition. With no one to share the business with, you can decide company policy, year-end goals, and other matters at your discretion.
• Con: No Outside Help. You’ll have to rely on your talents and knowledge to run your business efficiently. You’ll have to master good business practices and learn continually to keep things running smoothly. Investors could bring in people with experience to handle specific areas of the business, key influencers to drive interest, and experts in your commercial sector to establish your credibility. When you choose to bootstrap, you’ll have to hire these professionals as consultants instead.
• Pro: You’ll Build Everything. Since there’s no one else to turn to, you’ll have to come up and implement a strategy that will keep the business thriving. Without investor financing to fall back on, you won’t have the luxury to experiment on other strategies. This will hone your business acumen and give you “frontline experience” in running your startup.
• Con: You’ll Have to Work Harder. Having no additional funding could make everything harder. You may need to generate profit quickly or risk losing your business. You have to be frugal with everything and be careful with every decision you make. Bootstrapping is a hard path with many difficulties. You’ll have to be prepared to tough it out if you choose it.

The Pros and Cons of Venture Capital

Venture capitalists are individuals or firms that give funding to startups, usually in industries with high growth, like information technology. In exchange for their capital, they own a percentage of the business and a share of the profit it generates.

Venture capitalists also prefer to invest in high-yield and high-risk businesses. You may want to approach a venture capitalist instead of taking out a loan if your startup belongs to such an industry.

The rewards and drawbacks of partnering with a venture capitalist are as follows:

• Pro: The Payout is Huge. Venture capitalists can invest millions of dollars in your startup, depending on the calculated value of your business. That kind of capital can jumpstart almost any kind of company and provide enough monetary momentum for months. This kind of payout is invaluable if your startup needs high-tech equipment or valuable real estate.
• Con: They Can Be Picky. You have to woo venture capitalists before you see a single cent, and they can be picky. Venture capitalists look for businesses that can make a profit quickly and cater to high demands. For example, they may prefer to invest in a company that provides innovative local search engine optimization rather than on a high-end restaurant because of the former promises more revenue.
• Pro: You’re Part of a Team. Venture capitalists bring their experience and savvy when they invest in your company. Their advice will stem from years of intelligent business decisions, and they’re at your disposal. If you’re still new to running a business, having people with that level of experience can determine whether your startup prospers.
• Con: You’re Part of a Team. Because they own a part of your company, you can’t make decisions without at least consulting with your investors. They’ll have a say in the way you run your company and the way it operates. Worst-case, you end up answering to them instead of being equals or risk removal from your startup.
• Pro: They Have Connections. Venture capitalists can introduce you to industry experts, valuable consultants, fresh talent, and even potential clients. You should use their experience and connections to form your own network and help your business grow, whether through partnerships or transactions. You won’t have to stumble along on your own.
• Con: They Could Be Unscrupulous. Not all venture capitalists are benevolent. You have to be careful in choosing the right venture capitalist to partner with because some of them could demand more control over your business or a bigger share of its profits. Or they could be irresponsible and simply hand you the capital, then leave you without any guidance or connections.

So how do you know which one is more suited to your needs?

Some of it depends on your personality. If you have a vision for your business that you’d rather not share, or if you want to prove that you can do this on your own, bootstrapping is the choice for you. The type of industry you wish to enter is the second factor to consider. A startup that needs a lot of expensive equipment to operate is better off with funding from venture capitalists.

Whichever option you pick, you must remember that you’re blazing your own trail. Whether you forge ahead on your own or with some help, you already possess two things that can decide whether your business succeeds or not: courage and determination.