If you follow me at all, you know that I am a huge proponent of bootstrapping your business if at all possible. While raising outside investment from a venture capitalist or an angel may be the glitziest way to go, it’s not right for the vast majority of businesses. If you need a large sum of money in order to achieve the rapid growth that you know your company is capable of and can generate huge returns for an investor, by all means get your strategy together for raising VC money. However, for most of you entrepreneurs out there, you’ll just be spinning your wheels because the business you’re building is not suited for that type of investment.
Somehow over the years raising venture capital has become seen as a success in and of itself as opposed to another step on the journey to success, which means everyone wants to raise it, whether or not they should. Therefore, just to make sure that any of you who won’t be raising VC cash don’t get distracted by the glitz of VC land, here are some of the benefits of bootstrapping that entrepreneurs should take full advantage of if they have the option.
Firstly, bootstrapping is the only real way – with the exception of rewards crowdfunding – to maintain complete ownership and control of your business without taking on debt. If you want to be able to steer the ship based on your goals alone without being bogged down by principal and interest payments that may come due before you’re generating revenue, you have to maintain complete control. When you bring on VC investors, they take equity in your company and seats on your board and you are no longer the only leader at the table. You will be forced to take into account how your investors want things done and, depending on the deal structure, may legally need their permission for decisions about how to manage and where to take your company.
Similarly, if you want to build a long-term business, perhaps one that you can pass down to future generations in your family, you don’t want to look at divvying up ownership and control to outside investors because they will expect a quick profitable exit – a completely different goal. Bootstrapping gives you the option to remain in control or try to make a profitable exit and the only person who you need to get onboard with your decision is you.
Next, when you bootstrap you learn to be thrifty, creative, and efficient. Every single penny counts, so you’re not wasting time on stuff that doesn’t matter or you’ll go out of business. Raising too much outside funding can actually have the effect of making a company inefficient – not just in the sense that they spend a large chunk of their time courting investors and then trying to keep them happy, but because the founders now have more funds to play with and less skin in the game. While most don’t intend to slack off just because they’ve raised a round, having a long runway and a buffer to fix mistakes takes away a certain level of urgency and typically leads to a less efficient utilization of the capital available.
Finally, if and when you do succeed, knowing you literally built the entire thing yourself and that you don’t have to split the bragging rights or the cash with anyone will be an incredibly sweet feeling. If you jump into too many rounds of venture funding, you’d be surprised at how quickly you can dilute your power, control, and payout once you finally do sell or IPO. I’ve heard many stories of entrepreneurs who sold their companies for 7 or 8 figures but only walked away with a few hundred thousand dollars after years of hard work.
Once again, there are certain circumstances when raising venture capital is the best decision for your business, but for the vast majority of companies, bootstrapping is a more beneficial option and you should be careful to weigh the pros and cons of each before focusing your energy on raising money instead of building your business.
Now I’d like to hear from you. What are the best reasons you can think of for bootstrapping instead of raising outside capital? Let me know in the comments section below.
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