The question of whether one should run a bootstrap startup or raise a venture fund is one of the most difficult decisions that an entrepreneur has to make before starting a business. While the choice rests on a myriad of different factors, it is essential to understand these financing methods and how they could influence the future of your business.
Funded business ventures are those that are backed by venture capitalists (such as angel investors or venture capital firms) who invest their funds in a given business in exchange for equity.
Venture funding gives entrepreneurs the financial freedom to pursue their business interests and also ensures the involvement of more people in the business with different backgrounds, ideas, and expertise. This provides the business owners with the necessary resources to chalk out their business plan and make a fresh start.
The year 2017 witnessed a record total of $13.7 billion being invested in the Indian startup ecosystem across 820 different deals. Startups like Paytm and Flipkart have now become a familiar name across the Indian subcontinent, and are just a small percentage of the new-age businesses backed by VC firms. In 2017, both Paytm and Flipkart managed to raise as much as $1.4 billion in VC investments, and are spearheading the trend for funded ventures.
Pros and Cons of Funded Ventures:
External funding provides businesses with a lot of financial resources which lead to faster growth of the company. Experienced investors also act as mentors for the young entrepreneurs, and are there to guide them through tricky situations.
In addition to this, their network of industry contacts helps the startup in earning much-needed credibility. Funded ventures are entirely focused on developing the business, and can act as an effective starting point for introducing the product in a market.
However, like all operational models, funded ventures come with their own set of cons, the primary one being that the business owner loses a considerable claim over the company. In addition to this, the variety of restrictions on payments, equity, and decision-making drastically limits the scope of the founders. So, instead of owning a business, the founders end up owning just a smaller portion of a much bigger pie.
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The term “bootstrap” finds its roots in the phrase “pulling oneself up by bootstraps”. Entrepreneurs who bootstrap their business rely on their savings and initial revenues to fund their startup. The business focus is directed towards one goal and is devoid of external interference from investors. Studies indicate that out of the pool of new startups, more than 80% are funded by the founders’ personal investment.
The Indian startup ecosystem is replete with entrepreneurs who have successfully built their business through bootstrapping. For instance, Zoho, a tech-company that initially started as a network management framework for telecommunications and network equipment, has built itself through bootstrapping. It has now diversified into providing IT management products and was believed to constitute a quarter of Salesforce in 2012. Zoho now spends the bulk of its company revenue on product development, and currently services over 10,000 customers worldwide.
Pros and Cons of Bootstrap Startup:
Bootstrapping is a stable way of gathering revenue and supporting future investments. It also provides entrepreneurs with a safety net for managing long-term costs. Since businesses have no need of relying on other funding sources, the entrepreneur does not need to worry about diluting the business ownership among investors. Since entrepreneurs don’t need to issue equity, they can instead focus on building and developing their product
It allows entrepreneurs to experiment what they can do with their company as they don’t have the pressure from investors to release their product. So, when in it comes to taking on investors, they can focus on partnering with someone who brings in a required skill set and industry-specific expertise as well.
When compared with venture capital, bootstrapping can prove more beneficial as it allows the entrepreneur to exercise control over critical business decisions. However, the downside is that this form of financing might also place the entrepreneur under unnecessary financial risk. In addition to this, bootstrapping may not provide the company with enough investment for it become successful at a faster pace.
With all said and done, the decision to get funded or be bootstrapped is dependent on a variety of different factors, including your goals, your initial capital, and the kind of audience your business would cater to. In the end, you would need to feel comfortable with your decision, because you would be responsible for the success or failure of your project.
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Harsh Vardhan Dutta is the founder of italics, a content development agency and Markigence, a digital marketing agency. An entrepreneur at heart, Harsh is a keen follower of digital marketing practices, entrepreneurship and philosophy.