March 1, 2013 | 4-minute read (770 words)
Originally published in SoCalTech.
To self-fund or to raise funds? That’s the big question that many founders ask themselves as they try to get their product and service to market. You can find successful entrepreneurs on both sides of the bootstrap debate: there are definitely advantages—and disadvantages—to both bootstrapping and raising venture capital.
Admittedly, bootstrapping has its downside: the biggest drawback being the limit to how quickly you can get your product/service to market and how fast you can execute at a larger scale. Also, without VC funds, you will have less resources to focus on product development. But as someone who bootstrapped my own financial services company to great success—and has worked with many successful companies who started by bootstrapping—I wanted to extol what I see as the top virtues of bootstrapping:
1. Helps you to focus. Bootstrapping helps you to focus on your product in so much as you don’t need to worry about fundraising and investor/board governance. The cycle of fundraising can be a distraction from your core business. When you’re not dancing the VC dance, you can just focus on building your product/service and creating a sustainable business model, by identifying your milestones and what you’ll need to achieve them.
2. More time to develop your product/service. Without investors breathing down your neck, looking at your progress and financials, you can take your time developing your product/service. This doesn’t mean that bootstrappers don’t experience a sense of urgency, but it’s internally driven. You can take the time you need to develop a superior product, and time yourself to market appropriately.
3. Better focus on execution. Bootstrapping impacts on how fast you can execute. Because the runway is so short when you have less funds, by necessity you are forced to speed up the development-testing-reiteration cycle. When you’re bootstrapping, you don’t have the luxury of spending dollar after dollar to perfect your product (which is a good thing!).
4. Requires you to prioritize. With limited funds, you really have to prioritize what you do. This may slow down your process, but it also focuses your process. Instead of wasting time, energy, and money on less important issues, when you bootstrap, you prioritize and attack the essentials. Instead of rushing to scale and potentially making big, messy mistakes, you’ll start smaller and then scale up.
5. Larger profit margins. Bootstrapping is the key to staying lean and yielding higher profit margins. When you’re low on funds this often leads to low overhead. You are forced to evaluate and prioritize every cost—and cut out all but the most essential.
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6. Avoid dilution. Obviously, bootstrapping allows you to keep a bigger share of your equity. The longer you can wait to receive outside funds, the greater your share in your company.
7. Independence. When you raise money from investors, not only do you lose some equity, but you also lose some independence, When you bootstrap you have the ability to run your company without outside interference. You are only accountable to yourself and to your company, not to an outside investor who wants to make sure that their investment is being put to good use. No VC can complicate the decision-making process for your company.
8. Stay under the radar. Once you’ve raised funds, you’ve also raised your public profile. Not only will your investors be watching what you are doing, but so will competitors. When you bootstrap, you can keep your company under wraps until you’re ready to launch.
In my experience, bootstrapping provides a great startup foundation. I would even argue that bootstrapping makes for a stronger, more self-sufficient entrepreneur. When you bootstrap, you are solely responsible for the success of your company. It forces you to think and act strategically, closely holding your company reins in hand as you race to the finish line.
Questions about bootstrapping, why or how? Let us know in comments below or contact Early Growth Financial Services for financial support.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He's a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.