Best approach for a Startup. Raise Capital or Bootstrapping?
Introduction: Starting a business in the contemporary economic environment is not for the fainthearted.
In fact, there has never been any ideal time for starting a new venture. However, there are many new challenges that startups today face.
Unique challenges today include high cost of operations, geopolitical shifts such as Brexit, a globalized marketplace, increased regulations, and shrinking markets among many others.
Among the main causes of such failure is poor cash flow.
For a startup to survive these formative years, it is crucial to have a financing strategy in place. For a startup to survive these formative years, it is crucial to have a financing strategy in place.
The two main options for startups are raising capital by floating equity shares or bootstrapping.
It is important to get more insight on these two approaches in order to make the right decision.
Like the term implies, you are able to pull yourself up using resources within the startup and without external help.
To become successful, you have to embrace a multi-pronged approach in finances and it involves owner financing, personal debt, sweat equity (effort), fast turnaround, subsidy finance, cash-only approach and low operational costs.
Some of the major companies that started out by bootstrapping include Facebook, IBM, Oracle Corp, eBay, Coca Cola, Cisco Systems among others.
A) Pros of Bootstrapping It is Affordable – You will be forced to focus on efficiency and this means adopting a lean business principle.
Baptism by Fire – The fact that you don’t bring in investors with knowledge also means you have to adapt fast to decision making which helps you learn how to run the business fast.
Your Own Boss – You will remain your own boss because you don’t dilute your equity by welcoming wealthy investors.
Faster Progress – You will have more motivation to build a brand that lasts long and this is one reason bootstrap startups are more likely to become household names such as Facebook.
Full Focus – Your attention is on your core business and not on crowd funding and other funding efforts. You are able to concentrate on your books and strategies that will make your business grow.
B) Bootstrapping Drawbacks Some of the cons of bootstrapping as a startup include poor cash flow which can hinder growth, lack of experience, higher risks responsibilities, among others. of losses, and more
2) External Financing for Startups For most startups, there is an urgency to grow the business. In most cases, entrepreneurs will have harbored such ideas for years and when they finally come around to building the business, it is all systems go.
There are many reasons why you should think for external funding as opposed to bootstrapping. Take a look at some of these benefits:
a) Faster Growth – One reason why most new ventures struggle in the initial stages is of course lack of enough capital. However, if you seek financial help from an external investor, you will have the funds required to spur faster growth.
B) Wealth of knowledge – Many investors bring in knowledge and experience to your business venture which is something a startup badly needs.
C) Lower risk – By sharing investment risks with an external source, you will not be overly exposed to business risks.
Final Thoughts Which is better? Bootstrapping or raising capital? It is advisable to bootstrap until you finally have a business profile or a proof of concept. In such a case, you will be in a better negotiating position. If you are still thinking a better approach for your Startup, don’t hesitate to reach us.
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