Bootstrapping vs funding: pros and cons startups need to know

Bootstrap or seek funding? It's a tough one. While some founders self-finance their startup at the beginning, most will eventually turn to outside investment to scale up.

Securing funding from a VC or another investor can help new businesses defy the odds, gain credibility and fight for space in hyper-competitive markets. But it's not without its cons.

And the same goes for solely self-financing, i.e. bootstrapping (which we'll come on to in just a moment). Bootstrapping can be a valuable lesson in shrewd decision making and adapting to customers needs quickly.

There's merit in both methods. But what's best for you and your business? In this article, we take a closer look at bootstrapping and outline the pros and cons that you ought to know before making that decision.

What is bootstrapping?

Bootstrapping is when an entrepreneur uses their own money (savings, for instance) to start a business. If it all goes well, company profit is then reinvested back into the business. 

Not every startup need a lot of funds to get started. It depends on the business model, the goal, the overheads etc. In those cases, there’s no real need to seek third-party investment. Founders and their partners (if any) can fund it alone and retain complete ownership.

That being said, not every founder has access to the funds they need. That's where outside investment comes in.

What about funding?

Founders can raise funds from external sources, to launch a startup, sustain it and scale up, which usually involves pitching to investors like VCs and Angels to invest capital in the business in exchange for equity.

There are different types of funding rounds: Seed funding, Series A, B, C and so on. Often, we view these rounds as key milestones. Markers that indicate what stage of the journey a company is at. 

Generally speaking, most companies will take on outside investment at one point or another, usually with the intent to scale and exit in a few years. 

Because to scale, beat the competition and grow the business, you need funds to execute campaigns, ramp up production and resources. 

Bootstrapping vs. funding

Let’s take a closer look at the pros and cons of bootstrapped businesses vs those that receive additional investment.

The pros and cons

bootstrapped pros and cons by Vestdfunding pros and cons by Vestd

The key points to consider...

Pros of bootstrapping

Complete control

Founders of bootstrapped businesses don’t have to answer to anyone except themselves and their partners. They have the freedom to do as they see fit and make their own decisions

You can see the appeal, especially for founders with the drive (and the time) to devote themselves entirely to the business. Owners heavily involved tend to be closer to the customers, so they can quickly change tack and adapt to meet customer needs.

With complete control comes great responsibility. Founders of bootstrapped businesses must show discipline, make shrewd decisions like cutting back on unnecessary expenses and ruthlessly prioritising resources. 

In theory, that makes for a financially savvy and decisive founder. 

Owners of bootstrapped businesses can also leverage resources, like advisors and freelancers, as and when is needed (without asking third parties for permission). So, they have greater flexibility when it comes to hiring.

Scale at a suitable pace

In a hyper-competitive market, startups usually have to go full throttle to survive. One way to accelerate is with additional investment. But for some companies, rapid growth isn’t the immediate goal. 

Those targeting the mid-market (or a market where competitors quite happily co-exist) may prefer to grow gradually and consolidate when reaching milestones rather than steam ahead. Simply put, owners of bootstrapped businesses can set a pace that suits them.

Pros of funding

Resource

With the help of outside investment, founders have bigger budgets to play with without risking their own finances. They can spend money to make money. 

With funding, founders have the financial freedom to focus on business interests rather than day-to-day operations. Breathing space to assess where the business is headed. 

Rapid growth

Founders with additional funds can attract and hire top talent and increase production to drive the business forward at a much faster pace. Though, high salaries aren’t the only way to attract and retain talent.

Funding is an attractive option when there’s a short window of market opportunity and a need to capitalize quickly to compete with (or survive alongside) the top dogs.

Not only that, but investors can share valuable insight and expertise in different areas of the business and the market you’re in. Potentially, a wealth of knowledge and an influential network to draw upon when making decisions. 

And if you’ve persuaded a high-profile investor to get on board, that inevitably adds credibility to your venture.

Cons of bootstrapping

Personal and financial risk

Funding a company entirely by yourself is undoubtedly a risk that may or may not pay off. That being said, there are successful bootstrapped businesses that, to this day, have refused a single penny of outside investment and enjoyed a fruitful exit. Or remain at the head of the table as we speak.

Slow to scale

Bootstrapped businesses tend not to grow as fast because they don’t have the funds, nor the resources, to scale quickly. But as we mentioned earlier, rapid growth is not always the goal.

Ultimately, every business is unique, so it’s up to you to decide what speed suits you. And there are other ways to attract talent and grow the team, even if you don’t have big budgets.

Sharing equity is one way (which we’ll come on to later).

Cons of funding

Strings attached

In short, those that accept outside investment end up with more people to please. Major business decisions must be run by stakeholders, lessening a founder's control over the business.

If you pick the right partners and the right investors, this isn’t normally an issue. But in some cases, getting things done can take an unnecessarily long time. 

Investors like a VC or an Angel will typically attach conditions to their investment. Founders rarely receive the total amount right away, often bound to abide by a rigid timeline or meet pre-agreed milestones before any funds are released.

That’s not usual. After all, investors rightfully want to see a return on their investment. Be reassured that everything is going according to plan. Though, you can see why some founders may want to avoid ceding control and ownership.

On the subject of equity and ownership…

If you take a look at the graphics (above), you’ll see that equity and dilution have asterisks. There’s a reason for this. 

A common misconception is that equity dilution is bad. That one of the pros of bootstrapping is retaining complete ownership. And that those who give away precious equity to investors are at a disadvantage.

But share dilution isn’t always something to avoid. Every time equity gets awarded (to new investors, employees, etc.), this reduces the portion of the equity that everyone ultimately receives. BUT not necessarily its value.

By securing additional funds, a company may achieve growth otherwise believed impossible. Growth likely to increase the value of all shares. So, while founders and shareholders may own a smaller portion, they have a portion of a much bigger pie.

If you’re considering going down this route, share equity with the team, not just the board or investors. Why? Because employee share schemes are proven to attract talent, increase productivity, boost performance, employee engagement and improve retention rates.

Be sure to establish equity arrangements if you have a co-founder too. Your business may not be worth anything right now, but as it grows in value, you'll want to make sure that you've got your equity split hammered down to avoid any nasty surprises.

If you want to talk to us about equity, feel free to give us a call.

Hopefully, this guide has provided you with a good understanding of the pros and cons of bootstrapping vs funding a startup. However you decide to finance your business, be it off your own back or with the help of investors, we wish you all the best.