The Power of Choice: Bootstrapping vs Venture Capital by Pala Kuppusamy

TL;DR - When choosing between bootstrapping and VC, a start-up should highly consider revenue potential, personal investment, and amount of control over the company.

Helpfulness - 5

Tags - Bootstrapping, Start-up fundraising, VC Pro and Cons,

Questions answered:

  • How do entrepreneurs decide whether they should bootstrap or take money from venture capital?
  • What are some potential outcomes of choosing one or the other fundraising option?
  • How does a founder assess if they are a good candidate for VC?

Summary:

  • There are thousands of founders who have used bootstrapping as a strategy for survival until they got to a sizable revenue figure, and only then have sought funding. This way, they could easily convince the investors of their revenue and business model, as they had a strong record of trailing numbers, but they could also command a respectable premium for that proof.
  • Many factors are important in deciding whether fundraising or bootstrapping is the right choice: uniqueness of the product/service, maturity of the market, pace of the startup’s current growth, length of the opportunity growth, types of growth challenges and limitations, etc.
  • If the founder believes that they can build a successful startup in the $10 - $100 Million bracket, but not necessarily with the potential to go climb up the pyramid, they will likely be better off bootstrapping. This will reduce outside pressures on spending and rapid growth, therefore largely improving their chances of survival.
  • Pala Kuppusamy created a score sheet with a series of questions and points associated with them; if you score below 30, consider bootstrapping; if above 40, consider VC; if you’re between 30 and 40, consider the pros and cons of both options before choosing.
  • Pros of bootstrapping:
  • Bootstrapping gives the founder complete control of their company and direction.
  • Bootstrapping allows the founder to preserve their valuable equity until a point where they are ready to command an attractive price for it by having a demonstrable commercial traction and track record.
  • The founder should consider fundraising if they have a unique, highly scalable product with a short success window and the potential to be a $100 million company in the short run - because clearly an injection of capital would solve the majority of their growth challenges. However, the answer is oftentimes not as straightforward because every entrepreneur is likely to be biased about their product’s uniqueness, scalability, and potential. Money may appear to solve all of their growth problems; this can wrongly skew their decision-making process towards fundraising.
  • A product may not be unique, but instead, a terrific fast follower, challenging the incumbent and with the promise to take on the market more aggressively. This can also be a great candidate for fundraising despite the fact that it is not unique. Alibaba, Flipcart, and Ola are good examples of fast followers that created a geographical niche for themselves by using funding to establish themselves very quickly.
  • Pros of fundraising:
  • Fundraising can add value when the investors bring valuable network, client access, or industry expertise.
  • Strategic funding is a good option to get funded by your potential clients and prospective acquirers
  • External funding is seen as an endorsement that helps to attract better talent and clients. Funded companies are viewed more favorably by clients and employees, as it is perceived as a proof of the startup’s potential and financial capability, particularly if the funder has a good reputation.
  • Cons of fundraising:
  • The fundraising process can take away a considerable amount of founders’ bandwidth, possibly 10 to 20 man months of effort per round of fundraising.
  • Talking to entrepreneurs who have tried and succeeded (or failed) in both approaches will help collect thoughts.

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