In the business world, it seems to be widely accepted that receiving external investment is necessary for your business’s expansion.
Many founders believe that raising finance is the only way to scale their businesses. No matter if it comes through venture capital, seed funding, or angel investment. However, there are other options as well.
You should not enter into a contract with external investors carelessly. Moreover, you shouldn’t take it lightly, especially when there are challenges of starting and expanding a new start-up. While seeking venture funding in the early stages of your launch can seem like the logical solution to cash flow issues. But, it often causes more issues later on.
What are the drawbacks of receiving financial support from external sources, and what are the alternatives?
The negative aspects of venture capital
The time and effort required for fund-raising from external sources are one of the less-discussed parts of the process. It might seem counter-intuitive. However, finding external investors can be extremely expensive. So, instead of putting that energy into managing and growing a business, you ultimately use it to find and secure venture funding.
Due to the drawn-out, time-consuming nature of such investment rounds, time that businesses might have invested directly in a budding start-up, they rather use it to raise external funds.
Furthermore, this type of capital raising will almost probably need a long-term contract. It’ll need a long-term engagement with your investors. This isn’t necessarily a bad thing. However, if those investors don’t share your beliefs and vision for the company, it might lead to a lot of issues.
As a business owner, you desire control over the route your company is taking. But, since external investors also own a share in the company, they will also want to have a say in determining that course. If these interests are not compatible, you can lose control of your business. This could be another drawback for your business while you look for external investment.
Benefits of bootstrapping
Bootstrapping your start-up can seem like a daunting option. However, it can be one of the most financially rewarding ways to finance your expanding business. Bootstrapping your start-up requires you to start a business with little capital. In this way, you rely on sources of funding other than external investments. So, you self-finance your business through organic growth.
However, in the end, every company, whether it is venture-backed or bootstrapped, needs to have the fundamentals of running a business to prosper and maintain growth over time. This entails having a firm understanding of the numbers. Moreover, you should know how to put the appropriate procedures and processes in place as you expand. Lastly, you’ll need to assemble the ideal team to realize your goals. Bootstrapping a start-up entails addressing these concerns early on. As a result, it gives you a head start. However, this list is by no means exhaustive. Besides, the specifics will depend on your business and the market you are operating in.
You can totally concentrate on your business, on creating income, and on reinvesting that revenue in line with your vision for the firm if you do not need to acquire external investment through funding rounds. This early emphasis on producing money instead of collecting money forces you to organize your firm in a sustainable and cost-effective way. Meanwhile, it also lets you have a much higher degree of control over the path of the company and your long-term goals for it.
Putting your money where your mouth is
A clear vision for your start-up is obviously important. However, it will only get you so far if you don’t have the working money to launch your business. Even while your business may not need millions from an external investor, it will still need money in the first phases of development. So, if you plan to bootstrap, this money will probably come from personal assets.
On the other hand, it’s critical to maximize how far this source of capital can take you and your company. It doesn’t matter if it comes from personal savings, selling off other assets, or redeeming bonds. This entails developing early comfort with adopting a lean strategy for your start-up. Meanwhile, you’ll have to understand where to decrease costs so you can start bringing in income as soon as possible. You can achieve early cost savings by devoting time to organic lead creation, outsourcing particular tasks, or working remotely if your company permits it.
On the other hand, making connections and expanding your support system takes time and is also invaluable. When operating on a limited budget, forming strategic alliances that can benefit both parties by reducing expenses or offering services. Also, networking to identify possible mentors, clients, or just supporters for your company, can make all the difference.
There are many funding sources available to start-ups. So, it’s critical to carefully examine which will meet your company’s demands. With a focus on generating income as soon as possible, bootstrapping guarantees you master those crucial business fundamentals early on. However, it comes with its own unique hurdles. This is not to say that there aren’t risks involved. But, if you are aware of them, you can take action to reduce or eliminate them sooner rather than later. This puts you in a strong financial position without having to give up ownership of your business.