Bootstrapping vs. Fundraising – Part 2

Deciding whether to bootstrap your startup or raise capital is usually quite difficult. In my previous post, I've covered the objective factors you should consider.  Just as important, there are some subjective factors you should add to the equation. These factors are subjective, since they’re mostly about your personal aspirations, your risk tolerance and the way you want to live your life. So here are the main subjective factors you should consider:

Are you aspiring to build a huge multi-national company that would change the world? If the answer is no, and you’re fine with having a nice life-style business that generates a few millions of dollars annually, then you’re probably better off with bootstrapping. However, if you’re aspiring to conquer the world, then your chances to do so without external capital are probably very low. Now don’t get me wrong. Having a life-style business isn’t better or worse than aiming to conquer the world. Each option has its advantages and disadvantages. The only thing you should be aware of is that once you raise capital, there’s no way back to a life-style business. Here’s why…

Venture capital investors expect you to build a huge multi-national company that would have the potential for a huge exit. In fact, there’s an internal conflict of interest between investors and entrepreneurs. Investors diversify their money between different companies. Thus, they want their companies to grow at a very high rate and aim to become huge companies, although there’s a risk that the company will die in the process. On the other hand, you, as an entrepreneur, are putting all your eggs in one basket – your stratup company. Hence, sometimes you’d rather grow your business at a slower rate and take fewer risks.

In addition, you might consider having an early and much smaller exit, while your investors would rather take the risk and wait until a much bigger exit. I personally know an entrepreneur who had an option to sell his company for $180MM, but the investors refused doing so with the hope to get a better exit in a few years. Eventually, the market changed and the company failed without having any exit at all.

Do you want to keep on being your own boss? If the answer is yes, then you should probably choose the bootstrapping route. Once you take money from investors, you de-facto become their employee. You’ll need to regularly report on your progress and get the investors’ approval on any major decision or expense. You also need to prepare yourself to hear a lot of criticism on how you’re managing the company, and if you don’t meet the goals that the board of directors set to the company, you might even get fired and replaced by an external CEO. Of course, there’s also a good side to having a board of director supervising you. It will probably push you to achieve goals you wouldn’t have pushed yourself for, it will force you to plan before executing, and it can provide you with great guidance and business connections.
To conclude, the bootstrapping vs. fundraising decision is not a simple one and there’s usually no wrong or right answer. So the best advice I can give you is to trust your ‘gut feeling’ and take the route that seems to make more sense. Good luck. 


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