Bootstrapped Vs Funded Ventures: Which Startups The Best?
Position yourself for growth in 2017—join us live at the Entrepreneur 360™ Conference in Long Beach, Calif. on Nov. 16. Secure Your Seat »
During mid 2015, when the development of Loyalie was on full-fledged, I was 22 years old and had an investment option of Rs. 50 Lakhs for a stake 40% from one of the leading business houses in Kolkata. A year from that date today, I’m sitting on multiple offers, valuing the company at millions of dollars. Yet, I’m proud to say that I still own 100% of the company.
Now you might be wondering, why would I be doing that? The answer is simple, I believe in bootstrapping my way to “Point X. I’m not saying that you should never raise funds, everyone should at some point use investments as a way to go from “Point X” to “Point Z”.
However, every entrepreneur should know that equity is the most expensive form of capital (A simple Google search will delve into the details of the same). The larger your scale, the cheaper your equity fund raising gets. Therefore plan for 1-1.5 years of operations, raise funds through debt instruments if at all needed.
My startup isn’t a typical startup. I used to invest in stocks and the only focus I had while choosing my stocks was the fundamentals and the PE multiple of the company. My startup is hard bent on generating profitability.
Bootstrapping allows a lot more freedom in decision-making and more scope to follow my instincts with advice from just a small core team. The focus is also directed towards one clear goal and there is no interference from investors who might have conflicting visions. Any investor would’ve asked me to shy away from Bangalore till we were more set in Kolkata, however, our expansion in Bangalore was our master stroke.
Moreover, bootstrapping is a more effective way to ensure positive cash flows. When you put yourself in the sink or swim situation you know you’re hungry to do the business just right. Most bootstrapped start-ups adopt a lean business model and come up with innovative ways to be as effective as possible.
For bootstrapped companies, you are forced to get good fast, there is no time to waste and no resources to waste in mistakes. Nonetheless, mistakes are still made, lessons are still learnt but in the process you also learn how to stretch your limits. We know we have boundaries but it’s only in this situation that we realize that these boundaries are only in our head.
With all this said, we cannot disregard those aspects that are better incase of a funded start-up. The most obvious difference is the amount of financial resources at our disposal. With external funding, we have a lot more money to spend of many more things that leads to much faster and greater growth. One of the biggest set backs of not getting funding is not having enough resources to employ experienced and talented employees. A lot of time and effort goes into training fresh graduates, especially in a country like India, and this could be avoided with more resources.
Another benefit of having external funding is that the investors, who are usually very experienced, act as great mentors for the young and inexperienced entrepreneurs. They are there to guide you when you get stuck and you never feel alone and lost. Moreover, they have an extremely valuable network of contacts established already and that really helps the startup in earning credibility.
FusionCharts and ZOHO are two great examples of companies that are 100% bootstrapped and have taken the business world by a storm. FusionCharts founder PallavNadhani, started the company in 2003 at age sixteen and has kept it completely bootstrapped since then. The company, backed by Nadhani’s direction, vision and hard work, has already clocked revenues of over US$ 7 million (almost INR 40 rores)!
FusionCharts is being used by over 80% of the Fortune 500 companies today, something not expected of a bootstrapped company!
With ZOHO as well, people are always amazed by the fact that it has no outside funding. In a recent blog post written by founder Sridhar Vembu, he said he wishes to keep it that way forever. He believes he doesn’t need outside funding as long as he is doing good work. Getting external funding forces you to focus more on profits to keep all stakeholders happy and according to Vembu, too much focus on profits will eventually destroy profits!
All said and done, the decision of whether to bootstrap or get outside funding depends on a myriad of factors like the industry you’re entering, how much capital you have saved already, expected growth rate and what the risk factors are, among many others.
But my personal opinion remains that you should keep your company bootstrapped for at least a couple of years before getting outside funding. That gives you enough time to build something that is worth getting funded, a version of your product that is up and running and some performance data for investors to evaluate giving your company a greater leverage.
Moreover, once you finally bring in outside investments, you can expand quickly and make it big without having to waste time in figuring out what you’re doing and how to do it!