Subscribe to Entrepreneur for $5
Subscribe

Bootstrapping or Venture Capital? What strategy do you need to grow your business

Advantages and disadvantages of these types of financing.

By
This article was translated from our Spanish edition using AI technologies. Errors may exist due to this process. Opinions expressed by Entrepreneur contributors are their own.

Money talks. There is no way to start a startup if the entrepreneur does not have enough capital to start the business. While it is important to have a good team, a great innovative, disruptive and scalable idea, or to have found a problem to solve, none of this is going to work if you don't have the money to go from idea to action.

Depositphotos.com

According to CB Insights in their study The Top 12 Reasons Startups Fail published in 2021, the most important reason why startups fail is due to lack of money or they were not successful in raising capital round.

Initially the main sources of financing are the entrepreneurs' own money, partner investments, family or some angel investor; it is unlikely to consider bank money, as startups are unlikely to be incorporated, and thus are not generating revenue or other important factor for financial institutions. They are considered as a latent risk for the payment of that capital.

Although raising capital also means spreading shares to future investors, the advantage is that there are no personal risks. Some entrepreneurs consider that doing so can be a disadvantage, since they are giving a percentage of the final value of the company to third parties, for this reason they prefer to use their own capital or finance themselves with the income of the same company, this is known as Bootstrapping (which means start a venture with the resources that the entrepreneur has available).

From another perspective, having 100% of the shares worth 10,000 pesos is not the same as having 55% worth 300,000 pesos (for example).

If you have doubts about what is better if bootstrapping or Venture Capital (VC), then G2 Consultores, a firm specialized in Startups, shares some advantages and disadvantages of each of them:

Bootstrapping

Advantage

  1. You own 100% of your company
  2. The control of the company is of the founders
  3. Founders don't need to have an outlet to get the ROI for the investor
  4. The CEO is not at risk of being fired or replaced by the Board of Directors
  5. It can be said that it is a sustainable and solid business

Disadvantages

  1. Your capital is limited unless you have a good income
  2. Growth is slow due to lack of resources, remember that in an industry where technology and innovation are involved , time is money
  3. Building a key team will also take time, since many professionals tend to look for spaces in companies that have a vision of growth.
  4. Consider that you can run out of cash to pay your payroll in low-income periods. Running out of cash is not an option
  5. You assume 100% of the company's risks
  6. You do not have specialized advice in the industry in which you want to enter

Venture Capital

Advantage

  1. By raising capital you have the possibility to grow aggressively
  2. Your goal is to scale the business, not profitability ... it will come in due course
  3. You have the possibility of doing things well and structured with a Corporate Governance
  4. You have a shared responsibility, the risks are also shared
  5. You will have the ability to make a good team (the best team) because you can finance it
  6. Your company will be worth more and grow much faster, allowing you to be competitive in your market

Disadvantages

  1. You lose absolute control of your company
  2. You require the validation of investors to carry out certain actions such as acquisitions or sale of assets
  3. You need to create a Corporate Governance, which was possibly not in your next plans
  4. You will feel pressured to achieve the objectives you committed to with investors
  5. Also for continuing to raise capital, since your maximum objective is to return the capital to your investors considering that the value of the company must increase

How in everything there are advantages and disadvantages, although in our experience it is always better to raise capital, not only will you have resources for your company, you will be able to count on the mentoring of experts in the industry, in the entrepreneurial ecosystem and Venture Capital for future rounds . Time is in your favor and not against you, a network will be on your side to which you can approach to generate suppliers, allies, clients, new investors or even other startups with which you create mutual collaboration synergies.