Fundraising Vs. Bootstrapping: How To Decide What You Need For Your Tech Startup
Considering these three questions can help you decide whether you really need funding or whether bootstrapping would suit you better.
Do you really need funding for your tech business?
If you're a tech startup founder, it won't be long before you start facing pressure to raise funding.
Funding might seem to you like the best way to realize business objectives. It may also seem like the shortcut to accelerating growth or the fastest way to realizing your big ambitions.
Those things can be true- but they are not always so.
Pursuing funding can bring its own problems, like loss of control, dwindling founder equity, and draining time and energy that could have been better invested elsewhere.
So, let's consider three questions to help you decide whether you really need funding or whether bootstrapping would suit you better.
1. Why do you want funding?
Many startup founders, not only in the MENA region but everywhere else, automatically go down the funding route, because they assume that's the obvious step, without ever stopping to consider why.
"Why do we want funding?" should be your first question, because if you don't have a robust answer, that's a pretty good sign you are just hopping on a bandwagon that might not be right for you.
Indeed, bootstrapping might be better if:
- You want funding just because that's just what tech startups do.
- You want funding because it will make your life easier and more comfortable– for instance, enabling you to invest in better office space.
The latter is an especially tempting trap for founders. As Emerson Spartz, founder of viral media company Dose, points out, "Bootstrapping forces you to ruthlessly prioritize your spending and cut away unnecessary expenses, but having a pool of venture money forces you to have much more personal discipline when it comes to spending money."
On the other hand, funding might be a great idea if:
- You have a short window of market opportunity, and funding will help you accelerate your plans and capitalize fully.
- You're looking for the specific insight and expertise a VC can bring, and you've researched exactly whose investment you want.
You might come up with other reasons, too.
The point is that, if you can achieve your goals without funding, albeit scaling more slowly and being less comfortable, then bootstrapping might be a better choice. At least for now.
2. What are your long-term goals and vision?
A big part of deciding whether to pursue funding is looking at whether your long-term goals and vision align with those of your investor(s). For instance, accepting funding from MENA based VCs, such as 500 Startups, Global Ventures, Shorooq Partners, or Dtec Ventures, might come with very different expectations, as compared to working with smaller entities.
The possibility of funding can be a strong lure, but if you are not on the same page as investors, there's scope for serious heartache down the line. For example, you may be pushed to make decisions and meet targets that are not realistic or consistent with your original vision for your business.
If you aligned with investors who are all focused on fast financial growth, you could feel forced into prioritizing the latter at the expense of your own business priorities.
Also, if you have different long-term goals from investors, you are more likely to be trapped working towards an unrealistic exit. That ultimately could mean you are leaving money on the table that you would have been very happy taking.
As Tomasz Tunguz, Venture Capitalist at Redpoint, points out, "Larger funds will push companies to pursue larger exits. When raising capital, ensure that your investors share the same vision and commitment to the product, but also verify that your target outcomes for the business are in the same ballpark and that you both define success in the same terms."
And what if you are not looking for an exit at all? If you are building a business to have that business long-term– that is a good sign you would be better off bootstrapping. VC investors typically expect you to have a grandiose vision, not a personal one.
3. How strong is your startup?
According to Laura Entis in Entrepreneur, only 0.05% of startups ever raise venture capital. Deciding to pursue funding and securing funding are, unfortunately, very different things.
And although you might only get ten minutes to actually pitch your business (in fact, according to insights by Fenwick, the average VC investor only looks at a deck for three minutes and 44 seconds), the fundraising process requires lots of time and energy.
To make that investment of your time worthwhile, you need to really believe your business needs VC capital. Self-belief is crucial for entrepreneurs, but so is common sense.
As Investopedia points out, VCs are "hoping to hit a home-run on a future billion-dollar company." That is the bottom line. Has your business gotten the potential to become the next Careem or Souq.com?
Three great indicators are:
- Target addressable market. Most VC investors who are looking for a large market are targeting those that can generate more than US$1 billion in revenue.
- Competition. Startups that stand out to investors have little to no direct competition to limit market share and potential returns.
- Execution. VCs will expect to see that you have successfully executed your plans.
If you do not have a robust case (and hard evidence of success so far) that your business ticks those boxes, that is a good sign that you would do better saving your time and bootstrapping instead of fundraising.
But does bootstrapping mean slow growth and small ambitions?
It is important to get away from the pervasive myth that funding is the only route to success for tech businesses. Raising funding can be a fantastic path but it is certainly not the only path.
Bootstrapping can mean you keep control, do not dilute your equity, and have more breathing room to scale at a pace that makes sense– not a breakneck speed that might mean mistakes and compromises.
Bootstrapping does not mean you are giving up your ambitions for success. In fact, many successful businesses are bootstrapped success stories as shown below:
- Awok - A UAE-based e-commerce platform that successfully bootstrapped from 2013 until raising a Series A round of $30 million in 2019.
- Mailchimp - A marketing platform that bootstrapped to $700 million in revenue.
- Selfdrive.ae - Having started in 2016 with one founder based in Dubai Technology Entrepreneur Campus and one in India, this Dubai Silicon Oasis-based startup has been successfully bootstrapped to profitability, a 24-person team, strong client base, and steady growth.
Basing your startup in a location like Dtec that offers a supportive framework, flexible workspace options and the opportunity to interact with other businesses, allows you to focus on growing your business; while bootstrapping gives you that much needed time to understand the key dynamics and working mechanics of your business, market and product.
The key is finding the solution that is right for your startup- and the ambition you have for it.