What are the pros and cons of bootstrapping (on a services model) versus taking an investment, for a first time entrepreneur? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
Answer by Todd Belveal, Founder and CEO at Washlava, on Quora:
When you begin the journey of building your own business, you’re often told that you have a couple of options: You can either find investors and raise money, or you can bootstrap.
The reality is, for a “startup” (not a small business), you really only have one option. And it isn’t bootstrapping.
I don’t mean that it’s impossible for bootstrapping to work, but realistically, the odds are much longer when you bootstrap.
There are a few reasons for this.
1. You need to move quickly.
Here’s the thing about startups: they’re big ideas, big opportunities, and they’re all about pace. And that requires capital. Unless you’re a trust fund baby, or you’re starting a company after a wildly successful career, you probably won’t have the kind of capital you’re going to need just lying around.
And even if you do, you’re going to need more. You have to keep up that rapid development so that you don’t get stuck in one particular aspect of what you’re doing for too long. Startups require a particular style of company building, one that works well when you’re moving through a progression. Raising money keeps those wheels turning and keeps you moving through that progression. Most people think successful startups are overnight successes, they’re not. Believe it or not, 10 years is accelerated for a company worth $100 million at exit.
2. It forces you to take quality to the next level.
At whatever stage you’re at, your concept better be good to get funding. There’s a certain level of quality that just has to be there. A level of quality where you can sleep at night, regardless of success or failure. I mean, you’re about to take someone else’s money. And probably a lot of it. They expect 8-10X when they give it to you, and rest assured they will not take losing it lightly.
When you’re raising money, you’re automatically more diligent about the expression of your concept, about your strategy, about your business model. Everything that you have to define at a conceptual level to make yourself investable is now incredibly important. It’s simply a level of scrutiny you would never apply to yourself, regardless of the strength of your internal critic.
3. You have set milestones (funding rounds).
At Silvercar, we spent all of our seed money on preparation. It was a $250,000 Power Point presentation and deal book. We knew that we didn’t have enough to really do what we needed to, so we invested a lot in research, presentation, branding, and performing our due diligence on every aspect of our venture. We made ourselves appear professional and investable. We made sure we knew what we were getting into and could express it to our investors.
And because of that, we got more funding. $11.5 million of it, with nothing more than a deck. And with that funding, we were able to prove some technology concepts and give a demonstration. But that was just to stage through to the next round of funding.
Do you see how difficult that would be with bootstrapping?
4. Your startup isn’t a small business.
I think part of the reason people decide to bootstrap is because of a misconception about startups and small businesses. They aren’t the same thing. Ask yourself right now how many customers you’re going to have in five years. If it’s 500, then you’re a small to medium-sized business. And there’s absolutely nothing wrong with that. Small businesses are the backbone of this country. But they aren’t startups.
If you’re a startup, you take a concept and turn it into a business plan. You’re not looking for 1,000 customers, you’re building for 100,000. You use that business plan to attract capital. Then you start a company and scale it like crazy. When you have $25 million in revenue three years later, then you’ve broken even.
The goal is different. You’re aiming for size. Quickly. It’s different for all businesses, and maybe the distinction isn’t 100% clear every time, but venture capitalists don’t invest in small businesses. They invest in startups.
You’re a startup. Raise money.
5. Validation.
Don’t underestimate the power of validation at this level. When you get funding from investors, rather than by your mortgaging your house, you’re convincing people to give you a lot of their money. All because they actually believe your idea will eventually bring them significant returns on that investment. Investors take returns seriously. It isn’t an incubation exercise when they invest, nor is it because they’re naïve and think startups are cool.
That’s quite a confidence booster. And going down this road requires a tremendous amount of belief in yourself and your idea. It requires confidence not only in your vision, but in your plan to get there, too.
Presenting your ideas and raising capital both help you build belief in yourself and in your team. You’re confident that you can deliver. You really believe that your company is worth it and that you’re going to end up giving this investor back 10 times what they put in.
Not everyone can get that kind of confidence by giving themselves a pep talk in the mirror. I know that’s not how I do it. If you can get the same feeling from bootstrapping, then that’s great. But keep in mind that when you’re bootstrapping, that feeling doesn’t come with a big check attached to it. Denial is a powerful force.
So remember, you’re not a small business. You’re a startup. Fund yourself like it. Raise the money that you’re going to need to keep your wheels turning and the dream alive.
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