Most business ideas require a good amount of funding. However, finding investors when a business is just starting takes work. Therefore, finance always proves to be a consþraint for many startups. As a result, many entrepreneurs invest their money when working on their startups. It is what bootstrapping means.
When entrepreneurs bootstrap their businesses, they invest their own personal money in the company. There is no role of external funding in bootstrapping.
Furthermore, a bootstrapped company relies only on internal revenue. Even though the success stories of bootstrapped startups are many, it is crucial to consider the pros and cons of bootstrapping your company before jumping into self-funding. Let us first focus on the goods of bootstrapping your startup.
The Goods Of Bootstrapping Your Startup
1. Full Ownership Of The Business
With no external money involved in the business, the entrepreneurs fully own their company. When investors invest in a startup, they take equity in the company in exchange for their money. However, it is not the case when someone bootstraps their company.
Let us understand this in a better way with the help of an example. If you take money from someone to buy the tickets to Lottery Sambad, you might have to share the reward if you win. However, if you self-finance the ticket, you can take the entire money with you.
2. Greater Control On The Start-Up
Many entrepreneurs focus on keeping the investors happy if they have invested in their startup. It shifts the focus from the business to the investors. Furthermore, investors get greater control over the company because of their invested money. It can prove to be troublesome for entrepreneurs, especially when the views of the entrepreneurs and investors do not match.
For instance, even within a family, there can be a clashing view regarding whether to invest in Dhankesari. In a bootstrapped company, the entrepreneurs have greater control, and they can solely decide the direction in which they want to lead their startup.
3. Better Business Model
With limited resources, founders of bootstrapped startups used all the resources available to them judiciously. It forces them to get creative with their business models. Ultimately, most of the founders end up creating a business model that not only works but is also sustainable.
Other benefits of bootstrapping your startup include a sense of accomplishment and no pressure of returning any money. Let us now discuss the disadvantages of bootstrapping your startup.
The Bads Of Bootstrapping Your Start-Up
1. Less Credibility
When you bootstrap your startup, you miss a lot of networking. When investors put their money into a business, their name is associated with the company itself. It helps open many new doors for the founders of the company.
When you bootstrap your company, finding the right connections is difficult, which makes branding a slow process. Disadvantages related to less credibility include missing out on partnership opportunities and less visibility.
2. Slow Growth
As discussed above, founders of a bootstrapped company often use their resources judiciously because they are limited. Unfortunately, this finite resource availability can also hamper the fast growth of the business, primarily due to financial constraints.
Also, even if you manage to grow your company by bootstrapping it, you will need to wait a long period to enjoy exponential growth. Furthermore, you might have to give away potential opportunities because of the limited finance.
3. High Personal Risk
As a result of personal finance used in the startup while bootstrapping, the individual risk associated with a bootstrapped startup is relatively high when things go south. Furthermore, with little money in the starting stage, the risk of running out of money and stagnant cash flow remains high for most bootstrapped companies. It can make it challenging to ensure the survivability of the business.
Furthermore, as the money invested in the startup entirely belongs to the entrepreneurs, any bad financial hit will have a significant and direct impact on the founders with no cushioning effect.
What To Do?
Whether you should consider bootstrapping your startup or not depends on numerous factors. Firstly, it is crucial to have short- and long-term goals for the business. The availability of sufficient capital is a prominent factor.
Bootstrapping is only recommended when the entrepreneurs know about all its risks and still decide to go ahead. Furthermore, the investment should be wise, and the business decisions should be intelligent.