Bootstrapping Vs VC Funding

For an entrepreneur, the eternal area of conflict is whether the bootstrapping method of raising funds is better or is venture capital a better route. The reasons for this conflict are several. You have all kinds of advice and advocacies coming in from various quarters.

There are news reports/articles to read and counsel to be gained from entrepreneurs who would have gone either way. In all likelihood, the ones who did it the bootstrapping way may guide against venture capital funding, while the ones who hit it with VCs would recommend them wholeheartedly. Besides, there have been successes at both the ends. While Google, Hotmail and Cisco made it big with VC funding, Craigslist, Dell and Siebel did it on their own. So how does an entrepreneur take a call on the route to be taken for funding?

Business Focus/Mode of Operation

The business focus would determine whether venture capital funding would work for a company or not. For instance, intellectual property is something that attracts venture capitalists. Value-added resellers or pure-play consulting companies would not.

Same is the case with the mode of operation. Bootstrapping works better for lifestyle businesses which are primarily run by a single owner while VCs would go more for professionally managed businesses which involve partners.

Clarity

An entrepreneur needs to have a decent idea about the product features, the customer value proposition and sales & marketing model that will be applied. In case of lack of clarity it is better to bootstrap, be done with due diligence and then approach the venture capitalists for further funding. The reason is that venture capitalists will expect you to have a clear short-term/long-term strategy and work towards achieving it. Lack of clarity may not go well with them.

Fast Growing Market/Competition

If the market is growing at a fast clip (like in the case of online travel) and competition is increasing by the day it is better to wake up and gain momentum. Even if you are better, faster or cheaper than others, you may not always be heard because of the din. At that point of time, VC funding works as it helps you invest better and rise above the noise faster.

Strategic Partners

Strategic partners may be able to meet your financial needs. However, ensure that they fund you without excess baggage (like signing a deal of exclusivity with a customer). Investment from such partners should not preclude you from doing free business.

Irrespective of the route that you take, it is always good to gain confidence and achieve predictability before you ramp up. It is better to be clear about your goals, work towards achieving those and be on par with what’s been set, before you go for higher amounts of funding that could range from debt financing to VC funding.

VCs on their part are not looking at owning your company. The value that they bring to the table includes capital, rolodex and expertise. It is a Zero Sum game for them as well – simply because based on the kind of ventures they usually invest in, it is not physical assets that they are betting on. They are bidding on intangible assets that comprise intellectual capital and innovation. Therefore, even they will win if you have enough skin in the game.

Considering that there are growing numbers of Me-Toos in all sectors, it is a tough task to gain critical mass before appearing on your competitors’ radar. But if it happens with your venture, you’ve lucked out.