Trying to get your startup off the ground can be difficult, especially when you have a unique, one-of-a-kind idea.
After all, you have to pay for product development, testing, website costs, and marketing costs before you can possibly even make a single sale!
Needless to say, things can start to get expensive and fast. Therefore, in this article, I will explain more about the concept of self-funding through bootstrapping and some pros and cons of external funding approaches you can consider for your startup.
Is time running out? Here are the main ways out
- Bootstrapping is a great option for most startups because it gives you complete autonomy over the decision-making process and direction of your business.
- If bootstrapping isn’t an option for you, you can look at several other financing options, each with their own advantages and disadvantages.
- Foundr+ teaches you everything you need to know about investing, as well as everything you need to know to scale your startup and make your dream business a reality.
What is Bootstrapping?
Bootstrapping, also known as “self-funding,” is a funding approach that relies on you generating revenue from internal resources rather than relying on outside business or prospects.
As you can imagine, this approach has many benefits, as it allows you to retain additional control over your business and you won’t have to answer to any shareholders.
After all, one of the biggest attractions of starting your own business is being your own boss!
Self-financing can come in a number of ways, such as personal savings, inheritance or income from another business.
Of course, bootstrapping is not always possible for every entrepreneur or industry, but it should definitely be the first thing you consider before looking for external investment.
After all, if you can’t continue opening a business after a certain period of time, you can either focus your efforts elsewhere or look for foreign investment at this point.
But if you’ve already accepted outside investment, you’re more tied to your approach and lose some of the freedom and independence that running a startup can provide.
Pros and cons of other financing routes
With that in mind, let’s assume that bootstrapping is not an option for your chosen industry or your current financial situation. That doesn’t mean you can’t explore other financing routes for your business. Here are some of the best options for startup entrepreneurs.
Venture Capital
Let’s start with venture capital (VC) first, as it is one of the most popular options for startups seeking external funding.
One of the main advantages of working with a VC is that they can offer you significant funding that can help you grow and scale quickly, especially when product development and marketing in your chosen industry is expensive.
But VCs can also offer many other benefits, including valuable industry knowledge and connections that help your startup flourish and grow.
However, as you would expect with any external financing, there are some drawbacks to consider, one of which is equity dilution. To work with any VC, you must be willing to sacrifice some of your ownership. In some cases, you may have to let them influence the direction of your company, not to mention the pressure you’ll feel to bring in immediate growth and revenue.
Angel Investors
Another funding option similar to VC is Angel Investment. Angel investors can also provide funds for the right project and are more inclined to invest in early-stage or high-risk ventures.
Their terms are also more flexible than when you work with a VC, as many angel investors prefer to take a back seat.
However, as with VC investing, angel investors require you to give up some equity and business ownership. In general, angel investors also tend to invest smaller amounts than VCs and offer less support and connections.
Bank loans
If you are giving up partial ownership of your business, you may want to consider a bank loan instead. That way, you won’t be required to sacrifice any capital or control of your startup, and you’ll have a clear and easy-to-understand payment plan to keep track of each month.
Of course, as with any type of loan, you’ll be required to repay the loan with interest, which can significantly affect your monthly growth. Many bank loans may also require you to post significant collateral, which means putting personal or business assets at risk.
There’s also the matter of actually securing a bank loan in the first place, which can be extremely difficult and time-consuming, especially for startups.
Crowdfunding
If you’re having trouble securing a bank loan or are completely reluctant to take on any debt, crowdfunding can be an alternative way to grow your brand.
Crowdfunding is the process of generating interest in your business and allowing people to invest money in it if they feel they will use it after launch.
Crowdfunding is a great way to validate your business idea through early interest and support, and funds are usually raised without giving up equity or borrowing, especially in donation-based models.
Not to mention the fact that a well-managed crowdfunding campaign can act as a brilliant marketing opportunity due to exposure, attracting new potential customers along the way.
Of course, just because you put something up for crowdfunding doesn’t mean success is guaranteed. In most cases, if you do not reach your funding goal, you will not be able to access any of the funded money and it will be returned to the user.
Additionally, crowdfunding platforms often charge fees regardless of success, and it’s easy to see why many startups struggle to generate funding this way when they don’t have a truly innovative product to share.
Final Thoughts
As you can see, there are many benefits (and drawbacks) to each form of financing you choose for your business.
While the concept of raising capital to grow your startup may seem daunting, the results of your efforts can be well worth the effort required.
Check out Foundr+ for everything you need to know about funding your projects, including more on Alexa von Tobel’s excellent course. Funding for founders.
You can access this course and more from our brilliant team of successful founders with a Foundr+ membership. try it for seven days for just $1.
Frequently asked questions about financing startups
What are the common types of funding for startups?
Common types of funding for startups include bootstrapping, angel investors, venture capital, crowdfunding, and grants. Each type offers different benefits and requirements.
What should I include in my pitch to investors?
Your application should include a compelling business idea, market analysis, clear revenue model, experienced team and financial projections. Highlight your startup’s unique value proposition and growth potential.
What are the advantages and disadvantages of bootstrapping?
Bootstrapping involves funding your startup with personal savings or income generated by the business. Benefits include retaining full control and ownership, but this can limit growth and put personal finances at risk.
How do I value my startup for investment purposes?
Evaluating a startup involves assessing its potential market size, revenue projections, and growth potential. Methods include discounted cash flow analysis, comparable company analysis, and consideration of industry benchmarks.