Starting a business, even a small one, entails money. Business owners will have to decide what kind of startup should they use to jumpstart their venture. The question now is: should they use bootstrapping or engage in a funded venture?
Bootstrapped startup is when a business is started with a small amount of money or capital. The business is funded with the owner’s personal finances or funds that are eventually generated from the business itself. With bootstrapping, no money comes from outside resources like a loan; therefore, the business will save more since there is no interest to be paid. This also means that the business has a low chance of going into bankruptcy because of unpaid debts or ineffective equity.
Funded startup is when a business is started through obtaining capital from others. There are 3 models of funding:
Debt is when the owner borrows money from a bank or loaning company and there is a need to repay the money back with an interest. The interest is paid back over an agreed timeframe. This is the model that applies to bank loans and use of credit cards. The upside of this model is that money can be easily attained once proper requirements have been met. The downside is that if the business is not able to maintain a proper cash flow, then there will be difficulty in paying back the loan and its interest.
Equity is a model where shares of the business ownership are offered to investors in exchange for money, which will be used for funding the business. The upside of this model is that there is no need for the business to repay a loan to banks or loaning agencies. The downside is that if most of the shares have been sold to investors, the owner might lose control of the business itself.
3. Grants or gifts
Grants are funding given to charities, nonprofit organizations, or social groups. Even though grants do not come with interest or sharing ownership, they are quite hard to attain. Grants are usually obtained if the requirements of the grant maker have been met. Gifts, on the other hand, are given as donations.
Bootstrapped versus Funded Startup
Bootstrapping gives owners more freedom in decision-making for the business. The owner can focus his efforts towards the business goal. There is no involvement from investors who might have different ideas. This investor interference is one of the most common concerns for funded startups. Positive cash flow is also more evident with bootstrapped businesses but the business should make sure that cash flow is regular. Resources, which usually come from personal money, should be well maintained.
On the other side of the coin, bootstrapped startup means slow growth for the business. More often, bootstrapped businesses have restrictions as to where the capital will be allocated. New and innovative ideas, especially those that entail large money, cannot be easily implemented. Conventional business style is also usually used by owners who do bootstrapping.
Funded startup has its positive aspects too. Since the business capital comes from external sources, the business may expand and grow faster. With enough resources, employing talented and experienced employees is possible. Also, unlike bootstrapping, new ideas can easily be put to action since there is minimal restriction with the business budget. Moreover, while investors may sometimes have different opinions, most are business experts who can impart important knowledge to inexperienced entrepreneurs. Investors also have vast networks of contacts that can also help in the business.
The negative side of funded startup is the risk that comes along with external funding. By loaning money from banks, the business may be at risk of being in debt for a long time. When investors come in, different opinions from these business sharers may have a negative effect on business decision making.
Making a decision
The decision of which startup model to use depends on the industry, and how much the capital is, and if it is enough to sustain the business. A business capital is needed to start any business. Owners must venture at the right moment with the right knowledge to make sure that resources are properly allocated and used. Most successful businesses initially do bootstrapping. But once they have reached stability, outside funding is also done.
Whether bootstrapping or funding is used, there will always be some advantages and disadvantages for either of the two. The key is to assess the advantages and disadvantages, then determine which strategy will work with the business venture. Also, the most important factor for a business to succeed will depend on hard work and the work place culture of the business.