“Do I seek venture capital, or should I fund myself?”
This is a question many entrepreneurs ask themselves at one time or another. Venture capital, in which you sell equity in your company for funding, is tempting because it can bring huge growth to your business in a very short time. On the other hand, businesses that bootstrap, meaning that they build their businesses without taking loans or selling company equity, are often mysticized for their rigor and vision. Whether the growth you seek is fast or slow, each choice is riddled with its own risks.
To address the debate of venture capital vs. bootstrapping, let’s look at the benefits each of them offer.
First Off, Is Your Business Venture Capital Material?
The types of businesses that venture capitalists (VCs) look for are those that can produce huge returns. If you don’t see your business growing 100 times in size, you probably won’t pique their interest. Thus, restaurants, retail shops, accounting firms, and other small businesses that are not typically very scalable are not a good match for VCs.
As detailed by Forbes, here are two general rules that VCs follow when looking at potential investments:
- Your market is worth at least $1 billion. To put this in perspective, lawn care is a $40 billion/year industry in the US. Toilet paper is $6 billion. Vinyl records, worldwide, is only $300 million.
- You can grow to $100 million in revenue and higher. In other words, does your business have the potential to “blow up” and expand many times over? Is your idea both novel and essential to consumers?
If your business doesn’t pass these tests, you’re probably looking at bootstrapping or an alternative source of funding.
Benefits of Bootstrapping
That said, there are still many benefits to growing your business yourself. Even if your business is “VC material,” you might be attracted to bootstrapping for some of these perks:
- You Keep the Equity: In a first round of investing, a VC will want to take 20 to 35% ownership of your company, according to Gil Silberman. During ensuring rounds, this can grow up to 70%.
- Control: VCs will expect to have some input on where your business is heading and how it is managed. They’ll probably want to weigh in on certain decisions. Even in the areas where you maintain control, you may feel obligated to get input from your VC and show that you’re considering it in your decision.
- Real Solutions: A bigger budget can solve many of your business’ problems, but not permanently. By contrast, when you don’t have extra capital, you’re forced to get creative and solve issues head-on.
- Flexibility: It’s not uncommon for business to change directions early on. You might begin in one corner of an industry and end up somewhere completely different. Pivoting is easy when you’re the sole owner of a business. It’s much harder, however, when you have other stakeholders (like VCs) that need to be convinced.
Benefits of Venture Capital
So why open the door to somebody who will want to take control of your business? Well, the most obvious answer is money. A typical VC investment is between $500,000 and $5 million—try getting that from a bank. Even besides the money, however, there are other benefits to bringing on a VC:
- Status: A VC-backed company gets instant credibility. You start getting more press, more attention from clients and more respect from competitors.
- Connections: VCs are often industry veterans that can open new doors for you. They can introduce you to big name clients, or key talent to join your business.
- Focus: How often have you had to postpone a purchase because you didn’t have the cash? How much time have you had to spend seeking loans, investors or credit? With your cash flow secured, you can spend a lot more time focusing on growing your business, and a lot less time worrying about funding.
- Security: Cash may not be the end-all solution, but it does give you a lifeline when your business hits a snag.
The Bottom Line: Venture Capital vs Bootstrapping
Where one stands on the debate of venture capital vs. bootstrapping will likely depend on how they view the world of business. Do you enjoy the “ride of business,” including the personal rigor, vision and reward? Or are you focused on results, regardless of how you reach them? In the end, you should be able to answer these questions just by looking at the type of business you started, and where you see it five years in the future.