Trying to get your startup off the ground can be tricky, especially when you have a unique, one of a kind idea.
After all, you need to pay for product creation, testing, website costs, and marketing, all before you’ve likely made a single sale!
Needless to say, things can start getting expensive and fast. That’s why, in this article, I will teach more about the concept of self-funding through bootstrapping, and some of the pros and cons of external funding approaches you can consider for your startup.
Short on time? Here are the key takeaways
- Bootstrapping is an excellent option for most startups, as it provides you with full autonomy over the decision-making process and direction of your business.
- If bootstrapping is not an option for you, there are several other funding options you can look into, each with its own benefits and drawbacks.
- The Foundr+ program teaches you everything you need to know about investment, as well as everything else you need to know to scale your startup and bring your dream business to life.
What is Bootstrapping?
Bootstrapping, also known as ‘self-funding’ is the approach to funding that relies on you providing the revenue from internal resources, rather than relying on external businesses or avenues.
As you can imagine, there are many benefits to taking this approach, as it allows you to maintain complement control of your business, ensuring you don’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-funding can come from a range of avenues, such as personal savings, inheritance, or revenue generated from another business.
Of course, bootstrapping isn’t always possible for every entrepreneur or industry, but it should certainly be the first thing you consider before searching for external investment.
After all, if you are unable to continue bootstrapping a business after a set amount of time, you can either pivot your efforts elsewhere or seek external investment at that point.
But if you’ve already accepted external investment, you are much more tied into your approach and lose some of the freedom and independence that running a startup company can provide.
The Pros and Cons of Other Funding Routes
With that in mind, let’s assume that bootstrapping isn’t an option for your chosen industry or current financial situation. That doesn’t mean that you can’t explore other funding routes for your business. Here are some of the best options for startup entrepreneurs.
Venture Capital
First off let’s start with venture capital (VC) as this is one of the most popular options for startups looking for external funding.
One major benefit of working with VC is that they can offer you significant funding, which can help you grow and scale rapidly, especially if product development and marketing is expensive in your chosen industry.
But VCs can also offer alot of other benefits, including valuable industry knowledge and connects, which also help your startup blossom and grow.
However, as you would expect with any external funding, there are some drawbacks to be conscious of, one of which is equity dilution. To work with any VC, you will need to be willing to sacrifice some portion of your ownership. In some instances, you may also need to allow them to have influence over your company’s direction, not to mention the pressure you will likely feel to deliver immediate growth and returns.
Angel Investors
Another funding option similar to that of a VC is Angel Investment. Angel investors are also able to provide funds for the right project and tend to be more willing to invest in early-stage or high-risk ventures.
Their terms also tend to be more flexible than if you work with a VC, as many angel investors prefer to take more of a backseat.
However, as with VC investment, angel investors do require you to give up some equity and ownership of the business. Generally speaking, angel investors also tend to invest smaller amounts than VCs and offer less support and connections.
Bank Loans
If giving up part ownership of your business it out of the question, then you could consider opting for a bank loan instead. That way, you aren’t required to sacrifice any equity or control of your startup, and you will also have a clear and easy-to-understand repayment plan in place to account for each month.
Of course, as with any type of loan, you will be required to repay what you owe with interest, which can have a significant impact on your monthly growth. For many bank loans, you may also be required to put up substantial collateral, which likely means putting personal or business assets at risk.
There is also the issue of actually securing a bank loan in the first place, which can be extremely challenging and time-consuming, especially for startups.
Crowdfunding
If you’re struggling to secure a bank loan, or you’d rather avoid taking on any debt altogether, crowdfunding could be an alternative route of growth for your brand.
Crowdfunding is the process of drumming up interest for your business, allowing people to put money toward it if they feel it is something they would use once it was released.
Crowdfunding is an excellent way to validate your business idea through early interest and support, and funds are typically raised without giving up equity or incurring debt, especially in donation-based models.
Not to mention the fact that a well-run crowdfunding campaign acts 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, it certainly doesn’t mean success is guaranteed. In most instances, if you don’t hit your funding goal, you aren’t able to access any of the funded money, and it is returned to the user.
In addition to that, crowdfunding platforms often charge fees regardless of success, and it’s easy to see why most startups struggle to generate funding this way unless they have a truly innovative product to share.
Final Thoughts
As you can see, there are many benefits (and drawbacks) to each form of funding you choose for your business.
While the concept of gathering capital for your startup to grow can feel daunting, the results of your efforts can be well worth the effort required.
Check out Foundr+ for more guidance on everything you need to know about financing your projects, including Alexa von Tobel’s excellent course on Finance for Founders.
You can access this course and so many more from our brilliant team of successful founders with a Foundr+ membership, which you can try for seven days for just $1.
Frequently Asked Questions About Funding 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 pitch should include a compelling business idea, market analysis, a clear revenue model, an experienced team, and financial projections. Highlight your startup’s unique value proposition and growth potential.
What are the benefits and drawbacks of bootstrapping?
Bootstrapping involves funding your startup with personal savings or revenue generated by the business. Benefits include retaining full control and ownership, but it may limit growth and put personal finances at risk.
How do I value my startup for investment purposes?
Valuing a startup involves assessing its potential market size, revenue projections, and growth potential. Methods include discounted cash flow analysis, comparable company analysis, and considering industry benchmarks.
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