Got Capital? Bootstrapping vs. Venture Capital

18 Aug Got Capital? Bootstrapping vs. Venture Capital

Every company, regardless of which stage they are in the business life cycle, requires capital in order to grow and attain its next goal. At Venture Capitalist, we believe that capital is more than just money. Bootstrapping and venture capital both have their benefits and trade-offs, so it is important to evaluate each option carefully before deciding which is optimal for expanding your business.

Bootstrapping – When an entrepreneur founds a company with minimal capital that sustains itself using operating revenues of the business.

Pros

  • The entrepreneur has complete control over all business decisions.
  • Having skin in the game tends to push entrepreneurs to become more financially disciplined.
  • At the time of exit, entrepreneurs realize larger returns than they would have if they accepted money from an investor.

Cons

  • Entrepreneur’s personal assets are exposed to significant financial risk in the event of startup failure, even when operating under a separate legal entity.
  • Businesses tend to take longer to grow and become profitable without an external investment.
  • Competitors with more capital have the potential to capture a larger market share before an entrepreneur can even start their venture.

Venture Capital – Funding is given to startup firms and small businesses by investors who recognize the potential for long-term growth.

Pros

  • Investors bear all the financial risk if the company fails. Entrepreneurs are not expected to pay investors back.
  • High-profile investors give a startup credibility, allowing it to compete with leaders in the industry.
  • Venture capital investors add value with their industry-specific expertise as well as give entrepreneurs access to resources and contacts that would otherwise be impossible to obtain.
  • Additional funding provides startups the potential to experience rapid growth.

Cons

  • Entrepreneurs relinquish partial ownership of the firm to investors and are required to consult with all partners before any decisions are made. This gives investors the ability to heavily influence the business.
  • Significant time and effort is spent seeking and securing capital from an investor.
  • Entrepreneurs are less likely to be financially savvy since their money isn’t at risk if the venture fails.
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