As a start-up entrepreneur, would you rather bootstrap your company or to raise capital? Why?
Let’s say you start a company. You build up the company and you sell it for $10M five years later.
And let’s say your friend starts another company. Meanwhile, your friend builds it up and sells the company for $100M seven years later.
Who was more successful? You or your friend?
Most people would say your friend because of the larger exit.
Let’s add some more data.
In your case, you bootstrapped the company, so you still own 80% of it. You end up with $8M before taxes.
Your friend raised $100M, and he owned 6% of the company. So he made $100M-$100M or $0.
Ask yourself who was the bigger success? You or your friend?
In absolute value, you made more money than your friend, $8m vs $6m. However, it comes with a cost.
Bootstrapping gives you more exit options, but it comes at a cost.
You start your bootstrapped company with $50,000 you and your co-founder saved. You’re determined that you’re going to make it on your terms, your way.
You’re even prepared to go without a salary for the next year or two as you build your business. You work at Starbucks to save money, and you don’t go out anymore because you need to make your savings last.
And all of that is just the financial cost to you in the short run. Your business will go slower than it would if you had more funding.
You will not be able to hire the staff you need, and the people you do hire will have to work for minimum salaries. Then you watch a competitor scoop up $6M in funding and you wonder whether you made the right decision.
The good news is you have a range of exit options that your venture backed competitors don’t have. You can exit for $10M and still come out way ahead. Or, if you’re fortunate enough, you can exit for $100M or more.
That’s the beauty of bootstrapping versus taking VC funding.
And just because you want to raise venture capital doesn’t mean you will be able to do it successfully. 99% of all startups never raise any venture capital.
Plus, you have complete control of your destiny if you bootstrap.
You don’t have to worry about investors pushing you out as CEO if you bootstrap. Moreover, there aren’t any investors that can force you to change your strategy if you bootstrap. You don’t have to listen to anyone when you know that your direction is correct.
However, there aren’t any investors that can save you from your screw-ups when you bootstrap either. And there aren’t any investors that give you an infusion of cash when you need to save the company.
How about your friend who took VC funds? VC Funding Journey
- He gets money that he didn’t have in exchange for a large portion of his company
- VC who represent the Limited Partners (Investors) who own that large portion of your company will only satisfy the Investor they got the money from if your company has a significantly above-average return in a sale or public offering, so they will make decision based on that.
- He got pushed constantly to taking risks that have an oversized payout rather than being pushed to do all of the small things right
- All successful businesses need to do the small things right to have a chance at any continued success
- After a few years and if he is lucky and have done everything right, he owns 6% of a successful business and have a limited say in how it’s being runned.
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