Pros and Cons of Bootstrapping
Bootstrapping as a way of financing startup.
What is bootstrapping? Bootstrapping is the term used in startup financing to describe a situation where the owner of a business choose to use his personal savings to fund its business rather than seeking for external financing.
Some business owners choose to bootstrap not because they actually like this option as a means of financing their business. If they try other sources and it seems nothing is forthcoming, they may therefore resolve to bootstrap. Sourcing for funds from Venture Capitalists is not as easy as people write about it in the articles. Before you can secure capital from Venture Capitalists, you must prepare to meet their terms and conditions which in most cases will be to their favour. Also, in actual sense, some startups are too small in size to warrant investments from venture capitalists. For this reason, bootstrapping as a means of financing is common among small business owners.
Advantages of Bootstrapping
Bootstrapping has its own advantages. Few of these advantages are considered below:
Control: If you are the type that likes to have absolute control over your business, bootstrapping is the way to go. With bootstrapping, you are the only contributor of funds. Therefore, the question of sharing control with another person does not arise. For example, if you source fund from a venture capitalist, he will like to have substantial part of your business so that he will be able to influence decision about the business. Since you are the only person financing the business, you have full right and control over the business. This means that you can make your own decision regarding the business without any recourse to any external investor. Also, you can decide on what to do with the profits you make from the business.
Read Also: How to Raise Initial Investment Capital for Small Businesses
Freedom: One of the major disadvantages of seeking funds from venture capitalists is that they tend to dictate to you. They dictate almost everything ranging to the structure of the business to the appointment of the key staff of the business. They do these in an attempt to protect their own interests. You may need to seek their approval for any major decision you will ever make concerning the business. Also, there will be a need for adequate feedback and reporting. But with bootstrapping, you are accountable to yourself. You are at the liberty to create a structure you consider the best for your business.
You are not under pressure to deliver: A lot of people make mistakes when it comes to sourcing for funds. If you want to source for external funds, you need to assess the implications. I have seen many founders that turned an employee in their own company. When you seek funds from venture capitalists, if care is not taken, you may find yourself in this type of situation. Venture capitalists usually invest in businesses not because they like the owner of the business. They invest primarily to make profit from the business. When they invest in a business, they have expectations which they want you to deliver. Of course, this may not be convenient for you. You work tirelessly to meet their targets and deadlines. But with bootstrapping, you are at the liberty to work at your own pace so that you don’t put your health into jeopardy.
You save time: Fundraising is time consuming. Before you finally meet a venture capitalist that will agree to invest in your business, you must have spent a lot of time. The time used in preparing and presenting slide shows could be used to focus on your business. When you bootstrap, your energy and time are geared towards on how to source for customers and how you can satisfy them. This is very important in business.
You become more prudent: Bootstrapping does not allow extravagance. Bootstrapping actually teaches you to spend wisely. Because the money is not enough, you need to evaluate every decision to buy before making any purchase. You seek if there are better alternatives or if the expenses can be avoided totally.
Read Also: The Hidden Benefits of Not Having Sufficient Capital
Disadvantages of Bootstrapping
Anything that has advantages must have disadvantages. In spite of all the advantages discussed above, bootstrapping has its own disadvantages. These are discussed below;
Growth is slow: When you bootstrap, it is difficult to grow a business aggressively. You need money to take advantage of business opportunities. When you don’t have enough money, a lot of opportunities may pass you by. For instance, if you don’t have money to hire additional hands, you may end up to be the only one doing the job of three or four persons. No matter how hardworking you may be, there is no way you can match the efforts of four persons. However, if you are faced with this type of challenge, you can always outsource or hire freelancers when there is need for that.
Personal risk: Bootstrapping leads to “eat alone, die alone” syndrome. If you invest all your resources in a business and the business fails, you will be the one to bear all the risks. You may need to sell your personal properties in case the assets of your business are not enough to pay off the liabilities of the business.
Lack of access to venture capitalists’ supports: Venture capitalists do not only provide funds. They provide supports that can be helpful to the success of the business. You can leverage on their contacts to secure contracts. They lend you their wealth of experience in helping you to navigate the turbulent waters on the path of entrepreneurship. When you bootstrap, you can be denying yourself of these added benefits.
Read Also: Funding Options for Small Businesses
Lack of image: The hype that goes with seeking finance from venture capitalists helps in boosting the image of the company involved. But when you bootstrap, people may see you as a lone ranger. This can even lead to loss of business opportunities. Corporate clients prefer giving contracts to companies where continuity is guaranteed. As a one man business, they may be afraid that if something should happen to you, it may mean the end of their contract with you. This can also disrupt client’s business.
Competition: With fewer resources at your disposal, you may not be able to compete effectively with your competitors. Competitors may be able to spend money on advertisements. By this they will soon take the larger share of the market. With time, they may even push you out of the market. Because they have money to buy goods in large quantity, they may be privileged to buy at cheaper prices from their suppliers. This may afford them to sell at cheaper prices to customers. However, you may not be able to match their prices.