Startup Funding Strategies
Bootstrapping, or self-funding, is what most people do when starting up their own ventures. And usually they have little choice in the matter as outside investors are unlikely to put money into a new program which has yet to demonstrate any possible return.
So most new ventures start out in college rooms, kitchens and garages, and this keeps expenses to a minimum. And, unlike most commercial enterprises such as manufacturing, retailing or services, internet startups don’t require much initial investment.
So the entrepreneur continues using his own money, his savings, his salary, advances from his parents or borrowings from his friends in order to keep going until, hopefully, he reaches the break-even point. But any success will only open the gates to more opportunities which will probably require more work than one or two people can handle and more funds than they have in hand.
Then the decision has to be made – carry on as best they can with the limited funds available, or look for outside investors. But when the project progresses to a certain size, and unless the owners themselves have no money problems, then the introduction of venture capital becomes unavoidable. This, of course, dilutes the owners’ equity in the company, but, if all goes well, the funders will sell out later, giving the original owners an opportunity to buy back the shares.
Another point is that when money worries are lifted by the entrance of new capital there is a tendency to spend some of it needlessly or recklessly or become more relaxed about expenses. But this is a temptation that has to be resisted – it’s not your money you’re playing with, it’s somebody else’s.
Bootstrapping Or Venture Capital?
So what is it to be – bootstrapping or venture funding? The answer is that this will depend on the financial strength of the entrepreneurs and their willingness, or unwillingness, to risk their own money. If they are confident in their project and they have the financial muscle, there should be no need to introduce outside investors.
Another way is that if the project is immediately successful, if it fills a niche, then the big players may well become interested. And if they make a good offer this is the time to sell out as this will give you the money to fund your next startup.