Got a killer idea that you’re ready to turn into a potential new business? Has your new business kicked off and you’re in those early days of late nights and seemingly endless costs? No doubt you all have one major item on your mind… Money. Funding. Capital. Cashflow. Whatever you want to call it, we all need it.
What we want to look at are the questions about money. Will it come from your projected sales? Will you get your business proposal together for the bank and hope for a loan? Or will you rely on your own savings? Or critically, dilute your shareholding and reach out for some investor funding?
Here we talk the pros and cons of bootstrapping versus investor funding to kick-start your new startup and get the best bang for your buck.
The term bootstrapping comes from that very famous legend ofBaron Münchhausen who pulled himself out of the water with the help of his own bootstraps, becoming a metaphor for achieving success with no outside assistance.
It is building a company from the ground up with nothing but personal savings, and with a little luck, the cash coming in from the first sales.
Studies show that more than 80% of startup operations are funded by the founders' personal finances, with the median in start-up capital being about $10,000. Some of the most famous and most successful companies in the world started off this way – Apple, Microsoft and DellComputers to name a few!
As all of the financial risk is placed on you as the business owner, bootstrapping can be a tough way to go. Limited resources can inhibit growth and even undermine the quality and integrity of the business envisioned. Not to mention cause a few headaches. On the other hand, you are able to maintain full control over all decisions and the business itself. And, all the energy goes into the product or service itself, not into pitching venture capitalists and other potential sources of capital investment.
Bootstrapping allows you to experiment more with the brand, as there is no pressure from investors who may have their own ideas. There is another kind of pressure though – you may have personal or family assets on the line.
It might not be the quickest way to turn a profit, but bootstrapping can be a way to start slowly bringing in revenue and establishing a safety net that enables you to maintain total control of the business.
It must be said, there’s no definitive number in terms of how much you need to bootstrap a business, that all depends on the business.
This is all about selling your idea to an investor, who is interested in getting some form of profit or return out of your business idea in the future. They finance or help you finance your business for some ownership equity in return. They usually closely evaluate the business and projections before hand and may have some say in decision making and goal setting. The most popular investors are generally angel investors or venture capital investment funds, but they’re generally not easy to get involved with.
An angel investor is generally a high-net-worth individual who provides financial backing for small startups or entrepreneurs, typically in exchange for ownership equity in the company. They can often be found amongst your family, friends or colleagues. The funds that angel investors provide may be a one-time investment to help your business get off the ground or an ongoing injection to support and carry the company through it's difficult early stages. In addition to cash, they usually bring along with them a range of expertise, connections, knowledge, experience and advice.
Venture capital generally comes from well-off investors, investment banks, and any other financial institutions who see a lot of potential in your business. For new companies or ventures that have a limited operating history (under two years), venture capital is becoming a popular way of raising money, especially if they lack access to capital markets, bank loans, or other debt instruments.
In short form here’s the quick potential pros & cons list depending on your needs:
• Money in the door for growth
• Ongoing access to business experience and advice that comes with the right investor
• Less personal financial risk
• Loss of equity in your own business
• Potential loss of some control depending on your agreement
• Potential extra pressure for the business to perform
Bringing in an external investor is a great way to get money and get it fast. Sometimes it’s enough to really make or break your business and if you’ve exhausted your personal savings (and then some!) this may be your last option. The cash comes at a cost though as the investor will always take their slice of the pie.
Some investors may be happy to sit back and leave the decision making to you however some may choose to get really involved. This may bring some misunderstandings and a misalignment of goals for the future. On the other hand, it may also bring another perspective and a new set of skills.
Similarly, selecting the right investor for your business can often be dictated by the input you’re looking for. As an example, you maybe missing a certain skillset that your business needs that could be filled by the investor, or perhaps would like an investor to bring their network of contacts and knowledge with them.
Ultimately, making the decision to bring on an investor (and what kind) shouldn’t be done completely on a financial basis, but with your entire business and goals in mind alongside the money factor.
If you’d like to discuss your business strategy, what investment might look like for you alongside other accounting implications, we’d love to chat. Speak with one of the Attune team on 1300 866 113 or click here to start the conversation on email.