Bootstrapping or Capital Raising: The Founder’s Funding Dilemma

One of the primary issues the founders of a company face is determining how to fund the business. On the one hand, the founders could use their own personal funds and “bootstrap” the company. On the other hand, the company could raise capital through external sources like venture capitalists, crowdfunding, angel investors, or friends and family. Each of these options comes with its own pros and cons, ultimately leading young companies to ask its advisors, “which option is best for us”? Unfortunately, the usual answer is “it depends,” because there is not a one-size fits all solution.

At the outset, companies should consider the advantages and disadvantages of both options. Generally, the primary advantages of bootstrapping a startup are, among other things, (i) maintaining complete ownership and control of the business since all the equity is held by individuals who are (usually) actively involved in the business; and (ii) the potential for long-term profitability and M&A attractiveness, because of the company’s limited debt, low overhead, and minimal investor obligations. 

Raising capital from outside sources has its own advantages, which include (i) accelerated growth by having liquidity to fund certain operational needs more quickly; (ii) investor expertise when individual or entity investors have certain market experience or connections to help grow the business; and (iii) a stronger market reputation by being associated with certain investors who are trusted in the industry. 

Based on these considerations, the founders should ask themselves a few key questions to determine if bootstrapping, capital raising, or a combination of both is the right approach for the company.

The first, and arguably the most important question: what is the founders’ tolerance for personal financial risk? In bootstrapping, the founders are using their own money to build and operate the company. This might mean a significant initial investment and/or constant investments over time, all of which could be lost if the business does not flourish as intended. There’s also opportunity cost; meaning the loss of time and expense that could have gone into other endeavors rather than growing the business.  Meanwhile, raising capital from outside sources will mitigate such risk because the founders are not using as much, or any, of their personal money to start and operate the company.

Second, what sort of cash-flow does the company expect to have under a conservative estimate? A strong positive cash-flow means the company will have enough to pay its bills without additional injections of personal funds. If it is also profitable, then the founders can use those profits to fund the business. Alternatively, if the company expects to have negative cash flow or operate at a loss for some time, its operating budget could limit the ability to hire or retain key employees needed to grow the company. Outside funding can relieve some of this pressure by providing enough liquidity to cover expenses the company planned for and disclosed (to some extent) at the time it started a round of fundraising. 

Finally, how important is it for the founders to control the operation and direction of the business? With bootstrapping, the founders have complete control of the operations and only need to consult with each other on major decisions involving the future of the company. Alternatively, if a company takes on debt and/or additional equityholders, the control of the founders will be limited by requiring consent from debtholders and/or equityholders to take certain actions (e.g., sell assets, make certain capital expenditures, accept or refuse an offer). The extent that the founders lose control depends on the terms of the funding (e.g., designated board members, voting rights, etc.) but, theoretically, could result in the founders accepting an offer that they would otherwise refuse.

As a new business changes, the answer to which strategy is best might change as well. In one case, a company that is bootstrapped might reach a point where it needs to raise capital or risk closing the business. In another case, a company might need initial capital because the founders do not have immediate funds to begin operations, but quickly becomes profitable and they are able to grow the company without the need for additional investment.

Obviously, there is much to consider.  You should consult your skilled advisors, weigh the pros and cons of how to raise capital, make sure you are complying with applicable laws (especially securities laws if they are raising capital from others) and chart the best legal course for your business to thrive.