When an entrepreneur is about to start a new business venture, he starts to think of ways to fund his business. He thinks about the type of business, the industry, his goals and the capital required to kick off the business. He understands that sourcing for funds is critical for the success of his business. So he thinks, “Is it better to raise the money solely by myself or do I source for funds from other people?”
And that is where investment funding versus bootstrapping comes to play. This post discusses these financing methods along with their pros and cons to help you as an entrepreneur decide on the best way to finance your business.
So, what is bootstrapping?
Bootstrapping is when the entrepreneur decides to fund his business with his own personal finances i.e. without external help. After the business has kicked off, he then reinvests the profits made from the business back into the business. And that is how he keeps his business running.
It allows the entrepreneur have more freedom regarding his business decisions. Due to the fact that he didn’t source for funds from a third party, he can make all the decisions himself without having to seek external opinions. His goals are clear, and he follows through without having to consult other investors who may have conflicting opinions.
What is Investment Funding?
Investment Funding is a form of financing that is provided by investors to SMEs and emerging businesses that are deemed to have high growth potential in exchange for equity in a business.
The good thing about this is that it brings together investors that have creative ideas and expertise who can give suggestions to give your business a great head start.
But it might not be an easy task to source for these investors. You’ll need to meet with the investors, let them know about your plan and convince them that it’s a really good one. You’ll also have to fish out the right investors from the ones that are seeking for ways to take over your business. It could be a long process.
|TYPES OF FUNDING||PROS||CONS|
|Bootstrapping||Founder makes all the decisions and has all the control||Slow growth|
|Founder doesn’t have to share profit with investors||Reinvesting profits earned|
|There is more financial discipline||Not every business can be bootstrapped|
|The business is the sole focus of the founder||It’s easier for competitors that have better funding to succeed in the market.|
|Investment Funding||The business has external support in terms of funding||There could be misunderstandings between the entrepreneur and investors|
|Investors can give expert ideas to make the business grow||The entrepreneur doesn’t have a lot of control over the business|
|The business grows faster than it would have grown if it was bootstrapped||The investors always have to be involved in decision making|
|The entrepreneur doesn’t need to pay back the investors with cash; rather they get equity||At the end of the day, the entrepreneur owns only a portion of the large company|
|The investor is backed up by his team of experienced investors||There is less financial discipline|
There are pros and cons to both bootstrapping and investment funding. So you’ll need to compare both sides and decide which one would suit your business best.
All the best in your business!