Is it better to get business angel or early stage VC funding? Or are you better off building a bootstrap business?
This is a debate that used to be one sided – funding was always best – but increasingly, this is becoming more balanced. Here we look at the five benefits of bootstrapping and the five benefits of business angel or VC funding.
Bootstrapping – 5 reasons why it is best
1. You keep the shares! Or at least, you and your partners keep the shares. This is important because without any early stage funding you and your partners will almost certainly need to work part-time in order to put the initial burst of energy and effort into the business. Therefore, a bootstrapped business will need a few partners – working part-time – if it is going to build the necessary momentum.
So, whilst you don’t have to give business angels shares, you may have to give more equity away to partners and co-founders.
2. Working without an investor allows you to take more time and be more exploratory. This is both a good thing and a bad thing. If you use this flexibility to text and explore your market, then you are far more likely to find the profitable business in the market need before you run out of money – given that you don’t start with any money. Equally, if the lack of urgency or lack of dwindling resources is avoided, you may find the bootstrap business simply drifts and never achieves anything.
3. You can always ask for money later. This key point may mean that you would trade 25% of your equity instead of 70% of your equity for the same money, but 6 months down the line.
4. A bootstrapped business will look for revenue opportunities much earlier than a funded business. It is just human nature that when our bank balances are full and our bellies are feed we lack the instinctive ‘hunger’ that many startups need to survive and then thrive. Keeping a business short on resource is a great way to drive the team forward – so long as no one actually starves.
Also, business angels and VCs love to invest in revenue generating businesses, so, putting cash in the bank is going to encourage investors to find you.
5. A bootstrapped business has to be fun! No matter how big the $$$ potential, if it isn’t fun, you aren’t going to stick the late nights and weekend working. To have fun, you have to get on well together. It is good to find out if the team’s chemistry is right early on, as it is expensive and exhausting to correct it later.
Effectively, as a bootstrapped business, you are simply ‘keeping your powder dry’ – you can always take investment later, so long as your business doesn’t hit a flat or downward patch.
Advantages of business angel or VC funding?
1. You can grow your startup much faster! Or at least, you can grow your staff and build your developments much quicker – it may be that sales and revenue still take longer than would like.
2. Once an angel or fund has invested, then you’ve built the relationship to the money. If you are able to achieve your stated goals, then further funding should be available. Hence, the first round of funding is only the first, will your investor be able to invest in your second round? If not, then you should anticipate your first round investor exiting and being replaced by a larger second round investor. In the current investment climate, this is hard to achieve. So, it would be wise to ensure that the investor has the reserves to commit to a second round before accepting their cheque.
3. Contacts! Your business angel or early stage VC should arrive with an iphone’s worth of business contacts. Quite possibly, in the case of the business angel, the reason for investing will be because he or she knows something about the business sector that you are working – and therefore, knows who to talk to.
4. Great PR! A business which raises funds – but is losing money hand over fist – is often treated as a success in the media. The fact that the VC will also want to promote that notion means that you’ll gain extra publicity and start to build relationships with key media. Remember, newsletters like a story first and the truth second, so story of a famous business angel investing in small startup always gets great coverage.
5. Advice! You now have, in the form of your business angel, an inbuilt advisor. This is invaluable in a young business team (I’d describe anyone with less than 10 or 15 years business experience as young).
The major downside to business angel or VC funding is choosing the wrong angel or VC (see our post business angels to avoid). As you can see from the list above; contacts, advice, relationship to the money, only work if you have chosen the right investor. Be aware that many investors are actually brokers and not all business angels with money will be able to bring powerful contacts or great advice to the table.
This is, of course, one of the reasons why startup accelerators are successful – they allow the investors and entrepreneurs to get to know each other before committing.