The overall perception about start-ups is that; every new venture needs outside funding to start its operations. This is often the case with many US start-ups that are able to reach different kinds of funding resources like venture capital firms or angel investors. On the other side, the number of bootstrapping startups is growing every year.
Outside funding is a great opportunity for co-founders given the fact that financing a new business is quite costly however there are pros and cons of getting angel or VC money.
As a co-founder, the first money you need is when you have a viable product on hand. You usually build this first product yourself and you need a team and an office to transform it into a real product. At this point, you need some seed financing and usually the business angels (or the micro VCs) are the people who are willing to believe in you and take the risk with you. After you get the money and the unbearable lightness of being approved by your investor; you set up a team and start building your dream product. Being able to find an investor at the very first start of your company is definitely a great opportunity for you.
The downside of getting an early financing is the notion of getting a new partner for your business. This person is not only your investor but he has a say in every move you make about the company. If you believe that his advisory is valuable, then you are in a very good position. If not you may have made a wrong decision to choose that guy as an investor or maybe starting with someone else’s money was the wrong decision for your business.
On the other side of the investor – startup pendulum there is these self-financing start-ups. Thanks to Rob Walling we have a great list of successful bootstrapping start-ups here:
Why are these start-ups called ‘bootstrapping’? If you are financing your own business, you will always live under the pressure of ‘limited resources’. The resources are money, people and time. There will never be enough resources for you to help develop your operations and you will always need to be creative to be able to do more with less. You always need to be cautious, as you do not have external cash –investor money – waiting for you in the bank account.
Bootstrapping a start-up is the art of spending with discipline and making prioritisation. You believe in your business, you believe in yourself and you believe that you’ll somehow break the leg! But that will mean time and lots of effort. If you use outside funding at this stage, you may shorten the time it gets to develop a product but you have the risk of losing control over your work. If you stick to your own funds and the profit you make from your own customers, then the time it takes to penetrate the market may be longer compared with the VC-backed start-ups.
On the other side; the nature of your business is important in giving the financing decision. If your product/service needs high initial investment (ie hardware businesses) you may need a financial investor from the very first start. If you idea is about a software business and if you have technical co-founder(s) in your team, then becoming a bootstrapping start-up may be a good option for the first stages of your start-up
Whether you get outside investment or self-finance your start-up, entrepreneurship is tough and needs blood-sweat-tears for success.