Bootstrap or Fund Raise?
The first decision a new business needs to make is how it is going to fund itself. The two most common options are bootstrapping and seeking external funding.
Bootstrapping offers more control of your business.
What this means is launching with minimum capital instead of using personal financing, friends and family or external financing relying instead on revenue generation, sweat equity and through strategic partnerships.
If you elect bootstrapping, a focus on expense control is essential as is early revenue generation.
Deciding on what is essential in terms of expense management, sweat equity and revenue generation and then sticking to it requires discipline.
Some sources of external funding can be Friends & Family, Angel Investors, potential business partners/customers, venture capitalists, or loans. Investors usually want equity while lenders in want collateral and maybe even want rights to convert the debt to equity.
Each decision has a different impact on the equity your business may need to give and on levels of control over the business.
With the many ways these arrangements can be structured, it may make sense to seek a professional who can guide your business through the mix of equity, control, and cost of money to consider. A professional can also quarterback other considerations such as tax planning, labor law compliance and technology considerations.
Finding the right balance to launch your company depends on your level of desire to preserve equity and control the business. When bootstrapping, businesses often issue equity to the founders but little or no pay while the company gets on its feet. Often this leads to the equity partners not giving the business the dedication and focus it may need to get off the ground. That in turn makes a failure to launch a self-fulfilling prophecy.
In contrast, with investors, tracking investments and governance activities takes management focus if external capital is accepted. Focus away from generating revenue. Investors may also want some business control, and loans often have loan covenants that require oversight to avoid default.