“It’s more about When to choose, than Which one to choose”
In this highly competitive start-up world, where myriad enterprises have mushroomed over time – we’ve often come across the terms ‘Bootstrapping’ and ‘Seed Funds’. While both are a feasible way to get funds which can be utilised in growing up your venture, yet, there is a vast difference in how both these funding techniques play out in the future.
Bootstrapping essentially means funding your own start-up – from your own or your friends’ and relatives’ pocket. Seed funding, on the other hand, is the money an enterprise gets from a venture capitalist, angel investor, or any other investor, in order to grow its business.
The main difference between the two is that while bootstrapping means that you would not have to give your ownership rights to anyone; in seed funding the investor would claim ownership rights in your company in return for funds.
Most often, the start-up owners can be in dilemma as to whether they shall bootstrap or opt for seed funding. There is no right or wrong answer in this case, and depends upon the situation the start-up is in.
Before one even considers the option of investments, a noteworthy fact is that only 5% of the start-ups in the world are funded. So, if you do not have a start-up that has a credible management team, attractive product-market fit, strong growth prospects, defensibility and reasonable avenues for an exit – you’re either bootstrapping or do not have a start-up at all.
If you do not bootstrap your start-up, you do not really own it. Recent surveys show that most start-ups are compelled into a situation where they are forced to give away majority of the ownership rights to their investor – which means that the enterprise’s decisions aren’t its own anymore.
As an example, say your company comes up with a product you completely believe in, and which you think people will love, but your investor doesn’t reciprocate the same thoughts and tells you to change it. You are forced to do it, because your investor has the majority ownership in your company. Now, this is the problem most startups face in the real world, which gives an upper hand to bootstrapping – wherein you are the decision maker for yourself, and are restricted by no one.
The good part about seed funding is that most Investors provide enterprises with “Smart Money” – that is, connections with a great network of professionals in the same space, mentorship, and help with growth prospects. Bootstrapping, on the other hand can be more of a ‘Lonely Journey’.
Seed Funding often has healthier investments – which means faster growth. Bootstrapping on the other hand has a much smaller growth rate, but promises a much higher share in one’s own company.
So, if funding doesn’t give you an exponential growth trajectory, then don’t opt for it. Bootstrapping a business is more beneficial in the early stages, till you are clear about your idea and have a respectable establishment in the market-space.
Both Bootstrapping and Seed Funds have their own positives and negatives. It depends majorly on the situation the Enterprise is in, in order to decide between them.
It’s therefore more about When to choose, than Which one to choose.