Bootstrapping Vs Venture Capital: Which Is Best For Your Business?

Defining whether bootstrapping or venture capital is the best funding model for your business depends on different criteria. 

According to Boopos CEO Juan Ignacio García Braschi, the success rate of bootstrapped companies is usually higher. Still, the fate of your venture should depend on your business goals and strategy and maybe the speed at which you want to grow rather than the funding itself. 

"Both are valid options for a SaaS founder, but it will depend a lot on the type of project you want," says Boopos CEO. 

For sellers, choosing between one or the other means adjusting negotiation strategies based on whether a potential buyer is more likely to bootstrap or seek VC investment. 

For buyers looking to grow a business, deciding whether to seek external funding or not is key to forecasting growth and strategic planning post-acquisition.

What is bootstrapping?

Bootstrapping involves using your resources, such as personal savings, loans, or revenue, to fund the business. Its main advantage is that it gives founders complete control over their business, as they don't have to report to external investors or share decision-making.

"It is about trying to grow and build a company without obtaining financing from external sources: I invest a very small amount, but the idea is that I will start generating income, get that money, and gradually use it to reinvest and grow organically," says Juan Ignacio. 

What is venture capital?

Venture capital (VC) entails raising money from external investors in exchange for equity as a return on investment. 

In this case, "both owners and investors are aware that the first months will report losses as the money invested will be used for upfront expenses such as marketing campaigns, customer acquisition, and putting together a work team," according to Juan Ignacio.

VC funding also means the business owner may have little control over the company but can access financial resources and expert advice that otherwise wouldn't be available.

Now let's see what each funding option offers.

What makes bootstrapping and venture capital different?

The differences between bootstrapping and VC funding rely on three key factors: 

• Level of control
• Growth potential
• Risk profile

Bootstrapped companies are about organic growth. "Self-funding gives you more flexibility, a slower pace, and more personal governance. So it depends on whether you seek autonomy," says Juan Ignacio. "Maybe bootstrapping won't take you that far that quickly, but it has less risk, so to speak.”

Venture Capital, on the other hand, seeks higher returns faster. VC investors expect their shares to increase in value to make a profit. 

Juan Ignacio says: "If you strongly believe that what you are doing can scale rapidly, the VC money can be great

"If you have that ambition of building a unicorn, then the investment from a VC may be a good option for you. However, this decision comes with consequences and certain obligations, such as reporting to a Board of Directors or striving to double your company's growth yearly."

Pros & Cons of bootstrapping and vc capital funding

Bootstrapping

Pros

• Allows the investor to keep full ownership and control over decision-making and the business's direction.
• It takes away the pressure of keeping up with the expectations of external investors.
• Learning how to avoid expenses may improve operational processes in the early stages.

Cons

• Limited resources due to low upfront investment.
• Low growth rate at initial stages, which may also affect early scalability.
• Higher personal risk as a result of self-funding.

Venture Capital

Pros

• Access to both higher financial resources and an expertise network of investors.
• High scalability and rapid growth potential.
• Venture capital firms provide credibility and validation of businesses when attracting clients.

Cons

• It generally dilutes business ownership and takes away control from the owner over decision-making.
• Pressure to meet higher success metrics as venture capitalists expect short-term revenue.
• Possible conflicts with investors regarding business strategy.

Bootstrapping vs. VC funding: Which is best for business acquisitions?

Whether you're a buyer or a seller, there are different factors to consider when deciding between bootstrapping or venture funding. 

Seller considerations

• Speed & flexibility: Transferring a business to a bootstrapped owner could result in a smoother transition as VC firms may require more rigorous scrutiny.
• Risk management: Sellers may need to absorb varying levels of risk to achieve a successful sale. Venture capitalists may have higher expectations than solo buyers. 
• Alignment of goals: Since bootstrapped buyers don't have the same restraints as those seeking venture capital, sellers are more likely to meet buyers' goals and expectations.

Buyers considerations

• Control and ownership: In a bootstrapped model, the owner will keep control over the business.
• Financial resources: With venture capital, buyers who intend to resell a business in the future may be able to set a higher purchase price due to fewer resource constraints and better public perception of their business. 
• Expertise and network: Venture capital funding gives access to a more extensive expert network.
• Innovation and growth: When a business has high-revenue potential, venture funding can maximize it. 

Examples of bootstrapped vs. VC-funded businesses

In an early stage, well-established companies like Atlassian or GoPro were bootstrapped.

GoPros is an interesting case. Founder Nick Woodman, who made an initial capital investment of $10,000 in 2004, pulled a complete 180 when the company went public with an initial public offering (IPO) valued at $2.96 billion. Woodman's cash "came from selling bead and shell belts out of his VW van," according to Investopedia. 

On the other hand, Airbnb relied on venture capital funding to grow. A Forbes article about Jeff Jordan, venture capital investor for Airbnb, read:

"(Jeff) Jordan's Midas List status was assured when he led a $112 million Series B funding round into Airbnb that year (2011). Its then-lofty valuation of $1.2 billion had soared by the time the company went public at a market capitalization of $47 billion nine years later." 

Looking to buy a cash flow-positive business?

Whether you are a buyer or a seller, there's no right or wrong answer as to whether venture capital or bootstrapping is the best for you. It depends on the level of control, growth potential, and level of risk you're looking for.

The companies listed in Boopos are mostly bootstrapped and, therefore, have positive cash flows. According to Boopos CEO, VC-funded companies have been part of the marketplace because they were already mature.

"All the money they received from the VC was used to acquire customers, and they were already generating cash flow. They were in a more mature state than a bootstrapped company would at that point in time". 

Explore Boopos listings or join our marketplace today!

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