One of the earliest and most critical decisions an entrepreneur must make is whether to self-fund a startup by bootstrapping, or raise outside funding through venture capital. The implications of each decision are significant.
How you fund your company will help determine its chances of success, its scale, its long-term prospects, and ultimately, your relationship with it.
As an entrepreneur who has invested significantly in my own company, I believe that bootstrapping is the best option. It’s never easy, and it’s not always glamorous, but bootstrapping will force you to become a better, stronger entrepreneur with a more vibrant business. Here’s why:
- Creative Freedom: The creative and executive freedom that entrepreneurs have at the beginning of their projects is priceless. Bootstrapping a company with your own funds protects that freedom without the (often stifling) accountability to an outside voice protecting its investment. When you bootstrap, you are that voice -- and you’re the creator too. Even if you supplement with outside funding down the road, bootstrapping gives you far more control over your own business in those critical early days.
- Smaller = Scrappier: With less capital to work with, you will be forced to start small, test your assumptions carefully, and then scale up. Along the way, you will learn about your products, markets and customers more intimately. And if you make mistakes -- as all entrepreneurs do -- they will almost certainly be smaller in scale and impact. Meanwhile, you will learn to become a scrappier, more vigilant founder.
- Better Products: Another advantage of a limited budget is a greater focus on your products and services. The pressure of a shorter runway will force you to get your products right. When every last dollar matters, you need to pay attention to your customers and their needs by building a superior offering. That insight and dedication will increase the likelihood of generating revenue and building a brand more quickly.
- High Stakes (But Higher Rewards): As a bootstrapper and founder, you are your company’s original (and only) shareholder. As a result, you will retain control and equity. Bootstrapping also aligns your incentives with the success of the company: If it fails, so do you; if it succeeds, you succeed too -- and at higher multiples. This also keeps ownership clear and manageable; no other investors will claim parts of the company or impede the important, rapid decisions you have to make in a startup’s early days.
- Smarter Decisions: You will rarely be as cautious with other people’s money as you are with your own. Bootstrapping will almost certainly make you a better manager and incentivize you to intelligently grow your business. Learning how to do more with less is one of the most important skills of an entrepreneur -- and a key principle of 21st-century business.
- Better Profit Margins: Bootstrapping a business is one of the best ways to stay lean, which will do wonders for your profitability and valuation. Plus, companies running with low overhead, often enjoy a much larger profit margin. If they succeed and begin to consider exit opportunities, a low-cost margin can have a dramatic impact on earnings, which is a common basis for valuation. One of the most compelling ways to increase your exit multiple is to cut costs -- a skill that bootstrapping entrepreneurs understand well.
- Faster Progress: Bootstrapping usually keeps a company’s runway short -- with less cash, there is less time to get a company off the ground. This is one of the greatest motivators to quickly build a product and get it to market. Rapidly testing and iterating on your offering is an efficient and cost-effective way to develop a product. It will also dramatically increase your chances of success. Outside investment often reduces that pressure, creating a cushion that can add months or even years to your timeline.
- Less Outside Influence: Raising outside investment often attracts a great deal of attention, particularly when the investors are high profile or the deal is widely publicized. While glamorous and exciting, it also raises your profile significantly. In contrast, entrepreneurs who bootstrap have a major advantage: They can operate in relative secrecy for a period of time, staying off the radar as they fund their own operations. And that can make all the difference in maneuvering around competitors and building a great product .
Every entrepreneurial venture is different, of course. The one constant, however, is that success depends on an entrepreneur’s ability to execute effectively. And my years of experience as an entrepreneur have taught me that bootstrapping is a powerful, fulfilling, intelligent way to execute.
Jay leads Innovation at Best Drug Rehabilitation. In his startup experience, he has built a digital marketing agency, a content network, and an e-commerce store. Jay speaks in the Bay area about social media marketing, SEO, and current trends in the internet-startup industry.
The Young Entrepreneur Council (YEC) is an invite-only organization comprised of the world's most promising young entrepreneurs. In partnership with Citi, the YEC recently launched #StartupLab, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses via live video chats, an expert content library and email lessons.