Capital Raising Strategy: When to Bootstrap, and When to Raise Funding?

How do you strike a balance between latching on to opportunities for growth by leveraging your equity, and retaining control over the company you’re building?

Equity means opportunity, but it also means control. How do you strike a balance between latching on to opportunities for growth by leveraging your equity, and retaining control over the company you’re building?

For some companies, shooting for growth by raising outside funding in exchange for equity is natural. Others, meanwhile, seek to grow organically by ‘bootstrapping’. So how do you know whether bootstrapping or raising capital is the best path? In some ways, they are two sides of the same coin; after all, the aim is to grow and build successful companies. But the routes you’ll take to get to your end goal are very different.

In this article, we’ll give you a brief overview of bootstrapping. We’ll discuss how to identify whether your company could be a fit for bootstrapping, or whether equity financing might be a better fit. And we’ll also highlight examples that illustrate ideal scenarios where bootstrapping is possible and even optimal for different businesses.

Read on to learn:

  • What is bootstrapping?
  • The advantages and disadvantages of bootstrapping
  • Capital raising strategy: when to bootstrap, and when to raise outside funding

What is bootstrapping?

Bootstrapping comes from the idea of pulling yourself up by your bootstraps: i.e., using what you’ve already got to get ahead. In growing companies, bootstrapping startups typically seek to grow by minimizing burn and only spending the money coming in from paying customers. If executed well,

Depending on the business model, bootstrapping can be almost impossible: in highly capital-intensive industries, for instance, new entrants need to invest large sums in hiring and R&D before they are anywhere near having a market-ready product.

When bootstrapping works, startups can build significant value without surrendering control of the business, given that there is no need to give up portions of your equity to external investors. At the same time, though, there are sound reasons for wanting investors on board, which potentially means a more complex decision-making process for founders. Let’s look at the pros and cons of the bootstrapping approach.

Bootstrapping your startup: the pros

The biggest advantage of bootstrapping is that it allows you to retain control of all your equity. This has positive consequences if you want to retain autonomy over decision-making at board level, and it means you and your employees see proportionally more of the proceeds if and when an exit happens.

Meanwhile, minimizing burn has other positive effects. Bootstrapped companies often establish operating principles that center on rapid testing and iteration. This potentially allows product and engineering teams to build features quickly in response to specific customer pain points, rather than having developer time swallowed up by large, complex research projects.

Many startups bootstrap functions such as marketing, using PR and word-of-mouth campaigns to build hype without spending money. And remember – you can look to reduce cash spend on talent too by prioritizing equity over salary when negotiating with candidates. To learn more, check out Ledgy’s blog on attracting and retaining talent with equity.

Bootstrapping your startup: the cons

Unfortunately, relying on organic growth isn’t always enough, especially in a highly competitive or capital-intensive industry. New challenger brands in saturated markets may not be able to build a loyal group of customers by staying lean and thinking creatively about maximizing spend efficiency. In this context, if you want to scale at speed, you’ll almost certainly have to seek venture capital to stay solvent.

Furthermore, bootstrapping can become harder as time goes on. As your business becomes more complex, the input of external investors, particularly those with board seats, can contribute to evolving the strategic direction and continuing your growth trajectory. Additionally, investment partners can make connections with industry peers, candidates and other professional contacts, allowing you to access valuable networking resources as well as capital.

Bootstrapped startups: Where are they now?

Bootstrapping your startup is difficult, but it can be done. These success stories bootstrapped for years before receiving any external venture capital, achieving stellar results.

Take sports and lifestyle camera specialist GoPro, which was founded in 2002 by Nick Woodman. Using his personal savings and a family loan, Woodman developed and sold his product line independently for around ten years. Woodman was able to capture around 30% of the global pocket-camcorder market — one he’d largely revolutionized — over the next 10 years, during which GoPro took on no outside funding until a strategic investment round in 2011.

Similarly, email marketing leader Mailchimp bootstrapped over decades to build its email software suite for business customers. Mailchimp pivoted into email from web design by listening to clients who wanted a simple way to create slick, professional marketing emails. Founders Ben Chestnut and Dan Kurzius never accepted private equity or venture capital funding up until Mailchimp agreed a $12 billion acquisition by Intuit in 2021. The deal could be the biggest bootstrapped exit of all time.

Is the bootstrapping route for you?

Bootstrapping allows startup teams to create something from virtually nothing, and it can change your purchasing habits for the better. However, even bootstrapped companies need to think about managing equity and the cap table, particularly if you are focused on attracting top talent with equity packages.

Ledgy’s powerful, intuitive equity management software helps you make the most of your cap table, whether you’re bootstrapping or seeking venture capital. You can share files and data with investors, model financing rounds at the touch of a button, and improve communication on equity and fundraising with the whole organization.

Learn more about Ledgy: book a call with one of our product experts today.

17 Dec 2021
Joe Brennan
Content Lead & Drone Theorist

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