Should I Continue to Bootstrap?

ORIGINALLY POSTED ON FORBES AUGUST 15, 2012 | READ THE ORIGINAL POST

When is it time to look for funding? Tough question. And you know what? It is rare that you will find anyone to give you a definitive answer. What it really comes down to is – your business’s growth potential and finding the right fit for your company as well as your personality. Here are 4 steps to take when considering if your company should go after outside funding and if so – which kind.

First – let’s break down what some of the popular funding options are, with some pros and cons for each:

Short Definition: Business Accelerators can be defined as a set of programs that are set up by a government, business alliance, or academic group to assist in the startup of a business through training/services.

Pros: With the help of an accelerator, your startup business will acquire experience, networking opportunities, and informative business planning. These acquisitions will substantially grow your business.

Cons: Business Accelerators are only for mid to large-sized companies that will be introduced in large markets. If your company is smaller, Business Incubators have similar features but are better suited for smaller startups. This company’s assistance can be costly, depending on the level of involvement.

ANGEL INVESTORS

Short Definition: Angel Investors are usually affluent business people who are interested in utilizing their wealth to help worthy start-ups. In exchange for cash, they take an equity stake in your business, meaning they own a percentage of your company. When accepting ownership equity in the company, the investor can take on an indirect role, become a silent partner, or become a long-term part owner. Angel investors usually help entrepreneurs in the start-up phase of their business. They typically not only bring in the cash but the business acumen as well. They like to mentor and really assist the business owner in getting the business up and running.

Pros: One of the most rewarding aspects of angel investing is the ability to receive mentoring from a successful entrepreneur; this includes networks, knowledge, and experience. This is a great resource to raise small or large amounts of money since the investor has their own personal wealth that they can invest in your company quickly. Angel investors are in almost every industry as well.

Cons: Angel investing doesn’t guarantee that your business will be successful. Additionally, the angel investor will, in turn, own a piece of your company depending on the agreement. If you want your company to remain entirely your company, this may not be the route to take. Since there is a large amount of risk involved in the starting aspects of a new company, the return on the investment required may be high depending on the amount of risk.

CROWD FINANCING

Short Definition: (Sometimes referred to as crowdfunding), Crowd Financing is an approach to raising the capital required for a new project or enterprise by appealing to large numbers of ordinary people for small donations. While this approach is common in the sphere of charity, it is receiving renewed attention from entrepreneurs now that social media and online communities make it possible to reach out to a group of potentially interested supporters at a very low cost.

Pros: Crowdfunding takes advantage of the social nature of the targeted crowd. This not only allows you to solicit donations but also permits these followers to spread the word of your business and the potential need for growth (free marketing).

Cons: Crowd financing is not considered to be a sustainable source of revenue. It takes a lot of work and is based on having a pre-existing audience or having the ability to gain a following in a short amount of time. Also, because it deals with the collection of money and soliciting investments, you have to be extremely careful not to violate any existing laws or regulations.

VENTURE CAPTIAL

Short Definition: Venture Capital (VC) Funding is an investment fund that manages money from investors who are seeking private equity stakes in startups and small to medium-sized firms with strong growth potential. These investments are generally characterized as high risk/high return opportunities. “The typical venture capital investment occurs after the seed funding round as growth funding round (also referred to as Series A round) in the interest of generating a return through an eventual realization event, such as an IPO or trade sale of the company. Venture capital is a subset of private equity. Therefore, all venture capital is a private equity, but not all private equity is venture capital.”

Pros: Venture capital can provide the money you need to grow. For instance, if you are making sales, but need to spend on ramping up production or expanding your sales force into new territories, venture capitalists can provide the cash. Unlike a bank loan, there won’t be a drain on cash due to repayments. It’s also worth noting that venture capital investors won’t micro-manage your company, but they will provide help, advice, and contacts.

Cons: There is a price to be paid in equity. To compensate for their risk, VCs require high equity. Entrepreneurs often find that to secure a venture capital deal, they have to give up a greater share of the company than they originally expected. In cash terms, that is not necessarily a bad thing, but if you’re starting a business with the intent to be the only owner, this is not the route you should take. Also, remember that the amount of stake they have in your company corresponds to how much they will get paid out when the company is profitable.

4 STEPS: DO THE WORK TO FIND THE ANSWER

1. What type of revenues will you be able to generate in 1, 3, and 5 years from today without accepting outside funding? Really model it all out, considering your strongest revenue streams.
2. Take a look at how different sums of money could alter your revenue path? What would $50,000, $100,000, $500,000 0r even millions do to your projected growth?
3. What is your exit strategy? For example: If you plan on running a family business that you can pass down to future generations than a VC firm may not be as interested in funding your venture because there may not be an equity event such as the sale of the company to a larger organization in which the VC will be able to greatly benefit from the equity it will take from your organization.
4. How much control of the direction of your company do you want to maintain? Are you looking for advice on running the business or are you strictly looking for cash? How well does the management team respond to outside direction? All of these questions are vital in deciding which type of funding is best for your venture.

Not every business is a good fit for every type of funding and not every business needs to be funded. Most advisors will tell you that if you can swing it – bootstrap (penny-pinch and barely scape by) for as long as possible. The key is to recognize when the time is right to scale and pick the funding option that allows your specific company to get to success. The statistics for women achieving funding are very low: 3 to 5% get venture funded. (The American Express OPEN State of Women-Owned Businesses Report) Let’s change that! Dig deep into your business using the 4 steps above and really analyze if your business could greatly benefit from a cash infusion, then research and act! Remember, its not always the amount of the pie you own that’s important but rather the size of the pie itself. 100% of nothing is still nothing.