9/30/2016

VentureCapitalvsBootstrapping:HowDoestheDifferencePlayOut?

Venture Capital vs
Bootstrapping: How
Does the Difference
Play Out?
30

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by Marc Prosser
(http://quickbooks.intuit.com/r/author/marc-prosser/)
9:42 am

"Do I seek venture capital, or should I fund myself?"

This is a question many entrepreneurs ask themselves at one time or another.

Venture capital, in which you sell equity in your company for funding
(http://quickbooks.intuit.com/r/equity/how-to-use-venture-capital-to-fundyour-business), is tempting because it can bring huge growth to your
business in a very short time. On the other hand, businesses that bootstrap,
meaning that they build their businesses without taking loans or selling
company equity (http://quickbooks.intuit.com/r/growing-yourhttp://quickbooks.intuit.com/r/raisingcapital/venturecapitalvsbootstrappingdifferenceplay/

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business/bootstrapping-the-best-nancing-option-for-your-startup), are often

mysticized for their rigor and vision. Whether the growth you seek is fast or
slow, each choice is riddled with its own risks.

To address the debate of venture capital vs. bootstrapping, lets look at the
benets each of them offer.

First Off, Is Your Business Venture Capital Material?

The types of businesses that venture capitalists (VCs) look for are those that
can produce huge returns (http://quickbooks.intuit.com/r/equity/video-howto-nd-pitch-and-land-venture-capital-investors). If you dont see your
business growing 100 times in size, you probably wont pique their interest.
Thus, restaurants, retail shops, accounting rms, and other small businesses
that are not typically very scalable are not a good match for VCs.

As detailed by Forbes
(http://www.forbes.com/sites/geristengel/2013/11/20/want-venture-capitalhere-are-10-must-haves/), here are two general rules that VCs follow when
looking at potential investments:

1. Your market is worth at least $1 billion. To put this in perspective

(http://quickbooks.intuit.com/r/business-development/how-to-testmarket-your-big-idea-on-a-small-scale), lawn care is a $40 billion/year
industry in the US. Toilet paper is $6 billion. Vinyl records, worldwide, is
only $300 million.
2. You can grow to $100 million in revenue and higher. In other words,
does your business have the potential to blow up and expand many
times over? Is your idea both novel and essential to consumers?
If your business doesnt pass these tests, youre probably looking at
bootstrapping or an alternative source of funding
(http://quickbooks.intuit.com/r/raising-capital/looking-for-alternative-fundinghttp://quickbooks.intuit.com/r/raisingcapital/venturecapitalvsbootstrappingdifferenceplay/

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sources-go-online).

Benets of Bootstrapping
That said, there are still many benets to growing your business yourself
(http://quickbooks.intuit.com/r/raising-capital/video-avoid-debt-save-equitythe-secrets-to-bootstrapping). Even if your business is VC material, you
might be attracted to bootstrapping for some of these perks:

(http://intuit.me/1ElYnP1)

1. You Keep the Equity: In a rst round of investing, a VC will want to take
20 to 35% ownership of your company, according to Gil Silberman
(https://www.quora.com/When-a-VC-invests-seed-in-a-company-howmuch-equity-does-he-receive). During ensuring rounds, this can grow
up to 70%.
2. Control:VCs will expect to have some input on where your business is
heading and how it is managed. Theyll probably want to weigh in on
certain decisions. Even in the areas where you maintain control, you
may feel obligated to get input from your VC and show that youre
considering it in your decision.
3. Real Solutions: A bigger budget can solve many of your business'
problems, but not permanently. By contrast, when you dont have extra
capital, youre forced to get creative and solve issues head-on.

http://quickbooks.intuit.com/r/raisingcapital/venturecapitalvsbootstrappingdifferenceplay/

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4. Flexibility: Its not uncommon for business to change directions early

on. You might begin in one corner of an industry and end up
somewhere completely different. Pivoting
(http://quickbooks.intuit.com/r/business-planning/whats-a-pivot-andwhen-is-it-time-to-make-one)is easy when youre the sole owner of a
business. Its much harder, however, when you have other stakeholders
(like VCs) that need to be convinced.

Benets of Venture Capital

So why open the door to somebody who will want to take control of your
business? Well, the most obvious answer is money. A typical VC investment
is between $500,000 and $5 milliontry getting that from a bank. Even
besides the money, however, there are other benets to bringing on a VC:

1. Status: A VC-backed company gets instant credibility

(http://quickbooks.intuit.com/r/marketing/public-relations-tips-how-toget-your-startup-featured). You start getting more press, more attention
from clients and more respect from competitors.
2. Connections: VCs are often industry veterans that can open new doors
for you. They can introduce you to big name clients, or key talent to join
your business (http://quickbooks.intuit.com/r/hiring-and-recruiting/8ways-to-attract-top-talent-without-breaking-the-bank).
3. Focus: How often have you had to postpone a purchase because you
didnt have the cash? How much time have you had to spend seeking
loans, investors or credit? With your cash ow secured, you can spend
a lot more time focusing on growing your business, and a lot less time
worrying about funding.
4. Security: Cash may not be the end-all solution, but it does give you a
lifeline (http://quickbooks.intuit.com/r/nancial-management/how-tobring-more-cash-into-your-business-right-now) when your business hits
a snag.

The Bottom Line: Venture Capital vs Bootstrapping

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Where one stands on the debate of venture capital vs. bootstrapping will
likely depend on how they view the world of business. Do you enjoy the ride
of business, including the personal rigor, vision and reward? Or are you
focused on results, regardless of how you reach them? In the end, you
should be able to answer these questions just by looking at the type of
business you started, and where you see it ve years in the future
(http://quickbooks.intuit.com/r/business-planning/how-to-create-nancialprojections-for-your-startup).

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Bootstrapping: The Best Financing

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Should You Seek Investment, Incur

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http://quickbooks.intuit.com/r/raisingcapital/venturecapitalvsbootstrappingdifferenceplay/

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