Starting a company takes money — something you might not have much of when you’re just starting up. But there are both pros and cons to seeking outside capital before you’ve demonstrated traction or the potential for real success.
So we asked nine entrepreneurs the following:
“What are the pros and cons of bootstrapping a product based business before seeking outside capital?”
Here’s what YEC community members had to say:
1. Pro: Better Eventual Evaluation
“When seeking outside capital, the more data or customer traction you can demonstrate in regard to your product the better the evaluation of your company will be. Having a good evaluation minimizes the percent of equity you have to give up when seeking capital. Bootstrapping can help you keep your equity while raising an appropriate amount of capital.” ~ Phil Chen, Systems Watch
2. Con: Poor Beta Product
“Almost every angel investor will want to see a working beta version of your product — this will have a direct impact on your pre-money valuation and size of capital raise. The con is that in most cases your beta product is not your best designed or well thought out product. The team can feel a false sense of accomplishment, which can have a direct impact on the company’s long-term performance.” ~ Joseph DiTomaso, AllTheRooms
3. Pro: Less Dilution of Ownership
“One of the best reasons to bootstrap your business before fundraising is in order to reach a higher valuation. If you can build your product and drive revenues, you will be better positioned to command a higher valuation during the funding process. This means you’ll have less dilution in ownership after taking on external capital.” ~ Doreen Bloch, Poshly Inc.
4. Pro: Early Creative Control
“When you bootstrap a product-based business before seeking outside capital, you have the advantage of having creative control in the navigation of the company before encountering the “too many cooks in the kitchen” situation that so many entrepreneurs find themselves bogged down in. You don’t need this at the start. You want to be able to get your footing before hitting the ground.” ~ Rob Fulton, Exponential Black
5. Con: Can’t Afford to Do It Right
“You can’t really afford to do things right the first time, so you end up having to evolve them over time. The truth is that even with money it’s very hard to get it the first time. But the more resources you have, the better your chances. If your first product/packaging/messaging isn’t on the right track, it can be very hard to get feedback and data that would be helpful for improving it.” ~ Jake Kloberdanz, ONEHOPE Inc.
6. Pro: Your Only Stakeholders Are Your Core Team and Customers
“This allows entrepreneurs to focus on creating the best product possible, leading their teams with fewer competing interests and egos. Plus, a bootstrapped company means the founder has more skin in the game, so the incentives to produce a winning business model are typically greater than venture-backed initiatives.” ~ Jason Kulpa, Underground Elephant
7. Pro: Scaling One Unit at a Time
“With a surplus of money in the bank, entrepreneurs feel overly confident in their ability to fulfill thousands of orders. But quality assurance is only guaranteed after it has been field tested, over and over again. Before we could sell 100 beds to 100 happy customers, we knew we had to produce and ship a dozen. Along the way, we made improvements to ensure the 100th mattress we sold was flawless too.” ~Firas Kittaneh, Amerisleep
8. Pro: You’re too Small to Fail
“Once you add shareholders to the mix, you have a lot more revenue pressure. And sometimes, you may have a great business but it’s just not particularly scalable. Which is OK! When you’re bootstrapping a company, you have created something that is too small to fail. Keeping your costs down is essential early on, as you likely have no idea what you’re doing yet.” ~ Adam Stillman, SparkReel
9. Con: You Have to Hire Cheap Talent and Potentially Pay for Their Mistakes
“If you have funding and your product involves technology, you can hire top-notch people to build it. If you’re bootstrapping, it’s tempting to hire less expensive talent. But you can end up paying more to fix the mistakes of a cheap hire, which is a reality we faced. This can also impact your first-mover advantage and allow others to launch or hit the market while you’re still building.” ~ Justin Beegel, Infographic World, Inc.
Boot Photo via Shutterstock