Start your Business bootstrapped or with Investors?
This is a frequent asked question in the startup ecosystem area and is not easy to answer, but I will try to give an overview what is important to know with the experience I made so far. Often it depends on your planned business model and in which area you want to start your business.
Bootstrapped means that you fund your company from the beginning on with the revenue you make with the business and maybe to bypass some problems with your own money you may have also from family and friends.
With Investors you get money e.g. from Business Angels or Venture Capital Companies to grow your business when you could not fund it with your revenues from the beginning. I would say for the investors it is overdone said a bet in the future and the hope is that your business is in 5 – 7 years 10 times more worth than in the beginning.
Planned industry sector of your business
There are a lot of buzzwords out there like Smart City, Industry of Things, Industry 4.0, Automation, Machine Learning, Artificial Intelligence, Smart Agriculture and so forth. All of those have something to do with digitization. But of course, you could not only start a business in such “hyped” areas, but you could also start a business as craftsmen, electrician, car mechanic, dentist or author. Because that are probably also sectors which have a bright future, as everybody needs such services and they would most likely not be automated in the near future through some robotics or so.
In the following I would give three examples of different areas, where you may start a business and what that means regarding your capital needs in the beginning days, months and years.
A craftsman could start his complete business alone, when he as an education or master craftsmen. He does probably not need any support to develop a technology or build a piece of hardware. Maybe it would be good to hire a software developer to build a nice website and offer his services to people around him. But there are services like Jimdo or Wix where everybody, who can use a computer or smartphone, can create a nice and beautiful looking website. Thus, it should not be a problem to create some demand in the market to grow a business, also word-of-mouth recommendation through family and friends could help. The biggest investment is probably in tools & instruments he needs that he could do his work. When the business starts booming and the demand could not be covered alone anymore, of course it would be useful to hire fellow craftsmen and build an even bigger company. But probably in this kind of business there is no initial investment necessary that one can start his business and it would be great here to grow from his own cashflow.
To start an E-Commerce business, one probably need a website, where you can sell the goods you want to offer to the people. It must not be a complete customized and perfect developed website, that you can start with. Maybe it is useful to start small to validate the ideas you have and why people would buy from you. There are also services, which you can use to start an Online-Shop like Shopify or Woocommerce, which enhances Wordpress as a fully usable Web-Shop. As soon as you discover real traction for your shop you could also start to invest more money in getting “the perfect E-Commerce-Shop”. But the question is if you need to have it from the beginning and today I would say rather no.
The most important thing is not the technology or a beautiful design of something, it is rather the perfect product market fit. If you have the nicest looking shop but no one recognize why they should buy from you, then you may could buy customers with Google or Facebook Ads or similar, but the question is if this works sustainable for the future. In this kind of business, you always need to know your CAC (Customer acquisition costs) and your CLV (Customer lifetime value). If you have those two numbers (and your organization) completely in control, then of course it should work e.g. to insert 10m€ and get back 15m€. But I would suggest to bootstrap such an idea until you are really sure that you have the right market, the right products to sell, the first growing sales and know your KPIs and then you would attract Investors automatically to scale big.
Internet of Things (IoT)
Normally companies or startups in this area need software and hardware technology to start. And this is a big deal in the beginning versus if you just have e.g. software from the beginning. I would say a normal IoT product looks like: you have a piece of hardware that measures something and which sends this data to a Server, there the Data is saved and visualized to the customers, and best you create any added value for the customer through data science to the pure raw data. But as you could see this contains different knowledge to build a successful product like:
- General Software Development including knowledge in Device Management
- Data Science
- Hardware Development including knowledge in Communication (Transfer Data Wireless)
To successfully build a MVP (minimal viable product) here you probably would need two to three people who work some time on it to make a proof and then normally those guys are only tech people so you don’t have business people yet in the company. So, I would say your founding team would contain 4 to 5 people or more if you want to completely build the first prototype by yourself or in this case you need some money for the beginning on, to pay the right people for some tasks. That is how we did it with Binando, we started as one business founder and one tech founder. But me as the technical founder could just cover the complete software part, because I had very little to do with hardware before. Thus, we got a small 6-digit number from the beginning on, to create the first prototypes and MVP to validate the idea itself.
An alternative to this approach would be to offer services like e.g. software or hardware development in the beginning to paying customers and try to save some money that you can hire the right people later. But here is the risk, that you lose the focus for the original idea and you create more like a service agency. But there are some examples out there which proofed that you don’t need necessarily an initial investment to develop a complex product.
Of course, this are just three example sectors picked out by me to give you a better overview of what could be the key challenges you would discover regarding money in the beginning, if you decide to start a business.
Advantages and Disadvantages of Bootstrapping vs. Investment
As often every decision and way have its own advantages and disadvantages. Let’s start with Bootstrapping. When your Business works and you can grow from your own cashflow that is a very nice thing because 100% of your company belongs to you (or you and your co-founders). You have everything in your own hands and can solely decide alone what you think its best for your company. On the other hand, it is normally very hard to make big deals when you are completely bootstrapped and it lasts long to grow. Because a lot of business models have losses in the beginning and just after a few years they would have growing profits. Nevertheless, there are enough examples where you can see that it is also nice to grow more slowly but sustainable from your own earned money.
I heard from lot of people, who are not in that startup ecosystem, “wow you got an investment from a big company? Cool, then you must be a millionaire now (or latest in a few years)”. No, it works definitely not like that. It is a very long and stony path and it is not easy. Even after years you may not know if this will be a success or a fuckup story in the end, but that is entrepreneurship. You need the right focus, passion and environment to not give up and walk always ahead as a leader. Even when you get an investment you often have to worry about money and how long your company can survive. Hopefully it lasts long enough to achieve the next milestones to create more revenue or raise new money. Also, a famous quote here is: “You will raise money as long as people believe in your vision”. There are enough examples from companies who became unicorns (valuation of the company more than one billion) without earned one single Euro. But is that a target? Yes, sure for some people the big money is very important. But, in my opinion, a sustainable business is more important, to change something in the world (at least a little) and give good and nice people the chance to follow you and your dreams and help to build something big. If you have investments from Business Angels or Venture Capital Firms or similar in your company they always want to see good progress and so on. You will have regular investors meetings and you mostly need to justify for what and why you need to invest here and there.
The worst scenario here could be that you as a founder are convinced that you need to do something otherwise an important project or even the company will fail. In case there are enough shares with your investors and they have another opinion, then they could just block such important decisions. Thankfully I did not discover such things in the past and hopefully will never discover them in the future. I also have the view, that you can talk about anything and can convince people with good arguments, but you never know what all could happen.
As I said in the beginning there is no single truth and there are a lot of different ways on which you will get to Rome. Best is to figure out your best way depending on your personal way, business model and idea. For me I could say so far, I am happy how we proceed in the past with Binando, of course there were lot of ups and downs, but in general the direction is the right one I think. But when I would have the chance to start a new business (maybe some time in the future), probably I would try to bootstrap in the beginning as long as you can and hopefully until you have definitely found a product market fit. Because than you are through that whole “we are not sure if the customer really needs it” and “is it the right market, the right time” questions. And you are sure you found the right product for the right customers and hopefully in a big market. When you have investors in your company in that questions phase of a company and you may think of major pivots, it could be sometimes very challenging and you need a lot of sure instinct ;-)…
If you have another view on this, can just confirm it or see complete other ways to start a business of course I would be happy to hear about it!
Hopefully the post was interesting for you and you enjoyed reading it! Have a great time until the next post will be published next month and enjoy hustling, relaxing, chilling, sporting, travelling or whatever you plan to do!
All the best – Mo ❤
P.S.: If you have questions, suggestions, criticism, an idea for a great new topic or just want to have a cup of coffee or a glass of wine or you want to work out with me please do not hesitate to contact me.