How does one weigh the trade offs between bootstrapping a small business and seeking Venture Capital?

How do you decide whether your startup idea actually is best bootstrapped vs seeking VC and Angel funding? I am working on a startup application that I believe can potentially be of great benefit to a LOT of people. I sometimes wonder whether bootstrap slow start and growth is the best way to deliver that benefit widely. I also wonder whether the slow start might enable competitors with more funding to take and run with the application space much faster than I can in bootstrap mode.

How does one way the trade offs well so the question is settled enough to stop rehashing it?

Joshua is the #1 ranked advisor on Investopedia’s Advisor Insights

Joshua is the #1 ranked advisor on Investopedia’s Advisor Insights

While the concerns over the slower bootstrap method are legitimate and should be considered, I still believe bootstrapping for as long as possible is the way to go for the vast majority of enterprises because of the significant potential downsides of VC and Angel funding. Ultimately the question you want to ask is if it is possible to build your business through bootstrapping considering the concerns you identified. If it is, then I recommend going with bootstrapping as long as you can. Here are potential challenges created by getting VC funding:

Early-Stage Investors Might Inhibit Long-Term Growth

First, early stage investors will have a time-frame for their investment of up to five years and they want to exit the investment with their profit in a relatively short period of time. This means they will value shorter-term gains over the long-term investment in the business. Taking VC money means you will give up visionary control of your business and be placed under pressure to make decisions that have a relatively short-term positive financial impact.

Early-Stage Investors Take Big Chunks of Your Business

Second, early stage investors will want to take an outsized percentage of the business for their investment. This means you will be giving up significant ownership for what may be a small amount of money with limited impact. The longer you wait to take investors, the more you can grow your business and prove your concept. As your business develops, the valuation calculation for your business will be more in your favor. Even better, the power in the negotiation will balance and then start to shift toward you.

Early-Stage Investors Create Stress

Finally, taking on investors will create a sense of urgency and responsibility in you to make the business work. (And the investors will heavily encourage these feelings of obligation to grow). While a small sense of urgency and responsibility are beneficial, it won't take long before they turn into stress and anxiety. Those feelings won't be good for you personally, and can cause you to trade your health and family for your business. Additionally, you are less likely to make good decisions when under stress, and it can also harm the long-term benefits of your business.

Get A Fiduciary Advisor Before Taking ON INvestors

I recommend growing your business on your own (without investors) for a while to build a foundation and to prove your concept. Before taking on investors, make sure to explore the idea with an experienced and unbiased adviser. We specialize in working with business owners and offer both financial planning and strategic business coaching for our entrepreneur clients. Realize any advisor an investor in your business might introduce you to has a pretty significant conflict of interest. You want your own advisor who is legally obligated to do what’s in your best interest.

Joshua Escalante Troesh is the President of Purposeful Strategic Partners and a tenured professor of Business at El Camino College. To explore working with him on your personal financial planning and investment advising needs, simply schedule a free Discover Meeting.

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