Feeding Growth: When To Bootstrap Versus When To Raise Capital
When it comes to the decision to grow your business through investment funding, there’s a lot more that goes into it than the sound bites you see on Shark Tank. In fact, the decision of if and when to seek investors is as complex as it is important. Here’s what you should know when trying to raise capital.
Experts agree there are pros and cons to both bootstrapping and private funding, and the timing of your decision to do one or the other is also vitally important. Here’s some advice from a few local industry experts to help you evaluate which route best suits your company’s needs.
In the business world, bootstrapping refers to starting or growing your company without external capital.
During his career as an entrepreneur, Manny Chavez, president and founder of Impact Video Cards, has seen the advantages to bootstrapping during certain times of a company’s existence. Chavez believes the biggest benefit to bootstrapping is the freedom it gives you as the business owner to chart your own course and make all of your own decisions without “interference from investors.”
Justin Bott, director of marketing and operations at Grow Utah, a nonprofit dedicated to helping entrepreneurs, has advised over 1,000 entrepreneurs during his career and agrees that bootstrapping is often beneficial.
“Most people think that raising money will solve all of their problems, but that’s not true. Raising money comes at a high cost,” Bott says. “Generally speaking, entrepreneurs should bootstrap it as far as they can go. If they do it the right way, they’ll get their company far enough down the road to see if their idea is really going to work. They will learn to operate lean and will figure out if their company has a real future.”
On the other end of the spectrum is the decision to bring on investors. Raising capital through investors is attractive to many businesses—and with good reason. Having an investor offset some of your costs or provide funds you believe will help grow your business can be an opportunity that is hard to resist. The opportunity for faster growth and the additional skills and experience brought by investors is also desirable, according to Chavez. However, there are many things to consider before going down the path of seeking investment funding.
For example, Greg Warnock, co-founder and managing partner of Mercato Partners, believes you should only raise capital if it is absolutely essential. According to Warnock, situations such as a large inventory component or real estate cost, or a need to get to the market before competitors (also known as the first-mover advantage) are examples of barriers that can often only be overcome with the help of outside money.
Bott agrees. “When people are ready to get investment money, they’ll know it because there will be things they just can’t do without it, like hire more developers or get their product to the market sooner. They’ll see that they can’t hit the next part of growth and stay alive without scaling quickly and that if they try to continue to bootstrap at that point they will lose market shares. A wise entrepreneur will recognize these scenarios and know that they simply can’t meet the demand of the market without raising money,” Bott says.
But that’s just the beginning of the process.
Due to the long-term nature of the relationship between owners and investors, Warnock also encourages entrepreneurs to consider how the different personalities will get along and what else the investors could contribute to the business. “You’re going to be working closely with financial partners for many years, so the partnership can be even more important than the equity and the money you are asking for,” Warnock says.
And Chavez, Warnock and Bott all agree that how you envision the future of your company should be the most important factor in your decision-making. Do you want to grow and eventually sell your company? Do you want to be a local and regional success and run your company for your entire career? Do you want to continue having full control over your company? Would you be OK if accelerated growth changed your role in your business?
If, after taking everything into consideration, you believe that raising capital is the right choice for the company, Warnock suggests getting as much as you can.
“If the financing is being offered on terms that make sense to you, take all that’s offered. The capital-raising environment can change and seldomly do you wish you had raised less money. If it’s offered from a partner that you like, on reasonable terms, then take it,” Warnock says.