The question whether a startup should opt for raising funds or bootstrap is one that has brought about so many debates across the startup space.
Any business venture, irrespective of which industry it belongs to, requires a substantial investment in the form of business capital to help it get off the ground and accelerate its growth, at least in the first couple of years.
Fundraising seems like the luxurious alternative to bootstrapping, but it's just the opposite side of the same horse. And like Sherlock Holmes said, horses are dangerous at both ends and crafty in the middle.
When considering both options, it is important to know that both have their pros and cons. However, founders must have foreknowledge of their business models and starting capital, which are the fundamentals of getting any kind of investments.
This topic was raised at the just concluded Techpoint Build and we had experts from different walks of life give their views. You can watch a video of the panel session below.
Bootstrapping: What exactly is it?
Bootstrapping is when founders raise capital for their businesses without the assistance of investors. This involves building a company on personal savings or continually reinvesting revenue generated by the business.
While scalability is important, it should be noted that raising capital through this means allows founders retain full control of their companies, which is not possible when investors are involved.
At what stage should you raise funds?
It is important for founders to know when to raise funds, if at all they should. You should be able to determine if your startup is scalable or not.
Be the smartest in the room
According to Tosin Eniolorunda, who bootstrapped his startup to profitability in two years, founders should ensure their business is profitable before seeking to raise funds. To shed more light on this, Shola Akinlade (CEO, Paystack) said founders must understand that there are different stages of a business and it is important to know what the next stage is. He also emphasised having a viable product and understanding what it will take to get to the next level.
Using Paystack as a case study, Shola said he had to create a product and know his next stage -- which was to survive for the next 6 months without being distracted (surviving for the next 6 months of operations meant there would be much progress in the business).
In his words, “before the end of the 6 months, we raised $120,000, we launched the products with the money and got two more people to join the team, to focus more on building the product. We wanted to grow faster, so we raised $1.3 million -- knowing that we needed to survive for the next two years. In a nutshell, always set milestones in order to propel you to get great results”.
In other words, if you expect to get more than double in ROI, then you should consider raising more funds for your business. However, you should only go for fundraising if you feel you are the first mover, your product is time-bound, and you may need investors to scale.
What about bootstrapping?
As earlier stated, knowing one's business model is also important in deciding whether to bootstrap or raise funds; a point Onyeka Akumah (CEO, FarmCrowdy) validated when he said a B2B business model gives an upfront capital, therefore it helps you to bootstrap.
You also need to know that bootstrapping helps teach great lessons which could be beneficial to the health of your business. Firstly, it helps founders keep the cash flowing. This is because CEOs are always cognisant of their limited funds and maintain steady pressure needed to focus on revenue-driven innovations.
Secondly, it helps to lower overhead costs to the minimum. Reducing the burn rate of your business can empower it to pivot. As Uju Ojinnaka (CEO, Traders of Africa) said, founders must have ambitious goals with limited resources that will propel the company's growth in the face of any obstacle.
Lastly, it brings out creativity. Bootstrapping can be a great way for a startup team to stay quick on their feet, come up with creative solutions, and discover unexpected opportunities to grow their business.
In conclusion, raising funds helps accelerate the growth of a business, making it a blossoming enterprise, which is the dream of every business owner. However, as startups, you should consider first bootstrapping your way through to create a viable product that investors will be interested in.