While we have explored maintaining control versus bringing in subject matter experts to assist in growth, we have not thoroughly discussed the elephant in the room: outside investors. There is so much romance surrounding the bootstrapping entrepreneur. However, is that type of startup really feasible? How significantly can a business grow without an influx of monetary assistance from an outside source?
To Fund or Not to Fund?
As mentioned by Noam Wasserman in The Founder’s Dilemma, a typical entrepreneur invests their own financial capital into their business even when accepting investments from outside sources, such as investors. This is indicative that even the slightest bit of additional equity and control is important to most founders to retain, and that it is unlikely that even if someone is choosing to bootstrap or source funding, they will be able to sustain and grow the business through only one funnel of financial capital. Even if the startup is being funded by investors, or loans, there most likely is and should “skin in the game” from a founder/operator.
When to Pull on the Straps
Some research shows that bootstrapping to a certain extent is a healthy source of financial capital for many startups. The Impact of Financial Bootstrap Strategies on Value Added in New Ventures: A Longitudinal Study found that bootstrapping, when at all possible, instead of raising funds through venture capitalists or other means can help a company to retain better value as it grows. The results of this study showed that funds obtained from personal bank accounts, family, and friends were indicative of a startup keeping greater value at the end of the first year. However, this study does not explore the implications of what may happen in the second year and subsequent phase of growth if investors and outside funding is not leveraged.
The Bottom Line
When adequate funding can be obtained and maintained for a startup through personal means and direct social capital, it should be. However, if the desire of a founder to keep more control of the company begins to hinder its growth through funding limitations, outside sources should absolutely be considered. Once a business reaches the growth stage, it is likely that scaling is necessary to obtain optimum profitability. Oftentimes, an influx of large sums of money is necessary to reach an economical scale. Therefore, an entrepreneur must be aware of the business needs on an intellectual and financial level and avoid making decisions based on personal attachments and desires.
Print Reference:
Wasserman, N. (2012). The Founder’s Dilemmas. Princeton, New Jersey: Princeton University Press.
