Bootstrapping or venture capital: Which is the best way to fund startups?

Venture capital investments in India grew four-fold in 2021 from the previous year as India’s startup ecosystem reached an inflection point. According to a YourStory analysis, the VC investments in the country reached a record high of $38.3 billion in FY22, driven by a combination of COVID-19 tailwinds and sound macroeconomic fundamentals, among the major global economies. This year, India surpassed the milestone of 100 startups entering the coveted $1 billion-plus valuation club and becoming unicorns.

In a world of mega-fundraising sprints, many startups prefer to go the steady way and choose the path of bootstrapping. Most startups that prefer bootstrapping are those with the goal of controlled growth that wants to stay in the game for the long haul instead of relying on external funding for accelerating growth quickly.

The current economic situation (of the funding winter) means entrepreneurs across the board are being more frugal, highly innovative, and more focused on acquiring customers without the cash burn.

Two sides of the same coin

There are numerous shining examples of how fundraising has successfully accelerated the growth of many startups. At the same time, there are equally fascinating stories of bootstrapped startups attaining unicorn status. For every one of these success stories, whether bootstrapped or VC-funded, there are many more that resulted in downing the shutters.

There are stories of success as well as failure on both paths—be it venture-backed or bootstrapped; the path itself is not a great indicator of whether one way or the other is better. The decision to choose the ideal path for your startup idea depends upon various factors like market demand for the product/service, opportunities for growth and scalability, founders’ inclination towards independence, and so on.

The right approach for a startup funding strategy is not a straightforward one but some key considerations can help in the decision-making process.

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What works when

In most cases, bootstrapping works best when the product has a niche market. To go the bootstrapping way, the founders need to have strong passion and belief in their business idea. You want to enhance and customise your product by listening to your clients carefully and achieving product-market fit early on to operate the business with a lean model. Since the founders have high stakes in the business, they must be extremely self-disciplined to direct their business to success. The groundwork must also be laid to ensure that the founders can sustain themselves until sustained cash flow is established and profits are seen.

Venture capital works best when the initial product development requires a heavy investment that the founders alone cannot afford. The instances include where a product has a large user base that requires extensive funds and targeted marketing and advertising spend to acquire customers at scale and to quickly capitalise on a market gap faster than any competitor. To capture such a large market and sustain it, venture capital has more to offer than just the funds—a much-needed mentorship and extensive resources to help the firm in expanding its network.

While firms like MuSigma and Freshworks have made it big with VC money, Zerodha and Zoho prefer the bootstrapping way and are equally successful. Let’s dive in deep to understand various considerations for bootstrapping and venture capital—explaining which path makes more sense for your business.

Bootstrapping considerations

Freedom

One of the primary advantages of bootstrapping is that the founders have complete ownership of their firm. The freedom of ownership allows owners to make their own decisions and drive the operations of the firm as they see best suited for the firm. Contrary to this, in a VC-backed startup, the founders have the added responsibility of taking the investors into confidence in the firm’s business objectives.

Complete ownership in a bootstrapped startup enables founders to exercise full control over the company operations, and grow the business steadily with a strong focus on profitability.

In contrast, VC-backed startups must meet investors’ goals and interests. Investors are often in a strong position to call the shots in the business. Their interests might differ from the founders’, which may lead to a clash of ideas leading to inconsistencies.

Focus on product and customers

Founders of bootstrapped startups have the freedom to focus on creating a great business (organically) that customers love and slowly growing the business itself. VC-backed startup founders, on the other hand, are required to divide their time between working on their overall vision and investors’ business targets.

Bootstrapped companies can focus more on growing revenue profitably and providing the best services to acquire and retain customers, whereas VC-funded firms have a laser-sharp focus on creating market buzz and goodwill by spending on advertising and growing rapidly.

Profit-revenue driven

VC-funded startups focus on rapid growth and making things happen faster to meet investor targets while keeping the business profits secondary whereas bootstrapped firms are very efficient with their money and always consider business profits primary for their survival. When bootstrapping, you meticulously oversee every dollar spent and make the most of it.

A stark difference in the profit vs growth approach has been seen in the Indian startup ecosystem recently. The VC-backed startups aim for quicker growth prospects and hence, tend to mass hire to reach their objectives as fast as possible. As a result, we see a culture of hiring and firing, evident from the multiple rounds of layoffs by many firms in the recent past in a bid to survive in the times of funding winter.

However, bootstrapped startups have remained immune to such a scenario because hiring decisions are made very carefully and are directly linked with the demand for talent considering the steady and stable rise of the business.

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VC funding considerations

Faster growth

After investing in a business, VCs expect it to grow as quickly as possible. Founders can use VC funds to launch new goods or services, hire experienced and skilled employees, acquire cutting-edge technology to outsmart the competition, and so on, without having to worry about revenue and profits. The mantra is to get big fast, no matter what.

Expert help

Money is not the only resource provided by VCs; expert mentoring and advice are also extremely valuable. VCs typically have a large network of contacts, which can lead to new hires, profitable alliances, and more customers, among other advantages. When bootstrapping, you must rely on your personal contacts and network, which can be limited at times. There are various instances where a single email, phone call, or meeting with a VC contact sparks a new idea, guidance, or even a sale, resulting in the startup being a success.

Less personal risk

Be it VC funding or bootstrapping, both carry a significant risk of losing all the invested capital. In the case of bootstrapping, failure means losing all your savings or the funds raised through crowdfunds. This risk diminishes if you go the VC route as VCs’ equity stakes carry the major risk.

Are bootstrappers challenging status quo?

Whether it's bootstrapping or VC funding, they are just two different methods of financing a startup. Understanding that venture capitalists are financial enablers for business ideas that require quick scalability to grab market share as soon as possible, whereas bootstrapping is a steady and more controlled way of making things happen to build a business.

We see there is certainly a shift in focus from unbridled growth to stable fundamentals of the start-up growth, indicating that bootstrappers are out there working on their next big idea.