Bootstrapped vs. Funded Startups: Which one is Best for my Startup?

Choosing between bootstrapping or external investment? We’ve got all you need to know to help you decide, from experts at Angel’s Partners 

What is a bootstrapped startup?

Have you ever heard someone describing their business as ‘bootstrapped’ and wondered what on earth bootstraps and business have in common? Well, you wouldn’t be the first. That's why our team at Angels Partners have put together this guide on bootstrapped vs funded startups to get you familiarized with the different routes, so you can take the best path for your business.

Let's start with the basics - terminology. The term "bootstrapped startup" originally comes from the phrase "pulling oneself up by one's bootstraps," which refers to achieving success without external help, relying solely on oneself and hard work alone. In the world of startups, a bootstrapped business is one that has been built on personal finances or business revenues, without external investment or resources.

What is the difference between bootstrapped and funded startups?

When it comes to finding the funds to build a business, there are different strategies. The two most common pathways are bootstrapping and external funding. But what are the differences between the two? And which route is better for your business? In a nutshell, the difference between bootstrapped and funded startups is that bootstrapping relies on personal investment, whereas funded startups receive capital from an external party. 

More specifically, financing a bootstrapped startup often comes from either:

• Personal savings 
• Family or friends
• Revenue from the business

On the other hand, funded startups receive their financial support either from:

• Angel Investors
• Venture capitalists
• Crowdfunding

Is bootstrapping a startup hard?

If we take a deeper look into the statistics and data on the number of bootstrapped and funded startups it's quite astonishing (and, perhaps, unexpected) to uncover that, according to Fundera, less than 1% of startups receive venture funding! Not what you were expecting? Well, our collective perception of startups often learns towards a skewered and incorrect assumption that most startups raise external capital and that bootstrapped startups are few and far between. But that's just not the case. So, while bootstrapping a business can indeed be a challenging path to take, it's a pretty common route for startups! In fact, two successful companies, Mailchimp and Basecamp, started with bootstrapping, showcasing that, although difficult, it can be a very rewarding route to success. 

Should I bootstrap or get funding?

Understanding the pros and cons of personally financing a bootstrapped startup or seeking external capital through a funded startup can help entrepreneurs decide which pathway is more suitable and accessible for their business. Based on our experience at Angels Partners, we’ve put together the advantages and disadvantages of bootstrapped and funded startups, analyzing each financial route, to help you build your most optimal business. 

BOOTSTRAPPED STARTUPS

Pros:

1. - Complete Control - Founders that are financing their business from personal funds, such as savings, or contributions from family and friends, - retain full control and ownership of the company. This is important as it means founders can make their own decisions without external influence or pressure.
2. - No Equity Loss - As no external investments are involved in bootstrapped startups, founders are not eligible to give up any equity. In the long term, this will have substantial financial benefits for founders.
3. - Steady Growth - With the growth of the business driven by revenues instead of external investment, a more sustainable business model is established that supports organic growth.

Cons:

1. - High Personal Risk - Placing your savings, or the money of family and friends, into a business is a pretty big personal risk. Not to mention, the high amount of stress and emotional strain this path can induce. Bootstrapping a business is a risky endeavor on a personal level.
2. - Reduced Resources - When founders rely on their own financing, they also rely on their own resources, which could be limited. With reduced access to financial support, the growth of the business can be much slower than an externally funded startup.

FUNDED STARTUPS

Pros:

1. - Lower Personal Risk - In contrast to bootstrapped startups, the financial risk for funded startups is shared among the external investors, reducing the amount of personal risk for founders.
2. - Extensive Networks - Investors seldom provide just financial aid, instead they often come with valuable insights and advice, large networks and connections and offer mentorship to aid the growth of the business.
3. - Increased Growth - In order to scale quickly, startups need capital to hire the right team, invest in business development, and support a solid marketing campaign. With external investment, startups can grow their business fast and scale much more rapidly than a bootstrapped business.

Cons:

1. - Limited Control - With external investment, there is almost always a reduction in the amount of control and power a founder can retain. In short, important decisions for the business will be taken by investors and founders will have less of a say in the operational side of the business.
2. - High Pressure - Investors aren’t in the business of giving money for free - they expect a return on investment. This can lead to pressure in the short term to achieve profits and expansion, jeopardizing the long term goals of the business.
3. - Reduced Ownership - For founders raising multiple rounds of capital, the proportion of ownership will significantly reduce, influencing the amount of equity to be made. Although external investment can boost the growth of the business, it comes with a price.

By comparing the two, perhaps you already have an idea of which route to take for your business, but ultimately, choosing between bootstrapping or external funding depends on a range of factors. Understanding the dynamics of your particular industry, reflecting on your projected growth goals and acknowledging your personal tolerance for risk will all dictate which path is right for your startup. 

In the world of entrepreneurship, there is no ‘one shoe fits all’ for funding a startup. Both bootstrapping and seeking external capital come with their unique advantages and challenges. Whether you choose to go for the independence of bootstrapping or pursue the rapid scaling that external investments can bring, your decision should reflect the long-term vision you have for the company.