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Bootstrapping vs Venture Capital: The ideal funding for your startup
Establishing a startup in India is not an easy feat to achieve. The first and foremost question is funding for your startup or concept.
Figuring out funding strategies can help you accomplish the most critical step of startup development, as it solves most other questions related to operations and execution and eases your establishment.
Entrepreneurs must make multiple financial decisions when building a startup in India. The first question is whether their startup requires funding, i.e. bootstrapping or venture capital funding for advancing operations.
Several startups are bootstrapped, such as "Zerodha" (1), and several startups that are accelerated by venture capital funding, such as "CRED" (2), and have still attained unicorn status.
There have also been startups in both categories that have shuttered.
Since there exist hurdles and problems on both sides, success depends on how contingent you are on the efforts and dedication toward your startup. But, to relieve you of some of the strain, we have highlighted all the elements of bootstrapping and venture capital.
All you need to do is sit back and read as we determine which startup funding is essential for you and help you distinguish the advantages and disadvantages.
So, let's now comprehend bootstrapping vs venture capital funding to help you differentiate and determine the answer to your first question.
What is Bootstrapping in the startup ecosystem?
Bootstrapping your startup means you "yourself" fund the capital for your startup rather than relying on funds from investors and accelerators, who may also acquire some equity in your startup in exchange for funding. When entrepreneurs bootstrap a startup in India, they do so with their personal capital or operating income.
Advantages of Bootstrapping your startup in India
The primary benefit is receiving all the perks associated with sole ownership. If you prefer to use personal financing, you will avoid having to sell shares. Hence, here are some advantages of bootstrapping your startup in India:
You get better control over the cash flow
If you don't have any investors to convince, bootstrapping provides you more flexibility over the development of your startup. This degree of independence allows you to focus more on establishing a solid foundation and refining your operations.
You obtain complete ownership rights
Bootstrapping is one of the most popular non-dilutive financing approaches. With no other entity, you and your co-founders will be the only individuals with ownership and shares in your startup.
You are in very limited debt
Bootstrapped startups in India could employ a credit card to establish their company credit or make a one-time transaction. One distinguishing feature is that bootstrapped firms in India do not rely on anyone other than themselves for their management.
Disadvantages of Bootstrapping your startups in India
It is a pleasing and promising way to launch a startup in India. But, it has drawbacks that we need to be aware of to determine whether we need to bootstrap for our startup or move forward with venture capital funding instead.
So, here are some disadvantages of bootstrapping your startup in India:
Financial backup risk
This is the most obvious risk arising because you are investing your money. You may be giving everything in and saving less or even some, but eventually, you are investing your own money, leaving little room for financial backup when an emergency comes.
When your company suffers a setback or an unexpected expense, bootstrapped businesses are more likely to endure a cash flow slow down or run out of money, forcing them to seek bank loans.
It indeed creates less credibility
Creating a brand or prototype requires backing from investors with financial experience. It becomes tough for bootstrapped startups in India to obtain the necessary contacts.
It becomes a bit more difficult for bootstrapped entrepreneurs to establish the environment according to their choice without contacts, direction, and even market introduction. You have to create a base for yourself, which may take years but is achievable.
Don’t expect a higher jump
It is not simple for bootstrapped businesses to achieve exponential growth. Because you will produce and focus on an MVP product, you will have less money to spend on search engines and other marketing operations.
80% of small startups in India, including some significant brands, are bootstrapped.
What is Venture Capital in the startup ecosystem?
A venture capital startup raises private equity or financing from investors for long-term operational assistance. Venture Capital can refer to capital or stakes in a business, and investors seek out and invest extensively in startups with the potential to impact society.
Advantages of Venture Capital for your startup in India
There are many benefits of acquiring venture capital investment for your business in India, which we will explore below, but to do so, you must have the finest "PITCH" to convince the investors (haha).
But anyways, here are some advantages of Venture Capital for your startup in India:
You get business advice from financial experts in the field
You get financial support, which is obvious. Still, you also get essential guidance and advice to help you with various business concerns, such as financial management, business operations, and human resources management.
You get additional benefits from being tied up with industry experts
Being connected to a well-known or established bull assist you in a variety of essential areas such as legal, personnel matters, or tax management since VC businesses have the best source and assistance for you with active support as they invest in your concept and understand that the faster the growth, the greater the success benefiting them.
Nepotism (you can say)
Venture capitalists certainly have a lot of connections that will help you acquire the best and reach the greatest possible audience and market, as simply tapping into these relationships will open several opportunities for you.
Disadvantages of Venture Capital for your startup in India
The advantages are certainly enticing and appealing to help you decide and decide on venture capital investment for your startup in India. But don't rush because we're about to review some of the drawbacks of venture capital funding in India, which may bring you back to bootstrapping.
Here are some disadvantages of Venture Capital for your startup in India:
You don’t control the majority of the operations but consult
The main drawback of Venture Capital funding is that you are given a lot of stimulants to push your limits, which is the cash or funds for which you would disrupt your sleep and work hard to satisfy the venture capitalists and their demand from your investment.
Since they're injecting funds, venture capitalists (VCs) want to be the consultant advising you with decisions and finally creating a complication for those with solitary ideas which rely on approvals and share different proposals every day, week, or month.
You don’t own it completely
It all relies on your company's Venture Capitalists' share level, which may be 50%, 40%, 30%, 20%, 10%, or even 70% or more or less. Eventually, you will lose some management or more control, and VC may yield complete control and ownership.
You just keep impressing the Venture Capitalists
As they spend such a huge sum on your startup idea, you should offer multiple expansion suggestions to Venture Capitalists, demonstrating your dedication and active growth as it is the most important factor in preserving your relationship with your funder.
This is a pro since it helps VCs notice your existence and provides some space and time for your operation if they are not. Still, it may become exhausting for you at some point because impressing VCs is fine, but struggling with yourself and your staff is not, which is why it is listed in the con list.
So, what should you do? Opt for bootstrapping or Venture Capital funding?
We have differentiated the core elements of bootstrapping and venture capital funding, as everyone does, so it is up to you to pick your approach and which choice to choose, which we will not do.
Regarding financing, bootstrapping and Venture Capital are separate types of business management and operational activities; VCs are just the investors who will assist your startup in growing with the necessary cash because not everyone can bootstrap.
It also has its own set of perks and downsides, as we described above, but after all, something is better than nothing, which is why many startups go for Venture Capital funding, which comes with a large investment to scale your startup.
If you believe your idea has the potential to "CHANGE," we recommend Venture Capital funding for those with limited financial resources. Yet, you are entirely responsible for your earnings regarding bootstrapping.
There is no partition of shares to additional funders, and you are the lone decision-maker, etc. However, we recommend this for individuals with a financial backup, great knowledge of credit, and quick crisis response.
Keep the word "PANIC" out of your dictionary regarding bootstrapping.