THE BLOG
06/03/2013 08:24 am ET Updated Aug 03, 2013

Funding Your Small Business: Bootstrapping vs. Venture Capitalists

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Business analysts and advisers often tell newly-minted entrepreneurs that when it comes time to find funding, focus on asking friends, family, and fools. The reasoning behind this wise counsel is that, if things go south with your new business, you won't be on the hook for a huge loan taken from an unfeeling, unremorseful bank. There are a few ways for a new company to avoid the bank and raise start-up capital without hassling friends and family for money. For companies built on novel, often high-tech, ideas, there is the venture capitalist -- an investor willing to provide a business with the money they need on the assumption that, later on down the road, the business will do well enough to provide a substantial return on that investment. But is this the path that new businesses should follow? Or should they look within the business and keep it afloat without outside help?

Pulling yourself up by the bootstraps
More than just a popular conservative political talking point, 'bootstrapping' essentially means cutting everything out of your business but the bare necessities, and using your personal finances to make ends meet. It's also a largely internal process, and requires the business owner to pinch every single penny taken out of the till and put into the business. What this effectively does is force you to really take into consideration every business decision you make. After all, one bad investment and you might not have the money to keep things running. While the image of the miserly business owner has become a bit of a cliché (thanks, Scrooge), an entrepreneur that is careful with their money is admirable. And since so much of this money will be coming from customers, the business can continue to focus on customer service without having to worry about the opinions or desires of investors. Running your own business is always a gamble, and sinking all of your money into it could put you in serious financial straits.

Cozying up to Venture Capitalists
Pitching your business to venture capitalists is another way to avoid having to beg the bank for a loan. If a venture capitalist, or a venture capital firm, likes your idea and think it will make some money down the road, you'll be able to raise the money you need without having to worry about paying it back. VC investing is fairly akin to gambling -- the payoffs can be huge, but you have to be willing to absorb the losses in between the wins. A large injection of capital can also help a new business to expand and grow much more quickly than it had originally planned. Be warned, however, that a VC investor or firm is not going to hand over their money, no strings attached. They want a share of your company, and will likely push for getting their own say in how things are run. Since they will now be considered partial owners, you will be legally obligated to seriously consider what they have to say. Ultimately this results in a trade-off -- quick money for less control.

So... which one is better to go with?
The answer depends on the industry your business is in and the opportunity you are pursuing. High tech industries evolve quickly, and if you cannot grow with the industry due to a lack of funds, it won't matter how many bootstraps you pull on. I will say this, though, as they owner of a business that originally began during the dot-com boom -- taking on a large investor can lead to a company stagnating as that investor weighs, evaluates, and focus groups the pros and cons of every change in the business. I bought the business back because we all felt like we simply couldn't continue in our industry under a corporate model - the company we were under was run by very good, smart people, but we needed to evolve more quickly than we were able to while run by them. So I mortgaged my house to buy the company and to ensure that business decisions would be made solely within the business. Finding VC investors takes a lot of time, and they are very picky when choosing a business to invest in. If you know that you need a substantial amount of money in order to make your business successful, and you don't mind spending a lot of time pitching your company to venture capitalists and firms, then venture capital funding is definitely an option. But, if you want to keep near-complete control of your business and can make the decisions necessary to keep a business afloat when it's tight, then it may be best to simply make do with what you have.

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