Are You Bootstrapping or Raising Money

To succeed as an entrepreneur, what strategy should you follow? Is it better to raise money and grow a business, or to scale it up? Rob and Chris Taylor are powerhouse brother duos who are successful entrepreneurs in both fields.

In 2006, Chris started Square Root to help OEM field managers understand and act on new data patterns and opportunities for retailers. CDK Global bought the company, and Chris became Vice President and General Manager.

His brother Rob Taylor founded Austin-based Convey, which was acquired by project44 for $255 million. The Convey platform powers more than 2,000 brands’ direct-to-consumer deliveries.

Interestingly, Chris & Rob took very different startup paths but ended up at the same place.

It took Chris 17 years to bootstrap and scale a single startup and he never took a dime from anywhere else. Rob, on the other hand, raised money for seven startups over 20 years.

In this article, we dig into the pros and cons of both paths.

Having seen the Taylor brothers’ success in building, scaling, and selling businesses, I wanted them to share their experiences. Among the topics we’ll discuss are entrepreneurship, acquisition deals, IPOs, bootstrapping vs. raising money, and VC partnerships.

You will want to watch this episode of The Lifestyle Investor Podcast. 

There are two ways to be an entrepreneur.

Starting a business means deciding whether to bootstrap or raise money. Depending on your goals and circumstances, each approach has pros and cons.

Bootstrapping.

A bootstrapped business starts without any outside investment and grows without any outside help. Basically, you’re financing your company with your own savings, sweat equity, etc. Starting a business alone can be challenging. However, you have more control over how it unfolds.

For 17 years, Chris bootstrapped a startup without taking outside money, and it owned the whole company except for what he gave his employees.

The pros of bootstrapping:

• More control. You keep 100% ownership and control when you bootstrap. That means you don’t have to deal with investors or worry about meeting their expectations.
• Less risk. With bootstrapping, you don’t have to take on debt or give up equity. By doing this, you’ll be able to reduce your financial risk and avoid making bad decisions.
• More flexibility. If you bootstrap your business, you don’t have to consult investors about decisions. When making quick changes or pivoting your business, this can be helpful.

The cons of bootstrapping:

• Slower growth. Your business’s growth can be slowed down by bootstrapping. Investing in marketing, sales, and other growth initiatives is harder since you don’t have as much money.
• More stress. It can be stressful to bootstrap. Your job will require you to wear a lot of hats and do a lot of things yourself. When you’re not used to it, it can be overwhelming.
• Limited resources. Your resources are limited when you’re bootstrapping. Investing in new products and services or expanding into new markets can be difficult.

Raising Money

Another way to fund your startup is to raise money from investors. Doing this allows you to expand your business faster and reach a wider market. The downside is giving up equity in your company and answering to investors.

In Rob’s case, he’s done this from the start, which is to raise money, leverage other people’s money, in this case, venture capital, and invest ahead of traction. Basically, it’s “go big, go fast,” and he used that to launch seven startups over the last 27 years.

The pros of raising money:

• Faster growth. Your business can grow faster if you raise money. The reason for this is that you’ll have more money to invest in marketing, sales, and other growth tactics.
• Access to expertise. Often, investors are business people who can advise and guide you.
• Increased credibility. You’ll gain credibility with customers, partners, and other stakeholders by raising money from investors.

The cons of raising money:

• Loss of control. Raising money means giving up equity. In other words, investors get to choose how your business runs.
• Debt or dilution. Your ownership share may be diluted if you take on debt from investors. In the future, it might be harder to exit your business because of this.
• Time commitment. Fundraising can take a lot of time. You must prepare pitch decks, meet investors, and answer questions.

It’s up to you whether to bootstrap or raise money. There’s no right or wrong answer, depending on your circumstances and goals.

Consult with other entrepreneurs, mentors, and advisors if you’re unsure which option is right for you. By weighing the pros and cons of each approach, you can decide what’s right for you.

Bootstrapping vs. Venture Capital.

Whenever we talk bootstrap vs. VC, people always ask, “Who’s winning?” says Chris. The answer is never apparent, or obvious at any given time.

There are a few differences between bootstrapping and venture capital.

• Control. You’re in control of your business when you bootstrap. No one else has to answer you, and you don’t need investor approval for your decisions. For venture capital, you give up some control. Major decisions, like hiring and firing, product development, and marketing, are typically made by investors.
• Risk. If your business fails, it’s only you who loses money. Investing in venture capital only puts you at risk for the money you put in. If your business fails, investors will lose money.
• Growth. In general, bootstrapped businesses grow slower than venture-backed firms. Due to the lack of money available to invest in marketing, sales, and product development, bootstrapped businesses usually have fewer resources. A venture-backed business can grow faster because it has access to more funding.
• Time to market. Because bootstrapped businesses grow slowly, they typically take longer to hit the market. However, with more capital, venture-backed companies can reach the market faster.

To select the right option for you, you must consider your own circumstances and goals. Bootstrapping may be a good option if you want to retain full control of your business and are comfortable taking on more risk. Venture capital may be a better option if you want faster growth and are willing to relinquish some control.

How do you make a startup fundable?

As an entrepreneur, it’s essential to keep the end in mind. If you want to exit your company within a short period of time, you will make different decisions regarding the profitability of your company, how you reinvest it, how much you raise or wish to raise, what your marketing campaign might look like, and which venture capital firms you may approach. As opposed to if you want to build something slowly over time or if you only want a lifestyle business.

In light of that, several factors contribute to a startup’s funding ability. Among them are:

• A strong team. An investor wants a proven track record of success from the startup’s leadership team. In addition, they want to know that the team members have the necessary skills and experience to implement the plan.
• A large market opportunity. The startup must address a large and growing market to attract investors. In other words, this suggests that the business has a good chance of success and profit.
• A unique product or service. Investing in a startup requires that the company offers something new and unique from the competition. Businesses can benefit from this competitive advantage and succeed as a result.
• A sound business model. Startups must have a clear business model that is viable and scalable. A business plan shows how it plans to make money and generate revenue.
• Demonstrable traction. Startups should have already achieved some success before appealing to investors. You might achieve this by building a strong user base, generating early sales, or creating a working prototype.
• A clear exit strategy. It is essential for investors to know that they will be able to get their money back from an investment, usually through an IPO or acquisition.

Aside from these factors, investors will also consider the startup’s financial projections, the team’s fundraising history, and the market’s general state.

Do startups really need a lot of money?

No, startups do not need a lot of money to succeed. The fact is that many startups have been successful without much funding. However, it is important to note that some startups require a large amount of funding to get started, especially if they are developing a new product or technology.

In order for a startup to succeed, several factors must be considered:

• The industry in which the startup operates.
• The market size that the startup is targeting.
• A startup’s current stage of development.
• A description of the startup’s business model.

For startups, raising enough money to cover their expenses for 12 months is a good idea. As a result, their businesses will be able to get started and generate revenue before the end of the year.

As with any rule, there are always exceptions. There have been some startups that have succeeded without much money. On the flip side, some startups raise millions and fail.

Rob says it is false to believe that you should raise as much money as possible. When you raise money, Rob thinks you can do so at a higher valuation so that the next time you raise money, there will be less dilution, and the next set of milestones will also make your company more valuable. When you raise a lot of cash at a highly inflated value, he adds that you create a hurdle for yourself that is often impossible to overcome if your business has hiccups.

What to look for in a VC.

Picking the right VC and forming a partnership with them is crucial. It is, therefore, important to keep these things in mind when looking for a venture capitalist (VC):

• Investment thesis fit. Consider the VC’s investment philosophy and stage of development in relation to your company’s goals. In the case of an early-stage company with the potential for rapid growth, you’d want to go after a VC that supports seed and Series A funding.
• Track record. Research VCs with experience investing in your industry and look for those with a successful track record. This information can be found on the VC’s website, in their investment portfolio, or industry publications.
• Experience. Seek out investors with experience in your industry or similar business models. As your business grows, it can offer you valuable insights and guidance.
• Network. If you’re raising additional capital, hiring key employees, or finding strategic partners, a VC with a strong network of contacts will significantly help you.
• Chemistry. Based on Rob’s experience, you want to pick the partner who will serve on your board of directors and have chemistry with them.
• Commitment. Can the VCs help your company succeed by investing the time and resources it needs? What is their commitment to long-term partnership?

Ultimately, the best way to find a venture capitalist is to research and speak with other entrepreneurs who have raised money. You can find the right VC for your company by asking the right questions and performing due diligence.

Mentors, coaches, and board of advisors — oh my!

Several valuable resources can assist you in achieving your goals, including mentors, coaches, and boards of advisors. There are, however, differences in their responsibilities and roles.

• Mentor. A mentor can provide guidance and support as you strive toward your goals. Typically, they have more experience in your field than you do, so they can offer insight and advice to help you avoid pitfalls.
• Coach. Coaches help people improve certain aspects of their performance. To help you reach your maximum potential, they usually use techniques such as goal setting, visualization, and feedback.
• Board of advisors. A board of advisors can give you different perspectives and insights when making career or business decisions. Whether experts in your field, successful entrepreneurs, or trusted and respected people, they can be a great resource.

If you are looking for mentors, coaches, or advisors, here are some tips:

• Make connections with people in your field. Identify mentors, coaches, and board members among your friends, family, and colleagues.
• Attend conferences and events related to your industry. In addition to meeting new people, this is a great way to discover potential mentors, coaches, and board members.
• Check out online mentorship programs. Mentors and mentees can connect on some online platforms, such as Growth Mentor or Clarity.
• Get in touch with people you admire. Don’t be afraid to approach a successful person in your field and ask if they are interested in mentoring you.

You should interview potential mentors, coaches, or board members after you have found a few potential candidates. Ask them about their mentorship, coaching, and advising experience, goals, and style. Additionally, you should make sure that you are comfortable with them and that they can be trusted.

You may find a mentor, coach, or advisor invaluable on the journey to success. If you invest time and effort into an effective relationship with the right people, you can gain the support, guidance, and insights you need to succeed.

Making the switch from entrepreneur to investor.

Most entrepreneurs don’t understand this since they have had a lot of success, especially in ecosystems where many other successful entrepreneurs are involved. By doing so, you significantly increase your chances of success.

But how do you become an investor after being an entrepreneur? To make the transition from entrepreneur to investor, follow these tips:

• Take the time to research. Investing can be risky and rewarding, but before you start, it’s worth learning as much as you can about the types of investments available. Online courses, books, and websites are all resources that can help you.
• Put together a strategy. Having learned the basics of investing, you need to develop a capital allocation strategy. Depending on your goals and risk tolerance, this will vary from person to person. Investing in established companies may be more attractive to some investors than investing in startups in their early stages.
• Establish a network. Developing a network of contacts in the business world is a great way to find investment opportunities. A number of investors, business leaders, and entrepreneurs fall into this category. Connect with people on LinkedIn, attend industry events, and join relevant organizations.
• Don’t lose patience. The game of investing is long-term. In other words, you won’t get rich overnight. Building a successful investment portfolio takes time. In order to achieve your financial goals, you should be patient and disciplined with your investments.

Entrepreneurs who are considering investing should also consider the following:

• You can use your entrepreneurial experience to your advantage. Being an entrepreneur gives you a unique perspective when evaluating investment opportunities.
• In some cases, you may have access to deal flow that is not available to the general public. Entrepreneurs are often in touch with other entrepreneurs looking for investors. By knowing other entrepreneurs looking for investors, you can find the most attractive investment opportunities.
• Investing in companies may enable you to provide value-added services. Your background as an entrepreneur includes knowledge of product development, marketing, and sales. By using this knowledge, you can help invest in companies to grow and succeed.

When transitioning from entrepreneur to investor, there are also some challenges to consider. It is possible that you will miss the excitement of running your own business every day, for example. As an investor in startups, you may also experience an emotional rollercoaster.

Being an entrepreneur and an investor are both rewarding experiences. Your knowledge can help other businesses succeed if you have the skills and experience. But, as Chris says, it’s also kind of a different way of thinking about risk.

The key to happiness isn’t a BIG exit.

That’s right. Happiness doesn’t come from a big exit for entrepreneurs. Most entrepreneurs find the journey of building a successful business more rewarding than the end result.

There are several reasons why a BIG exit won’t bring you happiness:

• There is more to happiness than money. There are other sources of happiness besides financial success. In contrast to those who are solely motivated by money, entrepreneurs who are passionate about their work and find meaning in what they do will often be happier in their jobs.
• Entrepreneurship is a journey. The race to the finish line is not a sprint. Throughout the process, you learn, grow, and face challenges. Those who enjoy the process of building a business and watching it grow are more likely to be happy.
• Giving back brings happiness. Making a difference in the world or giving back to the community is something many entrepreneurs find satisfying. Making a positive impact through their business gives them a sense of purpose and satisfaction they can’t find in a big salary.

Having a BIG exit is undoubtedly nothing to be ashamed of. However, happiness isn’t the only measure of success for entrepreneurs truly seeking it. In many ways, building a successful business can be even more rewarding.

Featured Image Credit: Photo by Tima Miroshnichenko; Pexels; Thank you!