Denice R. Preston
As an entrepreneur, how do you choose the best way to finance your startup and consider bootstrapping? Venture capital? Each has its advantages and disadvantages. A framework can help you compare both and determine the best way to start a business.
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Aspirations and reality
An interview with a businessman from Bangalore revealed an essential aspect of the startup sector in emerging markets such as India and perhaps elsewhere. For a long time, the needs of these countries were not well-served. The venture capital market was booming after a handful of fantastic success stories, and unicorns were born from the markets. There was suddenly excessive money being chased by the wrong ideas, and, in the end, many businesses were over-funding. Some shrewd business owners returned the funds to investors, saying that they did not make effective use of the money received because the money wasn’t helping them solve the issues in their business. Many continued in the direction of excessive spending without any results until they burned and crashed.
In the end, some of those overfunded companies could have had a chance to be small operators in their industry, perhaps even making enough profits to make the founders satisfied and wealthy, resulting in what we would call”a “lifestyle business.” However, the results were insufficient to justify the massive amount of capital they could acquire, which meant they were forced to suffer a costly death.
Speaking to other entrepreneurs, I’ve observed a particular perception of the negative impact that bootstrapping can bring to it. The common belief they generally hold is that if your business is becoming profitable too early, you’re not pushing yourself. Let me elaborate on their thought process if you’re making money before receiving a significant capital sum. You’re in trouble by not expanding the business quickly enough. It’s not always the case. This is, in fact, the kind of trap that has enticed many entrepreneurs into spending much more money than is necessary and putting their businesses in danger.
Trace Cohen at New York Venture Partners warns, “We, want to know if you strategy to make $50 million over the next five years. This means you’re an expert within your industry, and you’ve got amazing customers, and figured out something. Anything lower than that doesn’t merit our time. .”
Although different venture funds might differ in their criteria for a venture, this statement above will give us an idea of what VCs would like to see from an aspiring startup. Take a look at this report regarding the amount of revenue generated by startups worldwide for a better grasp of the actual situation.
Let’s be honest. Many ideas are not likely to grow into an unicorn or to be in the $ 100 million mark. Christoph Janz’s excellent analysis of creating a $100 million company is a valuable basis for understanding the kind of market and the number of customers you’ll need to reach to get there. However, this may not be attainable for every person, and there’s no shame in doing that. You could be a successful entrepreneur, having a flourishing business offering a niche product that is addressing a 100 million market, earning $10 million in revenue, and striving to reach a goal of 30 million. You might not be the right candidate for a venture capitalists are seeking to fund. However, you could run a profitable and satisfying business with satisfied employees. I have worked with as well and worked for many similar-sized companies in the field of market research and consumer insights field.
The likelihood of launching the idea of a startup is already a considerable achievement, given the probability of success. The highest rungs of the ladder, however, is highly unlikely. Many VCs will pressure you to make it there and say, “Go big or go home.” If you think that you have the potential to create a profitable startup within the $10-100 million range, however, not necessarily with the capacity to rise the ladder and reach the top, you could benefit yourself by doing a bootstrapping. This can reduce external pressures on your spending and accelerate growth, thereby significantly improving your odds of survival.
A Scorecard Method for Deciding Whether to Bootstrap
The potential revenue for your business is an important indicator of whether or not you’re an ideal candidate for venture financing. Still, it’s not the only factor that can aid entrepreneurs in deciding between fundraising via bootstrapping or crowdfunding. If you’re reading this blog, you’ve probably researched the subject extensively and may have heard conflicting opinions.
I consider scorecards to be simple tools to help move from a state of analysis to actionable insight.
With all the information we need to sort through, it is helpful to apply the knowledge and create a framework that can assist us in making a sound decision. We’re trying to develop a framework that will allow you to determine the most essential characteristics you have in your business, your financial requirements, and the character and abilities of your founders. This will help you decide whether you’re a suitable potential candidate to receive venture capital. This is similar to VCs’ checklist to determine whether businesses are ideal for their investment. Here’s an illustration from point Nine.
Naturally, in this process, you must think about the medium, short, and long-term goals, your market strategy approach, and, more importantly, what resources you’ll need to accomplish these goals. Here are some great tips from Fred Wilson on how much funds it is worth raising (if it’s the correct route for your company).
