Bootstrapping is an organic process of growing a business by gaining customers who provide the funding needed to start up and grow. Venture capital is the opposite, where the company gets initial funding from investors who believe in one’s idea.
Bootstrapping is effective for companies operating in established and existing markets with lower entry barriers. Where venture capital is more suited when companies need to develop whole new markets, no customers are ready to finance it.
A hybrid approach also works in newly formed markets, where a company can gain initial traction through bootstrapping and get funding allocated for growth.
Aspect
Bootstrapping
Venture Capital
Definition
Bootstrapping is a self-funding approach where entrepreneurs use their own savings or revenue generated by the business to fund its growth, often avoiding external financing.
Venture Capital (VC) involves external investors providing capital in exchange for equity in early-stage or high-growth startups, aiming to achieve significant returns.
Ownership & Control
Entrepreneurs retain full ownership and control of the business, making all major decisions without external influence.
VC investors typically acquire equity shares, leading to shared ownership and influence over strategic decisions.
Risk & Reward
Entrepreneurs bear the entire financial risk but also have the potential for maximum rewards, as they retain all profits and equity.
VC investors share the financial risk but expect substantial returns on their investments, potentially through a successful exit strategy.
Funding Source
Bootstrapped businesses rely on personal savings, revenue generated by the business, or loans from friends and family.
VC-backed startups receive funding from venture capital firms, which pool resources from multiple investors.
Speed of Growth
Growth may be slower due to limited resources, as entrepreneurs reinvest profits to fund expansion gradually.
VC-funded startups can often achieve rapid growth by injecting significant capital into marketing, hiring, and scaling operations.
Capital Available
Capital is typically limited to the entrepreneur’s savings, revenue generated, or small loans, which may constrain expansion possibilities.
VC-backed startups have access to substantial capital that can fuel aggressive growth strategies, acquisitions, and market penetration.
Control Over Decisions
Entrepreneurs have full autonomy over decision-making, allowing them to align the business with their vision and values.
VC investors often have a say in major business decisions, potentially leading to conflicts if their interests diverge from the founder’s vision.
Exit Strategy
Exit options for bootstrapped businesses may include organic growth, acquisition, or remaining a lifestyle business, with decisions driven by the founder’s preferences.
VC-backed startups often have an exit strategy that aims for a high-value acquisition or an initial public offering (IPO), providing returns to investors.
Profitability Focus
Bootstrapped businesses tend to prioritize profitability from the start to ensure sustainability and cover operational expenses.
VC-backed startups may focus on growth and market share capture initially, often foregoing profitability to achieve scale.
Investor Relationships
Bootstrapped entrepreneurs do not have external investors, leading to fewer formal reporting requirements and interactions.
VC-backed startups maintain relationships with investors who may require regular updates and involvement in strategic decisions.
Use Cases
Common in lifestyle businesses, small startups, and industries with lower capital requirements where founders prefer independence.
Prevalent in technology, biotech, and high-growth sectors requiring substantial investment in research, development, and market expansion.
Control vs. Resources
Prioritizes control and autonomy over the business, even if it means limited access to external resources.
Emphasizes access to significant resources and expertise, often at the cost of ceding control to investors.
Founder’s Financial Risk
Entrepreneurs shoulder the full financial risk of the business but are not beholden to external parties for returns.
VC-backed founders share the financial risk with investors but face pressure to deliver high returns to secure future funding rounds.
Profit Distribution
Profits belong entirely to the founders and can be reinvested or distributed as they see fit, subject to tax considerations.
VC investors seek a share of future profits, often through capital gains upon exit, making them stakeholders in the company’s success.
Scalability Challenges
Bootstrapped businesses may face challenges in scaling rapidly due to limited capital, potentially missing market opportunities.
VC-backed startups can quickly scale operations and seize market opportunities but may also experience pressure to grow aggressively.
Impact on Culture
Entrepreneurs maintain full control over company culture and values, shaping them to align with their vision.
VC-backed startups may experience changes in culture as investor-driven objectives may influence company priorities.
Decision-Making Speed
Entrepreneurs can make decisions quickly due to the absence of external stakeholders, potentially leading to agility and adaptability.
VC-backed startups may require consensus-building among investors, which can slow down decision-making processes.
Examples
– Small local businesses. – Freelancers and consultants. – Lifestyle brands. – Some tech startups in the early stages.
– Tech startups with high growth potential. – Biotech and pharmaceutical companies. – Innovative ventures in emerging markets.
An entry strategy is how an organization can access a market based on its structure. The entry strategy will highly depend on the definition of potential customers in that market and whether those are ready to get value from your potential offering. It all starts by developing your smallest viable market.
The general concept of Bootstrapping connects to “a self-starting process that is supposed to proceed without external input.” In business, Bootstrapping means financing the growth of the company from the available cash flows produced by a viable business model. Bootstrapping requires the mastery of the key customers driving growth.In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).When entering the market, as a startup you can use different approaches. Some of them can be based on the product, distribution, or value. A product approach takes existing alternatives and it offers only the most valuable part of that product. A distribution approach cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.
Similarities between Bootstrapping and Venture Capital:
Funding for Growth: Both bootstrapping and venture capital are methods of obtaining funding to support business growth.
Market Entry: They can be used as market entry strategies for startups and new businesses.
Investment in Ideas: Both approaches involve investors believing in the potential of the business idea or concept.
Financial Support: They provide the necessary financial resources to scale and expand the business.
Differences between Bootstrapping and Venture Capital:
Funding Source:
Bootstrapping relies on self-funding through available cash flows and revenue generated by the business itself.
Venture capital involves raising external funding from investors who invest in the business.
Risk and Control:
Bootstrapping is lower-risk as the business owner maintains full control and ownership but may have limited access to substantial capital.
Venture capital involves sharing ownership and control with external investors, which can provide significant capital but also dilutes ownership.
Suitability for Market Type:
Bootstrapping is effective for companies operating in established and existing markets with lower entry barriers.
Venture capital is more suited for companies needing substantial funding to develop new markets or innovative ideas.
Customer-Funded vs. Investor-Funded:
Bootstrapping relies on customer revenue and growth to fund the business’s development.
Venture capital relies on investors’ capital to fund the business’s growth and expansion.
Flexibility and Independence:
Bootstrapped companies have more flexibility in decision-making and are not tied to investor expectations.
Venture-backed companies may face more pressure to meet investor expectations and milestones.
Traction and Validation:
Bootstrapping often requires early validation and traction in the market before significant growth can occur.
Venture capital may be attracted to early-stage startups with high-growth potential and promising ideas.
Applicability in Emerging Markets:
Bootstrapping can work well in established markets with existing customer bases.
In newly formed markets, a hybrid approach may be more suitable, combining bootstrapping for initial traction and funding from venture capital for growth and expansion.
Bootstrapping Examples:
Basecamp: A project management and team collaboration software. Started by Jason Fried and his team, they never took external funding and grew by reinvesting the profits.
Mailchimp: An email marketing service provider. Founded by Ben Chestnut and Dan Kurzius, it has never accepted venture capital or external funding, and is now worth over a billion dollars.
TechSmith: Makers of Snagit and Camtasia, the company has been around since the 1980s. They grew organically without the need for outside investment.
Shutterstock: Founded by Jon Oringer, who bootstrapped the company by taking 30,000 stock photos himself and launching the platform.
Venture Capital Examples:
Facebook: In its early stages, Facebook received a $500,000 investment from Peter Thiel, which played a crucial role in its growth.
Uber: The ride-hailing company secured millions in venture capital funding in its early days, which allowed it to expand rapidly across the globe.
Airbnb: Before becoming a global platform for lodging rentals, Airbnb raised significant amounts of money from investors like Y Combinator and Sequoia Capital.
Snapchat: The social media platform secured venture capital funding early on, helping it grow and eventually go public.
Hybrid Approach Examples:
GitHub: Initially, the platform was bootstrapped by its founders. Later on, when they saw a significant growth opportunity, they raised venture capital to scale even further.
Shopify: The e-commerce platform began as a bootstrapped venture but eventually raised venture capital to accelerate its growth and expansion.
Atlassian: The company behind JIRA and Trello initially bootstrapped their operations. Later, they raised venture capital to expand further before going public.
Key Highlights
Definition:
Bootstrapping: Organic growth using customer funds.
Venture Capital: Initial funding from investors.
Suitability:
Bootstrapping: Best for established markets with low entry barriers.
Venture Capital: Ideal for developing new markets without existing customer financing.
Hybrid Approach: Useful in newly formed markets; start with bootstrapping then venture capital for growth.
Market Entry Strategy:
Strategy depends on potential customers in the market.
It begins by defining the smallest viable market.
Concept of Bootstrapping:
A self-starting process with no external input.
Finances growth from cash flows of a viable business model.
FourWeekMBA Growth Matrix: Grow by tackling problems in gain, expand, extend, or reinvent modes.
Market Entry Approaches for Startups:
Product Approach: Offer the most valuable part of existing alternatives.
Distribution Approach: Remove intermediaries.
Value Approach: Offer the most valuable part of the experience.
Similarities between Bootstrapping and Venture Capital:
The circle of competence describes a person’s natural competence in an area that matches their skills and abilities. Beyond this imaginary circle are skills and abilities that a person is naturally less competent at. The concept was popularised by Warren Buffett, who argued that investors should only invest in companies they know and understand. However, the circle of competence applies to any topic and indeed any individual.
Economic or market moats represent the long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.
The Buffet Indicator is a measure of the total value of all publicly-traded stocks in a country divided by that country’s GDP. It’s a measure and ratio to evaluate whether a market is undervalued or overvalued. It’s one of Warren Buffet’s favorite measures as a warning that financial markets might be overvalued and riskier.
Venture capital is a form of investing skewed toward high-risk bets, that are likely to fail. Therefore venture capitalists look for higher returns. Indeed, venture capital is based on the power law, or the law for which a small number of bets will pay off big time for the larger numbers of low-return or investments that will go to zero. That is the whole premise of venture capital.
Foreign direct investment occurs when an individual or business purchases an interest of 10% or more in a company that operates in a different country. According to the International Monetary Fund (IMF), this percentage implies that the investor can influence or participate in the management of an enterprise. When the interest is less than 10%, on the other hand, the IMF simply defines it as a security that is part of a stock portfolio. Foreign direct investment (FDI), therefore, involves the purchase of an interest in a company by an entity that is located in another country.
Micro-investing is the process of investing small amounts of money regularly. The process of micro-investing involves small and sometimes irregular investments where the individual can set up recurring payments or invest a lump sum as cash becomes available.
Meme stocks are securities that go viral online and attract the attention of the younger generation of retail investors. Meme investing, therefore, is a bottom-up, community-driven approach to investing that positions itself as the antonym to Wall Street investing. Also, meme investing often looks at attractive opportunities with lower liquidity that might be easier to overtake, thus enabling wide speculation, as “meme investors” often look for disproportionate short-term returns.
Retail investing is the act of non-professional investors buying and selling securities for their own purposes. Retail investing has become popular with the rise of zero commissions digital platforms enabling anyone with small portfolio to trade.
Accredited investors are individuals or entities deemed sophisticated enough to purchase securities that are not bound by the laws that protect normal investors. These may encompass venture capital, angel investments, private equity funds, hedge funds, real estate investment funds, and specialty investment funds such as those related to cryptocurrency. Accredited investors, therefore, are individuals or entities permitted to invest in securities that are complex, opaque, loosely regulated, or otherwise unregistered with a financial authority.
Startup valuation describes a suite of methods used to value companies with little or no revenue. Therefore, startup valuation is the process of determining what a startup is worth. This value clarifies the company’s capacity to meet customer and investor expectations, achieve stated milestones, and use the new capital to grow.
Profit is the total income that a company generates from its operations. This includes money from sales, investments, and other income sources. In contrast, cash flow is the money that flows in and out of a company. This distinction is critical to understand as a profitable company might be short of cash and have liquidity crises.
Double-entry accounting is the foundation of modern financial accounting. It’s based on the accounting equation, where assets equal liabilities plus equity. That is the fundamental unit to build financial statements (balance sheet, income statement, and cash flow statement). The basic concept of double-entry is that a single transaction, to be recorded, will hit two accounts.
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The income statement, together with the balance sheet and the cash flow statement is among the key financial statements to understand how companies perform at fundamental level. The income statement shows the revenues and costs for a period and whether the company runs at profit or loss (also called P&L statement).
The cash flow statement is the third main financial statement, together with income statement and the balance sheet. It helps to assess the liquidity of an organization by showing the cash balances coming from operations, investing and financing. The cash flow statement can be prepared with two separate methods: direct or indirect.
The capital structure shows how an organization financed its operations. Following the balance sheet structure, usually, assets of an organization can be built either by using equity or liability. Equity usually comprises endowment from shareholders and profit reserves. Where instead, liabilities can comprise either current (short-term debt) or non-current (long-term obligations).
Capital expenditure or capital expense represents the money spent toward things that can be classified as fixed asset, with a longer term value. As such they will be recorded under non-current assets, on the balance sheet, and they will be amortized over the years. The reduced value on the balance sheet is expensed through the profit and loss.
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Financial modeling involves the analysis of accounting, finance, and business data to predict future financial performance. Financial modeling is often used in valuation, which consists of estimating the value in dollar terms of a company based on several parameters. Some of the most common financial models comprise discounted cash flows, the M&A model, and the CCA model.
Business valuations involve a formal analysis of the key operational aspects of a business. A business valuation is an analysis used to determine the economic value of a business or company unit. It’s important to note that valuations are one part science and one part art. Analysts use professional judgment to consider the financial performance of a business with respect to local, national, or global economic conditions. They will also consider the total value of assets and liabilities, in addition to patented or proprietary technology.
The Weighted Average Cost of Capital can also be defined as the cost of capital. That’s a rate – net of the weight of the equity and debt the company holds – that assesses how much it cost to that firm to get capital in the form of equity, debt or both.
A financial option is a contract, defined as a derivative drawing its value on a set of underlying variables (perhaps the volatility of the stock underlying the option). It comprises two parties (option writer and option buyer). This contract offers the right of the option holder to purchase the underlying asset at an agreed price.
A profitability framework helps you assess the profitability of any company within a few minutes. It starts by looking at two simple variables (revenues and costs) and it drills down from there. This helps us identify in which part of the organization there is a profitability issue and strategize from there.
The Triple Bottom Line (TBL) is a theory that seeks to gauge the level of corporate social responsibility in business. Instead of a single bottom line associated with profit, the TBL theory argues that there should be two more: people, and the planet. By balancing people, planet, and profit, it’s possible to build a more sustainable business model and a circular firm.
Behavioral finance or economics focuses on understanding how individuals make decisions and how those decisions are affected by psychological factors, such as biases, and how those can affect the collective. Behavioral finance is an expansion of classic finance and economics that assumed that people always rational choices based on optimizing their outcome, void of context.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
