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BOOTSTRAPPING

Why You Don't Need Venture Capital

Young entrepreneurs often pursue funding first, product second. That's a dangerous path--and it won't do your company much good.

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So often, young entrepreneurs think the viability of their fledgling company depends on their ability to intrigue investors and raise capital. But the truth is, raising capital is often a pipe dream.

Don't get discouraged, though: Raising capital should be the least of your concerns.

The reality is, no bank will give you a loan. Their cash flow has dropped in recent years; as a result, they deny more than 90 percent of small business loan applications. And pitching your company to venture capitalists is about as effective as chasing clouds. With an ever-expanding pool of entrepreneurs to invest in, VC firms have become increasingly choosy in deciding which companies are worth cultivating.

Better to Bootstrap

Simply put, it's not enough to be another guy with a great idea. What will separate your company from others is the quality of your product--not the money you have backing you. Bootstrapping your company is a must, not a choice.

Day one for your company should be about discovering how you can develop your great idea with the limited capital you currently have; you can build incrementally from there. A company’s true value--especially a young one’s--is measured by the quality of the product or service, not in terms of dollars.

Giving Up Equity

Self-funding a start-up may seem daunting and counter-intuitive, but the return on investing your own money into your venture is far higher than receiving third-party capital during your company’s infancy. Here's why: In the rare case that your idea seems so lucrative that you receive a substantial amount of capital up front, your equity will be dramatically diluted. And if your company does achieve the success, the money you earn will never equal the time and effort you put into building your company into the publicly traded powerhouse it will (hypothetically) become.

This is not to say that capital is not an integral part of expanding your company. Correctly timed angel and venture capital investments will at one point become vital.

But what many fail to realize is that your company will fail if raising money is your sole focus. Capital acquisition should be an incremental process. -As told to John McDermott

IMAGE: Adam Gault/Getty
Last updated: Feb 23, 2012

BRIAN HAMILTON is the co-founder and chairman of Sageworks, an Inc. 500 honoree. Hamilton is an original co-developer of FIND (Financial Information into Narrative Data), which converts financial numbers into plain language.




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