It's no secret that securing venture capital (VC) is a challenging endeavor. Even so, the sheer volume of headlines announcing a VC-backed startup's overnight success paints an unrealistic picture for entrepreneurs about the true level of difficulty in securing investor funding. According to the Small Business Administration, the number of startups funded by VCs in 2012 was an abysmal 300 of the approximately 600,000 new businesses started in the U.S., that means 99.95 percent of entrepreneurs did not gain access to VC for their new businesses that year.
But entrepreneurs don't let a little thing like going against the odds get in the way of following their dreams. At the same time, not every entrepreneur's vision of success depends on a financial backer.
I had the opportunity to gain insights from several industry experts and SME/startup executives about their own reasons for advising businesses to pursue VC despite all odds, or to bootstrap and forego external financial security in favor of greater autonomy. Here's what they had to say on the subject:
Seth Farbman, founder and CEO of eSignatureGuarantee, touts the benefits of forced frugality associated with a bootstrap model. "In the early days, our office structure consisted of a few small offices. When a large client approached us on a Friday and asked to come in-house to utilize our large conference facilities, we had a small construction crew come in for the entire weekend and knock down some walls to provide us with a presentable large conference facility to host our new clients. That hustle comes from a bootstrap mentality without access to a large expense account found with the VC route."
Chris Mackey, founder and CEO of MackeyRMS, said that for his business, venture capital would only get in the way. "Securing VC funding is an unnecessary distraction; I wasn't sure outside capital could get us where we needed to go any more quickly. We knew who we should be targeting, and that we could differentiate through mobility and automation. All we needed to do was hustle." He went on to emphasize the strong sense of pride in ownership he experiences thanks in part to his choice. "We're not here playing office with other people's money, we've risked everything to build a successful company from the ground up."
Venture capital proponents
Alexander Koles, investment banking expert and managing director at Evolve Capital Partners, purports that VC provides financial stability to startups that enhances their chances of success. "Having a qualified VC with deep expertise in SME lending adds tremendous stability." He also believes going it alone can be prohibitively difficult for small businesses. "A larger VC can help provide SMEs the capital for the risk retention aspects, while bootstrapping to do this would be very hard."
Ryan Ràfols, founder and CEO of Newchip, makes the point that although bootstrapping grants companies full control of their business, the tradeoff can be obscurity. "As is often said, 'I'd rather own 5 percent of Facebook than 100 percent of an unknown.'" He also emphasizes that just because a company has funding does not mean it's careless with it. "We've worked hard for every dollar and made each one count as if it were ten."
Supporters of something in-between
Robert Fifield, co-founder of Payably, opted for a third option when pursuing a financial strategy for his business: private funding. He explained the reasoning behind his choice by saying, "There are relationships and industry experience that often accompany VC funding. But then you give away your business before you start. We also considered the complete freedom of bootstrapping in our basement--but then you could end up owning 100 percent of nothing. Private funding meant we had other people to answer to, but it also meant we had certain freedoms. We chose investment partners whom we trust, admire, and most importantly respect. And they gave us the room to run."
Eric Frank, SME executive advisor and operating partner, saw both sides of the coin. "On the positive side of taking a funding round, a VC would articulate that the funds provided can accelerate growth and enable the business to move faster and farther along than without the funds. On the flip side, institutional funding comes at a price and perhaps the non-financial benefits are not as relevant."
When considering whether to pursue VC or to begin your business on a shoestring budget, take into consideration the experiences of entrepreneurs and professionals who have come to the same crossroads. Their stories may just save your business a handful of wrong turns and help you plant your feet firmly on the path to success.