Bootstrapping Or Funding – What Will Work For Your Company?
Without a business case, even angel investors are reluctant to make an investment. This is especially true for India where investors are more conservative. They look for evidence before writing a cheque. A great concept alone, normally, is not enough here for most investors.
I have seen startups trying to persuade investors to invest in just the concept. Investors are in the business of risk capital and will only invest when they are able to make a reasonable determination that the business idea will give them a handsome return.
If you do succeed getting the ear of an investor to a great concept, the question that comes up early on is – what’s your skin in the game. You need to have a good and convincing answer to this question. There will be an investor who will agree to finance even a paper concept. but the business case must be successfully made.
The next hurdle to startups is to persuade the investor to agree to a less one-sided term sheet. Most initial round of funding have one sided term sheets where the founder signs on the dotted line. The startup therefore needs to make out a case that the sweat equity that you bring to the table, when supported by funds, will yield, in due course, a handsome return to the investor.
Funding is generally theme based. There are some investors who look to fund social projects. Social project funding is different from commercial startup funding. A track record of the founder in social service may be enough to secure an initial round of funding from a social causes fund. I have come across an engineering startup with an engineering concept that would help the disabled secure an initial round of funding.
Most startups require bootstrap capital before securing the initial funding round. The question to my mind, for most Indian startups is not choosing between bootstrapping capital and funding but how to make the capital available with them last through the concept preparation and testing phase.
The strategies for making the bootstrap capital last long enough will vary from concept to concept. For instance, in the technology space, I have seen startup founders pooling together skills of friends to get a first rough cut of the product ready. They test their concept on friends and acquaintances and create a skeletal data set that demonstrates the marketability of their project. A garage tested concept then can be pitched to an angel investor.
If the marketability of the concept has been pilot tested, then the chances of getting an initial round of funds is quite high. Remember, the investor is in the business of risk capital. If he sees a potential which over the years will give him an attractive rate of return but also compensate his risk capital cost, he will invest.
It is a dream for most startups to secure funding. Yes, funding does help in giving a major push to the startup but getting it too early in the business cycle is not necessarily a good thing. Bootstrapping is a critical first step in a startups journey to success. It is at the pre-funding stage when the foundation of a successful startup is laid. I would therefore vote for bootstrapping capital preceding going for a funding round. But, if you are social causes startup then, the rules of investing game are different.
