Does every startup need outside funding?
Absolutely not.
We can tend to get the idea from news reports and places like TechCrunch and Y Combinator that every startup has outside investor funding. But that is a misconception.
There are many successful businesses that don’t have investors. In fact, if you can bootstrap and build your company without one it is often better for the following reasons:
- You can spend your time on the business rather than looking for an investor. Finding funding takes a lot of time which is a distraction from growing the business. Sometimes the business even grinds to a halt.
- You will learn to manage your finances very well – because you have to. There is no spare cash for non-essentials and you will direct your $ to the growth of the business
- You retain full ownership of your startup
- Internal relations are a lot simpler
- You learn to be self-reliant
Good reasons for having an investor is if they can contribute something more than money to the business:
- They have relevant skills or experience they can use to give you wise advice
- They have contacts which can significantly more the business forward
Note that you may be able to find advisors who can do this for you who do not have to be investors.
The only reason you really need an investor is:
- You really need a large amount of money which is vitally necessary to grow the business. ie. You have large infrastructure or staff costs which are absolutely necessary to the operation of the business. (And I mean ABSOLUTELY necessary – ie. the business cannot operate without them.)
I wouldn’t be a big fan of finding an investor for under $25,000. Most entrepreneurial people should be able to find this amount without giving away equity. (It’s kind of an early test of your entrepreneurial abilities!)
However, one reason you might look for an investor at this early level is if you were going to be part of an incubator (like Y-Combinator or the like) which would give your startup a huge strategic advantage because of the added value the investor brings, such as mentoring, knowledge or networks.
Personally, I prefer an idea that can be bootstrapped or at least grown to a point where it has been proven and has a reasonable income. Then you have better leverage in doing a deal with investors, if you want to take them on to grow the company.
Originally published (in a slightly different form) in answer to this question on answers.startups.com
Image used under Creative Commons license courtesy of Justin Scott
If your start up needs $25,000 or less a better option than investors would be peer to peer lending, using Lending Club or Prosper. But I agree the best way is to bootstrap, that is how Subway got its start.
Peer lending is an interesting phenomenom – thanks for bringing it up. The advantage for an entrepreneur is you pay back the debt and still own the company. The disadvantage is you usually have to pay either interest to the lenders and/or a fee to the website facilitating the loan.
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If you need the funds to take you through the obtaining of “proof of concept” or to prove the market acceptance of your idea, there is a NEW financial vehicle that has been growing in its acceptance and success, to obtain those funds and it’s called Crowd Funding.
As an example, assume your business is presenting a new technically innovative product or service. Instead of an investor for equity, or a loan you have to pay back, consider Crowd Funding. We are launching our crowd funding site, FundaGeek – Crowd Funding for Technical Innovation, early next month. After you post your project on FundaGeek, you then promote it to your contacts through social networks, directing them to your project, seeking their pledges for rewards you offer. We’ll assist you in the promotion of your project to your social network and beyond. We are accepting project submissions now for our launch, no cost to you unless your successful in raising your needed funds. Check it out here http://goo.gl/7SqRt you can click there on a 90 second Intro Video and read our FAQ that should answer all questions.
Thanks for letting us know about your venture Cary. Good luck with it.
As a caution to entrepreneurs looking for funding – Make sure you get some strategic advice about what form/s of funding are right for your venture. This decision will have a big impact on the future of your business.
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