Whether you've been thinking about bootstrapping or raising venture capital from day one or you have no idea where to start, it's essential to understand your funding options early on, especially in the context of your business model. Your fundraising strategy will depend on several factors, including your costs, current and projected revenues, industry, vision for growth, appetite for risk, and access to funders. We will not be focusing on any of the how-to's of fundraising or building your pitch deck in this section. Instead, we provide an overview of different funding options, including the pros and cons of each, the type of company that qualifies, and tools and resources for more information.
At a high-level, there are four different funding options (details are in the table below):
Before we go into detail on these funding options, we first want to talk about the structure and purpose of venture capital (VC). There is a prevalent culture in places with ample venture funding like Silicon Valley, where founders often consider the amount of money they've raised to be a badge of pride. While it is a clear indicator of people's trust in you, it is by no means the best measure of a startup's success.
The first thing to understand is that venture capital investors make their money from a small percentage of companies that knock it out of the park. As Peter Thiel explains in his book Zero to One, "The biggest secret in venture capital is that the best [startup] investment in a successful fund equals or outperforms the entire rest of the fund combined." He means that many investors will only make bets on companies that they think can be that great success - perhaps becoming the next Google or Facebook. To become an out-of-the-park success, VCs expect a portfolio company to grow quickly and continuously. Most often, this means hiring and spending more money than you make (if you make any money). To grow this continuously and rapidly, you have to be in a billion-dollar market (Market Size).
In exchange for investing capital, your investors will take ownership in your company in the form of stock. They will also take board seats that come with voting rights that give them influence in the direction of your company.
Investors will want you to continue to grow until you get acquired or go public. The reason is that they only make money from their investment if someone (the public market or another company) buys their stake in your company at a higher price than when they bought it. It can also happen that another investor will buy their shares, but that is less common.
If you are selling into a large market and have product that requires significant capital investments, for example, you have to hire expensive engineers to build the product, or you have to construct a plant to produce the product, venture capital is probably the way to go.
But if you're not sure whether the solution you're building or market you're targeting will align with the high growth model, venture capital may not be the right path for you. Venture capital can be used as rocket fuel that takes the right company into space, but it can be quite dangerous for a good airplane or car.
<aside> 🙌 Funding Tip: You can start as a bootstrapped company and then decide later on to raise venture capital. However, you cannot do the reverse: going from being venture-backed to being bootstrapped. Therefore, the decision to take on venture capital should be made with significant consideration.
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