BY ROBIN GHOSH
( FORMER CHIEF ECONOMIST, BENGAL CHAMBER OF COMMERCE AND INDUSTRY)
KOLKATA, 15 AUGUST 2022
( FORMER CHIEF ECONOMIST, BENGAL CHAMBER OF COMMERCE AND INDUSTRY)
KOLKATA, 15 AUGUST 2022
For the startup entrepreneur, one of the major issues is how to decide the quantum of investment to be made through personal funds and through raising money from outside investors.
What does bootstrapping mean?
Bootstrapping means running the business without a large dose of external capital. You create the product, create value, exchange the value in the market, earn profits, plough profits to run and finance expansion and growth.
Essentially, it is leveraging the business operation through internal cashflow. The other alternative available is external infusion of funds coterminous with exchange of major equity in the company.
How do we design how much bootstrapping and how much infusion of external funds?
Designing this blend would depend on two components.
The first factor is what is the nature of the business and the second factor is how much co founders are ready to invest themselves.
If your product is something which can be created and marketed by a small team of two or three co-founders and a few staff, you have a choice of not inviting external funds. You can bootstrap and keep going for a long term.
But bootstrapping is techno economically not viable if startup requires large capital, if your project has a long gestation period.
And need a large team of professionals, a band of technicians, advisors to run the business.
Essentially, what kind of combination you will choose: bootstrapping or external capital or a mix between the two depends on what kind of business you have chosen and what is your goal.
If you decide to grow fast and say exit after five or seven years, you have no choice other than inviting outside finance.
But if you want to stay calm and move incrementally through internal fund generation, you could avoid external fund infusion. Startups receive external finance from two buckets. One from family, friends and second from institutional investors.
Generally, startup companies feel comfortable in associating with institutional investors. Because advantages are many: the
institutional investors understand better the stages of growth, fund requirement cycle, vulnerability of the business and hiccups associated with changing market product fit.
While it is easier to present a case for accepting institutional investors , you should not overlook the hazards. Fundraising exercise may distract you from your core focus: the startup. It is time consuming. It may generate tension due to miscommunication, breakdowns of trust, disagreement and what not.
My own personal belief is before opting for institutional funds, venture funds, seed funds think and think again.
If you are not dreaming of your business being large-scale, gigantic , you should choose bootstrapping : it is practical.
Bootstrapping means running the business without a large dose of external capital. You create the product, create value, exchange the value in the market, earn profits, plough profits to run and finance expansion and growth.
Essentially, it is leveraging the business operation through internal cashflow. The other alternative available is external infusion of funds coterminous with exchange of major equity in the company.
How do we design how much bootstrapping and how much infusion of external funds?
Designing this blend would depend on two components.
The first factor is what is the nature of the business and the second factor is how much co founders are ready to invest themselves.
If your product is something which can be created and marketed by a small team of two or three co-founders and a few staff, you have a choice of not inviting external funds. You can bootstrap and keep going for a long term.
But bootstrapping is techno economically not viable if startup requires large capital, if your project has a long gestation period.
And need a large team of professionals, a band of technicians, advisors to run the business.
Essentially, what kind of combination you will choose: bootstrapping or external capital or a mix between the two depends on what kind of business you have chosen and what is your goal.
If you decide to grow fast and say exit after five or seven years, you have no choice other than inviting outside finance.
But if you want to stay calm and move incrementally through internal fund generation, you could avoid external fund infusion. Startups receive external finance from two buckets. One from family, friends and second from institutional investors.
Generally, startup companies feel comfortable in associating with institutional investors. Because advantages are many: the
institutional investors understand better the stages of growth, fund requirement cycle, vulnerability of the business and hiccups associated with changing market product fit.
While it is easier to present a case for accepting institutional investors , you should not overlook the hazards. Fundraising exercise may distract you from your core focus: the startup. It is time consuming. It may generate tension due to miscommunication, breakdowns of trust, disagreement and what not.
My own personal belief is before opting for institutional funds, venture funds, seed funds think and think again.
If you are not dreaming of your business being large-scale, gigantic , you should choose bootstrapping : it is practical.
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