Raising money vs Bootstrapping -

[Sirrom]

What is your opinion on raising money for a business vs bootstrapping?

I’m asking because I have plans to build an enterprise thats much larger than the solar installation company i’m currently running. I got advised from multiple sides to take on investors to bring the execution to the next level. I’m seriously doubting and i’m curious about your opinions. Especially the heavy hitters! Don’t be shy!!

Pros:
- It will bring me out of my comfort zone. I don’t have experience with raising money/dealing with investors. Also not really sure if I can manage a lot of people that are smarter then me lol. Lots of room to grow here.
- More money. I can hire great people from the start that can fulfill all the roles necessary. This will help to bring more value to the customers by giving a better experience and I could spend more money on marketing/referral plans to scale more aggressively.
- The relationship with investors. I guess they will mentor you if they put their money in it?

Cons:
- I lose equity. Felix Dennis is a big rolemodel for me and in his book(s) he said to protect your equity stake at all costs. I could still start this company without investors, but I’m sure I will never grow it as quickly as I can with outside money.
- Less freedom. This is ok in the short term, but I like to maintain my liberty a little.
- Competitors could outcompete me. This is a growing market and up for the taking right now.

The valuation will matter a lot though, but I don’t have any clear insight in this now.

 

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[David4431]

I'm not a heavy hitter but I run an ecommerce business. I'll share some thoughts and ideas from a more academic / business school perspective that hopefully helps a little with your decision making process. Get input from others who have gone the fund raising route as well to really flesh out what makes sense for your situation.

1. Assuming you really do need capital for your project, you should consider all possible funding options. There is no mention of debt in your consideration - this is a major source of funding. You should evaluate all options to determine what makes the most sense for your situation.

2. Debt vs Equity (fund raising) vs internal funding (bootstrapping) - The way a large corporation would do it is by calculating their cost of capital and determining their optimal capital structure. Their optimal capital structure (debt vs equity) will help inform their decision on what type of capital to raise for a potential project.

3. Cost of capital - This is a common tool used by large corporations to determine if a project makes sense or not. If you think your project is risky you would assign it a higher cost of capital. In short, what this means is that you need to think through what kinds of return your project of "building a larger enterprise" might generate and see if it exceeds your cost of capital. You might have to break this down into smaller projects and make some assumptions to the best of your abilities to assign some potential returns to those projects. Some of them will pass muster and some won't.

4. Consider building a financial model to help you think through the different scenarios. This is again how a large corporation with resources would do it. They would most likely build a few models and change the inputs to see which yields the best outcome. The reason why I bring up building a model is because it forces you to do the work of figuring out what are the considerations, inputs, outputs, etc.

5. There's a personal element to this at the end of the day. What makes sense on paper doesn't take into account simply what we want in our lives, our personalities, risk tolerance, etc. For example, maybe on paper it makes sense to borrow a bunch of money to pursue your project, but if you do that then maybe you introduce a lot personal financial risk into your life and it just isn't worth it to you. The point is that there might be practical considerations in your life that might trump what makes theoretical sense on paper.

 

[WJK]

I am against debt and taking on partners. I'm all about bootstrapping. And I LOVE my equity positions.

I've had to borrow in the past since I'm in the RE business. But I retire that debt as quickly as possible and try to do projects out of pocket. I'm very good at cutting my costs and stretching my dime. I'd rather take longer on a project than go out and borrow the money. Debt loads keep me up at night.

I prepare, prepare, prepare for projects and future projects by saving, saving, saving, and planning, planning, planning when possible. I like to have my pot of "strutting money" on hand just in case an opportunity comes up. I add at least a 20% contingency pad to my estimated project costs. I assume that things are going to go wrong. We will find that can of worms. Any overage on my cost estimates or 20% pad that is left over gets put into a slush fund for emergencies. There's a hazard around every corner in my world. I work really hard to buy in bulk at good prices. I have extra materials and parts on hand that use regularly. We use and reuse what we have.

That's how I want to see myself. And then there are those "other" projects.

I have bought properties that I couldn't properly look at when I made the deal. I bought a house last summer that had squatters inside and outside. There were piles of junk everywhere and RVs filled with nasty people. It was the local dope house. They had a hole in the floor of the downstairs bathroom where they were pooping in the unfinished basement. UG! I didn't see the inside of the house for 2 months until after I bought it. I had to legally get rid of the squatters in the house first -- without them burning it down. Challenging! I didn't know if it was teardown or what. The squatters in the yard took longer to get rid of. Yes, the house has good bones and we're working on it. We've gutted it and we're rehabbing it. It will be worth many times what I paid for the property and the included problems that came in the deal. My years of experience make it all OK and I'm improving our community.

The biggest lesson I've learned is: Cash talks and BS walks