Before making a decision on which of these approaches to follow, it makes sense to look at your specific situation. Rohit Arora, co-founder and CEO of small-business lending matchmaker Biz2Credit.com, suggests that if you’re launching an online or digital startup, you should be bootstrapping for the first year – in short this means following a self-sustaining process that allows you to proceed with what needs to be done without external help, in whatever way necessary – personal funds, savings and available credit all alike.
He says that this type of startup company should steer clear of banks as they want to see tangible assets, not an idea for an app that will teach young kids to learn French on their iPads or Tablets. “Once you’re up and running, you’ll have high profit margins, which makes it easier to scale your business.”
Only after your business has been up and running for 12 months, then look to angel investors for initial funding. These will be individuals that look to invest in companies that have a potential high-growth profile and hold some form of similarity with their own existing successfull business. You’re most likely to secure capital from angel investors if you’re willing to relinquish at least 10 percent of your company’s control, but for early-stage companies this could be as high as 50 percent. Angel investors are not in it for the long haul and will be looking for an exit offering you would offer them, most likely in the form of actual shares in the business or a capital buyout once you sell the company.
Arora recommends that more traditional startups, any company doing general retail or light manufacturing, such as a babies clothing line or a mobile pie-truck, should be bootstrapping only for the first three to six months: “By then you’ll be bringing in money, showing traction and you’ll have a better idea of what you’ll do with funding when you seek it,” he says.
For startups that will have more expenses, fixed monthly costs and set profit margins, Arora agrees that a bank loan will be the best way to go, rather than an investor, who is probably on the lookout only for a short-term investment with a high yield factor. “Once you’ve run your company for 18 months or more, you should be able to get access to better credit and interest rates for loans, which you can then use to scale up.”
Scott Gerber, founder of the Young Entrepreneur Council, warns against the over-eagerness to push too much capital into a new startup. “If you give equity to investors, you’ll always have to answer to others,” Gerber says. “But if you bootstrap, you can run your business however you like. You just might not scale it big enough to create real wealth.”