[Editorial Notes: This is a guest article by Mukund Mohan, in response to a query posted
The Truth: There’s no easy answer. It all depends on your situation. I don’t know the answer, but that does not stop me from offering an opinion : -)
My bias is always to bootstrap. Bootstrapping helps you get creative, it forces you to validate your idea and execution plan well and it teaches you many intricacies of finance that most entrepreneurs dont bother to learn.
Lets assume there are 2 options ahead of you:
1. Stay bootstrapped: Which means (by and large) grow slowly with accruals, be cautious on expenses and grow as you need. The upside is you own the company, the direction and the future. Lets call this the “Vembu way” after Zoho CEO Sridhar.
2. Get funded (either with angels or Venture Capital) and scale really fast and quick. This means you are focusing on growth (initially). Lets call this the “Bahl” way after Snapdeal CEO Kunal.
Neither approach is wrong or “better” fortunately. It all boils down to how you want to answer these questions:
1. How big is your market / idea? Bigger markets require more capital usually (But Zoho’s going after a huge market you say. Yes, he’s a rare breed). Hypothetically, if you build a company that has $100 Million in revenues in 5 years, and you are valued at say $500 Million (5 times revenue), and at exit (due to dilution) you own 15% of the company, you will be worth $75 Million. If however you bootstrap, and your company does $25 million in revenue in the same time, is valued at $75 Million (3 times revenue) , you potentially are worth the same if you took venture funding.
Generally VC’s don’t invest in companies that address small markets (i.e less than $1 Billion) because the time and effort to help build a company is the same, they might as well go after a large market and have the potential to have a huge return.
2. How quickly do you think the market will develop? If you believe the market for your product or service is going to be large very quickly, then you’ll need external funding.
3. How quickly do you need to scale? If the market demands that you need to scale quickly and need to invest money before to meet the potential demand, then you’ll need financing to help you invest before (or just before) the demand.
Unfortunately, there are only 1 in 20-50 (depending on VC firm) companies that meet all the criteria for VC investment –
a) addressing large market,
b) quick growth & fast to scale, and
c) exit in 5-7 years.
Most VC firms invest in not more than 10-15 companies a year out of over 200-500 (or more) they look at. So even if you believe you need the funds, if you dont meet the a, b and c, together, you’ll likely not get funded by a VC.
P.S. I admire Sridhar, so I may be biased on this one, and I really respect Kunal too, so I really mean it when I say there’s not a right or wrong way. They are different guys with different ambitions. Who do you guys admire?
[Reproduced from Mukund’s blog]