Here are the various ways you might finance a new company:
Generally “bootstrapping” occurs when a company is funded solely by the founders without assistance from external sources of capital. Doing so provides founders with the greatest amount of flexibility in terms of running the business but also requires the founders to take on additional financial risk. At the same time, there can be a downside to bootstrapping if it leaves the company without enough cash to spend before a fundraising event (e.g., making it difficult to offer cash compensation to a key hire). There are pros and cons of bootstrapping and each company is unique, so careful consideration should be given when deciding whether or not this is the correct path for your company.
Stages of bootstrapping
The beginner stage starts with saved money or borrowed/invested money coming from family, friends or business partners.
Customer funded stage
The customer funded stage is when money from customers or clients is used to keep the business running and helping fund its growth as time goes on.
The credit stage is when an entrepreneur focuses on funding certain areas of the business such as upgrading equipment, hiring staff or even paying for a larger workspace.
Advantages of bootstrapping
This approach allows the entrepreneur to gain extensive experience while running and growing their own business.
The bootstrapper has ownership of all developments within the business, as well as any new ideas that can contribute to the growth of their business.
If the founder is the sole owner of the business, then the founder is able to operate free from investor opinion, direction, and oversight.
Disadvantages of bootstrapping
The entrepreneur will take on all financial risk and form the business with little to no support.
Business growth can be difficult with little to no support during the early stages an no ability to leverage the networks gained from seed or institutional/VC investors.
Recruiting may be harder without being able to point to outside investor support.