July 28, 2016
It’s been more than two years since the Kauffman Foundation reported that new, tech-heavy businesses were outpacing more traditional ones in business and job creation. These new tech businesses also grow faster and hire more than other types.
Since then, nothing has indicated that trend is slowing.
With more tech companies being born all time, more and more are asking themselves about the best ways to grow — how to get the funds they need to hire staff, invest in better technology and acquire customers.
The process of raising money can be an exciting milestone for many companies – there’s a sense of validation that accompanies a successful round of venture capital funding, a feeling that people believe in your company and your vision. There are books devoted to raising money and entire publications devoted to just how much money your startup raised.
But the decision about whether to raise investor money in the first place is a big one. And many new businesses overlook some essential considerations – that taking VC investment will likely change your company and outside investment isn’t the only option to getting growth capital.
Making the Leap
Fundraising from institutional or Angel investors, while it can boost your company quickly, can put pressure on young companies to keep raising additional rounds of funding to keep investors happy. It can also shift the focus to inflating revenue instead of building a stronger business or delivering a quality product. It can also add plenty of new job responsibilities.
“My co-founder and I were always fairly metrics driven. However, the day we raised venture funding and started having board meetings, it certainly changed the culture,” says Jonathan Lacoste, the co-founder of Jebbit, a startup that has raised $3.3M to date. “We were lucky to partner with a VC firm that knew when I was a first time entrepreneur, and thus helped us go through the learning curves and growing pains.”
Seeking and winning VC investment is great and can be a life-time difference maker. Even so, some companies still buck the VC trend and use existing relationships to grow instead of turning to outside funders.
Turning to an Existing Relationship
That’s what Payline Data did. The Chicago-based Merchant Processor recently raised $2 million by leveraging their existing banking and partner relationships — funds they will use to increase their current operations. Payline Data went the banking and traditional lender route for financing because the merchant processing company placed a premium on slow, organic, sustainable growth. It was founded originally with seed funding directly from its current owners and each previous round of growth was financed using revenues from the business.
It’s possible and even likely that they could gone to VC investors. Companies with strong growth can be appealing investments and Payline Data was recently named the Fastest Growing Payment Processor of 2015 by leaders in the industry. The company has grown 300% year over year, with 25 employees currently in Chicago and more than 250 agents across the United States.
Bootstrapping Allows More Control
But in their case, being in control of their own funds allowed Payline Data to structure a deal that did not require distributing equity or changing its ownership structure. That was a strategic choice.
“Raising money can quickly change the dynamics of a company and move the focus towards driving top line revenue at the expense of building a business,” Payline Data CEO Jeff Shea told me. “We have strategically remained bootstrapped in order to further this mission of putting our employees and merchants first,” he said.
Like pitching VCs, bootstrapping can be a fickle thing. The lists of pros and cons are each a mile long, making it understandably difficult to figure out which route to take. The wrong choice can run an otherwise promising company into the ground and there’s no right answer for every company. Some businesses need angel investors to quickly capitalize on a new innovation or marketing opportunity. Others may benefit from crowdsourcing. And some bootstrap. That decision — where to turn for capital — may be among the most difficult decision an entrepreneur makes.
Its Not for Everyone
The bootstrap way of life is not for all startups: Bootstrapping owners often have to forego pay in order to drive revenue into the company. Those businesses also grow more slowly in the beginning years.
For those willing to take the risk however, bootstrapping can help ensure profitability and stable growth, as well as the control to guide your company’s mission. Payline Data enjoyed the ability to set it’s own goal: “Our focus was always to build world class solutions for merchants, and to invest and create opportunities for the team – not grow quickly.” Shea said.
The best advice place to turn for advice on this decision, is you. If you think your company needs investment or growth capital, look to your company mission statement.
If growing slowly, bootstrapping fits your long-term vision and company needs, it can be done successfully. But for some, VC is a better call. The answer may depend more on the type of company you are now rather than the type of company you aim to be.
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