Photo by flickr user 401(K) 2013

How Venture Capital Reduces Your Risk as a Founder

This post was co-authored by Lofty CEO Mark Lurie.

Entrepreneurs often face a choice when they start building their business: should I bootstrap or seek venture capital?

On the one hand, bootstrapping is appealing for founders because it allows them to remain in control and focus on execution. On the other hand, bootstrapping significantly increases the risk of an already risky endeavor. For most founders, the risks of bootstrapping outweigh the potential rewards.

A founder will sacrifice equity and control for VC dollars, but taking these dollars will substantially reduces his or her overall risk. Let’s consider career, financial and business risk and the implications of bootstrapping vs. venture capital.

Career Risk

Depending on which study you look at, 70–90% of startups fail.

As entrepreneurs, we always believe that our own business will succeed. But if your business were to fail, how would you like the story to be told at your next interview or Thanksgiving dinner?

If you bootstrap, then the story will likely be some variation of:

“I had this great idea and spent most of my savings to build the product and bring it to market. I was able to hire a couple people (mostly unpaid interns) but we just couldn’t get to profitability before I ran out of savings.”

If you raise venture capital, then your story will likely be some variation of:

“I was able to convince smart VCs that my idea was worth $2 million dollars in venture capital. I hired 12 people, and I learned a lot about how to build and lead a team. We built our product and launched. We generated revenue but we couldn’t get the metrics to where they needed to be in order to raise our Series A.”

Stories are important, and the VC-backed story is more powerful. No one will question your ability or the lessons you learned if you raised venture capital. People might question your decision making and how useful your experience was if you bootstrapped.

Obviously there are many exceptions but the VC-backed founder has significantly less career risk than the bootstrapped founder.

Financial Risk

If you raise venture capital, then you should be able to pay yourself a decent salary. You won’t go hungry or have “no life” as you build your empire. When you bootstrap, your savings sets your runway.

Besides getting a consistent income stream instead of depleting your life’s savings, venture funding comes with the added bonus of validation as smart people believe in you and your idea. It doesn’t make your business any less risky, but you should take some comfort in that and your paycheck.

Business Risk

Finally, your business could fail. Both bootstrapped and venture capital backed founders take business risk.

The fundraising process can help reduce business risk. By having your business scrutinized by investors, you’re forced to adjust and improve your business with their feedback.

It is difficult to get an honest and unfiltered opinion when bootstrapping. People will happily give you advice all day but you really learn something when you ask for $1 million dollars and ask “why not?” if the investor says “no.”

Takeaways

It’s essential to note that career risk is the most important and relevant risk for the bootstrapping founder. Financial risk is real but money is replaceable. Career risk (or the opportunity cost thereof) may not be replaceable.

You clearly need to put a lot of effort into fundraising, but you can mitigate a lot of personal risk if you are successful. Don’t take career and financial risk with your business risk — raise venture capital!

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