For the first five years, Alyssa Furtado ran personal finance website Ratehub Inc. out of her home. Being able to dispense with outside office space kept costs down, but it meant at one point there were 13 people working out of her basement. The seven-year-old next door saw them all piling out for lunch one day, she recalls. “Wow, miss,” he told her. “You sure live with a lot of people.”
Ms. Furtado didn’t initially consider pursuing funding to get her website off the ground “mostly out of naiveté.” She wasn’t from a tech background and she wasn’t familiar with venture capital. “I didn’t know any better,” she says.
But although she believes self-funding her business contributed to its long-term success, as Ms. Furtado and her fellow panelists at The Globe and Mail Small Business Summit pointed out, there are pros and cons to “bootstrapping.”
You stay lean and mean. For Ms. Furtado, perhaps the primary benefit of self-funding, at least in the early stages, is “it really forces you to lay a good foundation for your business. You have to get smart about acquiring customers and managing your expenses.”
She became accomplished at applying for government grants and loans, for example, and she used an inexpensive outsourced contractor to help her build the first website. A side benefit of using outsourced labour, she says: “You get to try out potential employees.”
Ms. Furtado also found ways to build her brand free of charge. “We tried to piggyback on media stories,” she says. “If there was a Bank of Canada rate hike, we would run calculations for journalists to break down what that meant for the average Canadians and how it would impact their payments.”
Panelist Steve Hubbard, founding partner with Lightenco, says he and his partners also self-funded their Ottawa-based, sustainable-lighting-solutions company. Although it launched in 2011, “we didn’t have a marketing budget until last year,” he says.
Instead, he and his partner employed “ninja marketing,” strategically targeting well-known local businesses and using their endorsement to help spread the word. “We looked for the ice cream shop everyone goes to and the restaurant everyone knows,” Mr. Hubbard says. “We got some brands behind us and built on referrals.”
He also used shared business space to cut down on costs and make connections, and reached out to organizations such as Futurpreneur for mentorship and advice to help Lightenco grow.
You’re indisputably in charge. When you self-fund, says Bryan Watson, partner with Toronto-based consulting and venture-services firm Flow Ventures, “you are master of your own destiny. You have the freedom to move dextrously and build the business your way.”
Ms. Furtado recalls sitting down with an adviser at one point who was pushing her to tackle e-mail marketing and Facebook, among other areas. “But we were really focused on making sure we were top ranked on Google when people searched for ‘personal finance’,” she says. “We were two people at the time and I thought to myself, ‘That is actually the wrong advice. All we can do is nail one thing and become the best at it’.”
The good news: she had no obligation to listen to that outside advice. If he had owned a good chunk of her company, she might not have had a choice. Once you persuade people to invest in your company, says Mr. Watson, “you are a steward of their money, so you don’t have as much control.”
You don’t get the benefit of mentors with skin in the game. Taking on an investor can actually be a “perk,” Mr. Watson contends. They should bring with them valuable input and connections, along with the capital you need. “But it is a relationship, so you have to look for the right fit for your company,” he says. “And you should really take your time trying to figure that out.”
You’re forced to take on added risk. “Our initial investment was basically one order of product from overseas that may or may not have shown up,” Mr. Hubbard says. “It was a bit risky.” Entrepreneurs who go the bootstrapping route tend to plow most of their companies’ earnings back into the business, meaning their entire financial fortune is tied up in their company. At some point, they often want to derisk − selling a stake to an outside investor can allow the founder to diversify their holdings.
You may not grow as fast. RateHub recently raised its first round of formal capital after seven years of bootstrapping. The reason? “We stumbled on insurance comparisons and we knew it could be a multimillion-dollar business,” Ms. Furtado says. “But we had zero excess capacity.”
If capital is truly restraining you from scaling up, then getting outside investment makes total sense, she says. And if you have a proven business model and “a good story to tell investors,” you’re in a better position to negotiate a deal.
“One of the benefits of waiting to raise capital is that we were able to retain a significant majority of the company,” Ms. Furtado concludes. “When you’ve been successful at building the company, your investors want you to run the company – they buy into your vision.”
Learn about other sources of funding outside of bootstrapping with this infographic.
Keep up with the latest entrepreneurship news by signing up for the free Report on Small Business newsletter.
This article originally ran in The Globe and Mail: View article
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.