“It takes money to make money.”
While I’m not in full agreement with this saying, there’s no doubt you’ve heard it before – whether in an old gangster movie, or from a seasoned business owner.
It’s a hurdle that every entrepreneur will likely face at some point in their entrepreneurial journey.
No matter how great your idea or product may be, the harsh reality is that you will probably need some cash to get it off the ground.
The amount of capital required varies from business to business, but the principle will generally hold true for almost all businesses.
But we live in interesting times… and things are changing.
For entrepreneurs in today’s environment, there are a few different ways of coming up with this startup cash. Among the most common for smaller businesses just starting out are: crowdfunding and bootstrapping.
It’s impossible to point to one as being better than the other, as they both have their own pros and cons.
However, certain types of businesses are better suited for one over the other; and ultimately it will be up to you to decide the best way to get your hands on the capital you need.
This post will help you decide which may be the right choice for you and your future business.
What is Crowdfunding?
As the name may suggest, crowdfunding is raising money from many different people (the “crowd”).
In many ways, crowdfunding sites (i.e. Kickstarter) are the ultimate Muse Testing platforms.
In fact, we dedicated a series to using crowdfunding to validate your business and product ideas – and have since gone a few steps further and developed “The Complete Crowdfunding Kit”. Download it here (100% FREE):
The power of crowdfunding lies in its ability to attract larger groups of people, or “investors”, but often contributing smaller amounts of money (e.g. $5 or $10).
Nonetheless, with the power of the Internet and social media, this can add up pretty quickly.
Unless you’re raising funds for a charitable cause, these supporters are expecting something tangible in return.
People pre-purchasing your product (in turn providing you with validation on your product or idea) is a common form of crowdfunding.
In this scenario, you are collecting money up-front to help fund the project (e.g. to manufacture your product). When the product is ready, your crowdfunders (who’ve already paid) become your first customers. This is typically how platforms such as Kickstarter and Indiegogo operate.
Crowdfunding has become increasingly popular in recent years. As such, many new companies have run extremely successful crowdfunding campaigns and have much to show for it.
Who should Crowdfund?
While crowdfunding can be a great way to raise money quickly, it’s not right for all types of businesses.
If you have a new product idea and want to sell directly to consumers, crowdfunding is a great way to get your product out there and to raise the money you need.
It is also helpful to see what types of products have been successfully crowdfunded to see if it’s right for you.
In my household, we purchased an adapter for an electrical outlet that lets the user charge their phone while also having other things plugged in due to a USB adapter on top of the device. From what we saw, it was a perfect crowdfunding product because all they needed was some cash to make it happen and there wasn’t anything else like it on the market at the time.
What is Bootstrapping?
On the other hand, bootstrapping is another common, and much more traditional way to launch your business idea.
Bootstrapping provides an alternative to crowdfunding while allowing the entrepreneur to have complete control over the business, and move at his or her own pace.
Under a bootstrapping model, the entrepreneur doesn’t look to outside investors to get their business of the ground.
Aside from maybe some cash from friends and family, the entrepreneur builds the business from the ground up with their own capital and sweat equity.
This is a much more traditional method of funding a business startup, as obviously it pre-dates crowdfunding, which is still a relatively new tool with the advent of the internet and social media.
Who should Bootstrap?
Bootstrapping appeals to many types of entrepreneurs who may not really feel they fit into the crowdfunding “crowd”.
To state the obvious, if you are flush with cash (capital) and/or have an abundance of free-time to invest (sweat equity), then bootstrapping makes perfect sense for you.
Another major indicator of having a business that may be better suited to be bootstrapped is by considering your ideal customer base.
If you are creating a service-based business or are selling products to other companies, you may want to take a closer look at bootstrapping.
When selling a service, you won’t need “X” number of dollars to be able to “ship” your product, so your startup costs will be a little different in nature.
If you are selling to other companies in a business-to-business (B2B) model, you probably won’t have much luck crowdfunding because most businesses aren’t willing to wait weeks or months before they receive your product.
Aside from the customer preferences, bootstrapping your business will give you complete control over how you spend your money and what you create.
In addition to picking your industry and figuring out a way to bring value to the market place, entrepreneurs will likely need some startup capital to get their idea off the ground.
Getting your hands on the necessary funding to startup your business idea will always be one of the first challenges you face. Better to accept it as a hurdle [to jump] rather than a wall [that could stop you cold].
While both crowdfunding and bootstrapping can be effective ways to get your business up and running, as you can see, they each have their place in the grand scheme of getting your business started.
While only you can decide which method of raising capital is right for you, the more you know, the easier it will be to make the right choice.
To determine what’s right for you, I urge you to take a good hard look at your business model and what you are trying to achieve.
Also it can be extremely helpful to look at businesses similar to the one you are trying to start and see how they did it – because “success leaves clues” (Tony Robbins).
If you’d like to learn more about the crowdfunding option, “The Complete Crowdfunding Kit” covers all the aspects of preparing and launching a successful crowdfunding campaign – including an approx. 60-page eBook, 2 step-by-step Action Plan checklists, a template form, and a 24-week project timeline & task list – all 100% FREE!