Self-financing or fundraising?

For or against self-financing?

The advantages of self-financing

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No dilution of share capital 

First of all, self-financing means not allowing external investors to dilute its share capital. 

Dilution occurs when a company issues new shares that result in a decrease in the percentage ownership of existing shareholders in that company. In effect, the number of shares the founder owns does not change, but the percentage ownership and the value of the shares decreases. 

A more profitable model 

Moreover, bootstrapping forces the entrepreneur to build his business model so that his company is profitable as soon as possible. With no salary, the entrepreneur's number one priority is profitability. Mechanically, the structure of the company is thrifty, using the least amount of resources possible to make the most. This strategy allows the entrepreneur to focus on the essential: the user. 

Faster field testing

Bootstrapping forces partners to build a beta product or service with a minimal budget. Being in direct contact with the market reality, an embryonic business project is quickly validated or reduced to nothing. Founders' decisions are rooted in the rationality of the user. Founders can be agile and responsive to impending customer feedback. 

"Making do with the means at hand" results in a growth proportional to the efforts of its creators. Being at human level is key to interacting directly with its users. 

More proximity to users

Users can communicate directly with the developer. The developer can interact with his users, listen to their feedback and make customized adjustments. Working on the product directly with the end user is the best strategy to solidify its value proposition. 

Showing your face can allow users to get to know the human behind the company and thus build a relationship of trust. The company's community then feels special and becomes loyal.

No unnecessary expenses

Having too much money too soon can lead to unnecessary and too "early" spending on communication for example. Not having cash also means not spending on bad decisions.

Disadvantages of self-financing

No rapid growth

Self-financing does not allow for rapid growth. Whether the business model is B2B or B2C, customer acquisition is essential. The cost of customer acquisition (CAC) varies depending on the nature of the business. But in general, CAC on a large scale, whether it's ads, sales staff or some other acquisition strategy, is expensive. In addition, many markets reflect the saying "the winner takes it all". In this case, a slow customer acquisition strategy is prohibitive. 

Less mentoring and networking 

Secondly, self-financing does not favor access to the benefits of fundraising such as mentoring, visibility or access to a network. 

Less media coverage

Finally, self-financing can be perceived as a lack of ambition. Slow growth can be at odds with the over-mediatized unicorns that are growing at 1500% per year. 

Fundraising, a better alternative to self-financing?

Benefits of fundraising

A fundraising, as its name indicates, is a contribution of new capital to the company. Unlike self-financing, a fundraising is the financing tool that mobilizes the most financial resources. 

An increase in liquidity 

This contribution does not have to be repaid. An increase in liquidity allows the founders to equip themselves for the next steps in the development of their start-up. Partners can try multiple expensive strategies to see if one works. To illustrate this strategy, it's like throwing a lot of objects at a wall to see which ones catch on.

An increase in visibility

The arrival of investors goes hand in hand with increased visibility and credibility in the market. It shows the general public that they are confident in the success of the company. The company benefits from the network of its investors. In addition, the investors can act as mentors and advise the partners with an outside view on the strategy. 

Disadvantages of fundraising

A long preparation 

First of all, the preparation time for a fundraising is long. It is an investment of time and energy that the founders no longer devote to the company's operations. Indeed, founders must create presentations, practice presenting them, canvass investors, apply and meet with them many times. Moreover, there is no guarantee that a fundraising will be successful. If it is successful, the post-selection procedures are time-consuming: negotiation, legal framework, closing.

Capital dilution 

The fundraising model has its limits. Fundraising means capital dilution. Indeed, in return for their financing, investors take a % of the company's share capital. In other words, the company belongs to them in part, which gives them decision-making power over the company's strategy. 

Unfortunately, investors do not always have the same interests as the founders. Partners must make regular reports to their various investors to demonstrate the financial health of the company. Dialoguing and reassuring investors can be time consuming over the long term.

Starting a company with the prospect of raising funds quickly is the best way to forget the essential: solving a user's problem. 

Too much liquidity - a danger? 

Having too much liquidity at once can be detrimental. Indeed, the more cash the partners have, the more they have the capacity to make big mistakes. For example, if an entrepreneur receives 15 million euros from his investors, he can spend a year developing an application with an army of 20 developers. 

After one year, its application is optimal but does not make any sales because it does not meet the user's need. A whole year disconnected from the market can lead to failure. 

Not having cash forces the partners to be profitable as quickly as possible by being as close as possible to the market's needs. To start a company, building a first community of users to co-construct the product or service is an advantage. Having too much liquidity can obscure the priorities of a company. It is easier to lose control of 15 billion than 500 euros.

Each strategy is not fixed in time. Bootstrapping and then fundraising?

Fortunately, bootstrapping is not in opposition to fundraising. 

The two strategies can be complementary. A start-up's self-financed beginning can lead to strong user traction. The founder can then more easily raise funds to accelerate the growth of his company.

Investors have proof that the beta product has worked which gives them confidence to invest in the future of a company. They are reassured by seeing the traction that a project has using simple bootstrapping methods. 

The best of both worlds: Revenue Based Financing.

Karmen offers an innovative alternative. We democratize access to non-dilutive financing through Revenue Based Financing. Revenue Based Financing is the name of the game. 

This tool allows to advance the revenues of a company. Within 48 hours, an entrepreneur can receive money in his account to finance his growth. 

You can repeat the process as you grow. Karmen's financing service is based on three principles: speed, non-dilution and transparency.