12: Bootstrapping and Raising Capital
12: Bootstrapping and Raising Capital
Today we start our module on venture finance and fund-raising. There is a myriad of jargon associated with venture finance. If you encounter unfamiliar terms when reading the financial aspects of our case studies and related articles, there are useful glossaries of related terminology available at http://www.investopedia.com/dictionary/ and https://pitchbook.com/blog/private-equity-and-venture-capital-glossary and https://www.cooleygo.com/glossary/.
Read “Bootstrap Finance: The Art of Startups” (HBR #92601). Consider the following study questions as you read this article:
- Explain why Professor Bhide states, "the big-money model has little in common with the traditional low-budget start-up."
- What is bootstrap finance? Why is it advantageous for the entrepreneur?
- What are "the hidden costs of other people's money?"
- The author provides seven axioms of successful entrepreneurs. What are they and why are they effective?
Read “Raising Startup Capital” (HBR 9-814-089). This is a very substantive article covering key elements of venture financing. Study it carefully. The glossaries provided at the top of this assignment will likely be of help in understanding unfamiliar terminology. Consider the following study questions as you read this article:
- What are the differences between debt financing and equity financing?
- What is convertible debt? How does it reflect elements of both types of financing?
- What's the major advantage of raising less money?
- While there are no hard and fast rules about stages of investment, what are the typical stages and what types of funding might be appropriate in each stage? How is the money raised used in each of the stages?
- How is a venture capital firm structured? Who are the different stakeholders in a venture firm and what role does each play?
- What do venture capital investors look for in a deal?
- What is crowdfunding? What are its advantages and disadvantages?
- Who are angel investors? How do they differ from venture capital firms? What are the advantages and disadvantages of angel investor funding?
- Describe the role of accelerators/incubators. When are they appropriate for a startup?
- What are sources of non-dilutive funding? What are its benefits?
- What is meant by pre- and post-money valuation? How are these values determined?
- What is an option pool and what purpose does it serve? Why should it be of concern to an entrepreneur?
- What are the principal elements of a venture capital deal? How do liquidation preference and control factor into a deal? How do these affect an entrepreneur?
Finally, watch/listen to the "How Venture Capital Works" video lecture on Canvas in Files\Handouts\Video Lectures. This 9-minute video provides an introduction to the stages and functions of a venture capital fund.
DUE:
Following the guidelines in the Case Method Overview (posted in Canvas Files), write a concise 2-page essay addressing the question:
In “Bootstrap Finance: The Art of Startups” Professor Bhide states that “… this big-money model has little in common with the traditional low-budget startup.” Using information from the readings assigned for today, explain his reasoning and whether you agree or disagree.
Submit your essay via Canvas prior to class. This essay must be your own work subject to the University’s Code of Academic Integrity.
Bootstrap Finance: The Art of Startups
- Why does Bhide state, "the big-money model has little in common with the traditional low-budget start-up"?
Bhide argues that venture-backed startups follow structured plans, prioritize rapid scaling, and face investor-driven constraints, while bootstrapped startups operate with limited resources, adapt quickly, and focus on profitability. The two models differ in approach, risk tolerance, and flexibility. - What is bootstrap finance? Why is it advantageous for entrepreneurs?
Bootstrap finance refers to starting and growing a business using personal savings, revenue, and minimal external funding. It allows entrepreneurs to retain control, remain adaptable, and develop financial discipline without investor pressure. - What are "the hidden costs of other people's money"?
External funding can lead to premature scaling, misaligned incentives, loss of control, and reduced flexibility in decision-making. Investors may resist pivots or demand rapid growth, increasing the risk of failure. - What are the seven axioms of successful entrepreneurs, and why are they effective?
- Get operational quickly – Avoid over-planning and start generating revenue early.
- Pursue quick break-even projects – Focus on cash flow over long-term profitability.
- Sell high-value products/services – Allows direct sales without a large marketing budget.
- Forget about a “perfect” team – Start with affordable, adaptable employees.
- Control growth carefully – Expand only when financially sustainable.
- Prioritize cash over profits or market share – Ensures survival and financial stability.
- Build banking relationships early – Helps secure financing when the business matures.
These principles ensure resilience, financial discipline, and adaptability in uncertain markets.
Raising Startup Capital
- What are the differences between debt financing and equity financing?
Debt financing involves borrowing capital that must be repaid with interest, while equity financing exchanges ownership stakes for investment. Debt provides control but requires repayment, whereas equity offers capital without fixed repayment but dilutes ownership. - What is convertible debt? How does it reflect elements of both types of financing?
Convertible debt starts as a loan but converts into equity at a later stage, often at a discount. It combines the flexibility of debt with the potential upside of equity, allowing startups to delay valuation while securing early funding. - What’s the major advantage of raising *less* money?
Less funding reduces dilution, increases founder control, and prevents unnecessary spending. It also allows for more strategic financing later at higher valuations. - What are the typical stages of investment, and what funding sources are used in each stage?
- Seed stage – Personal savings, angel investors, crowdfunding.
- Series A – Venture capital, accelerators, early-stage funds.
- Series B – Larger VC firms, strategic investors.
- Series C+ – Late-stage VC, private equity, IPO preparation.
Funding supports product development, team expansion, scaling, and market penetration.
- How is a venture capital firm structured? Who are the different stakeholders?
VC firms consist of:- General Partners (GPs) – Manage funds and make investment decisions.
- Limited Partners (LPs) – Investors providing capital (pension funds, endowments).
- Principals/Associates – Support investment research and deal execution.
- Entrepreneurs-in-Residence (EIRs) – Experts advising startups within the firm.
- What do venture capital investors look for in a deal?
Strong founding team, large market opportunity, scalable business model, defensible competitive advantage, and clear exit potential (acquisition or IPO). - What is crowdfunding? What are its advantages and disadvantages?
Crowdfunding raises small amounts of money from many individuals via platforms like Kickstarter or AngelList.- Advantages: Quick access to capital, market validation, community engagement.
- Disadvantages: Limited funds, public idea exposure, potential lack of experienced investors.
- Who are angel investors? How do they differ from VCs? What are the advantages and disadvantages?
Angel investors are wealthy individuals who invest early-stage capital, often with mentorship.- Differences: Angels invest personal money in smaller deals; VCs manage institutional funds for larger investments.
- Advantages: Flexible terms, industry expertise, faster decisions.
- Disadvantages: Limited follow-on funding, less structured support.
- What is the role of accelerators/incubators? When are they appropriate?
Accelerators/incubators provide mentorship, resources, and small investments in exchange for equity. They are best for early-stage startups refining their product, seeking funding, or needing networking opportunities. - What are sources of non-dilutive funding? What are its benefits?
Non-dilutive funding includes grants, government programs, revenue-based financing, and R&D tax credits. It provides capital without diluting ownership, allowing founders to maintain control. - What is pre- and post-money valuation? How are these values determined?
- Pre-money valuation: A startup’s value before new investment.
- Post-money valuation: The valuation after investment (Pre-money + new investment).
These are determined based on market potential, traction, and comparable industry valuations.
- What is an option pool? Why is it important to entrepreneurs?
An option pool is a reserved share of equity for future employees. It affects founder dilution and valuation, as investors often require a large pool before funding rounds. - What are the principal elements of a venture capital deal? How do liquidation preference and control impact entrepreneurs?
- Key elements: Valuation, ownership percentage, liquidation preference, voting rights, board control.
- Liquidation preference: Ensures investors recover funds first in a sale, often at a multiple.
- Control: Investors may secure board seats and voting rights, potentially reducing founder autonomy.
Venture Capital
Venture Pool
present value, future value
Time Value of Money
Opportunity Cost
Future Value Analysis
Compound
bank
Risk return trade off
Account Receivable
Bootstrapping: reinvestment
need a lot of capital to start, use bootstrapping
safe: an agreement, convert to future equity
post money valuation
pre money valuation
Equity, Debt
Investor Protections
- minimal
- May have discount on future share price