Self-funding a startup offers both high rewards and serious risks. On one hand, you will be risking your precious money and time. On the other, that very same risk taking gives you a freedom and flexibility that you would otherwise be trading in exchange for some stability.
Accepting outside investment means that someone else will eventually expect to see that money back, along with enough of a return to have made it worth their while. In addition to having a legal claim on a share of your company’s profits, outside investors will often seek to obtain the rights to exercise a degree of oversight or even control over your company while negotiating the terms of their investment. This is a double-edged sword because it can be assumed that those investors have a level of knowledge that you do not. They are veterans of getting a company off the ground. On the other hand, it’s your idea and having someone else suggest or even tell you how to approach a problem may not always sit well with you.
The rosy side of self-funding
Time savings. Courting venture capital, angel investors, or running a crowdsourced funding campaign can turn into a major time sink. One that interferes with focusing on your product, the company you are growing, and all of those people out there whom you want to turn into future customers.
Loyalty and passion. One of the most important advantages that you have when you first set up a startup is an inventor’s sense of dedication to both your app and the company you are building. Venture capitalists and angel investors have other loyalties. The desire of VC or angel investor to realize a short- or medium-term profit can hinder your pursuit of long-term success for your company.
The freedom to set your ultimate destination. Is your exit strategy a successful acquisition of your company by a larger entity once it’s proven its ability to make a big profit? Or are you more comfortable with an app or a SaaS (software as a service) that will generate a decent revenue stream? It’s a lot harder to choose the latter option when you have investors whose purpose in putting capital into your company is to satisfy a ROI (Return on Investment) that may be in the range of of three to five times the initial investment.
Leaving the door open to your future freedom. Should your company prove to be successful enough, you will be able to keep your freedom through bootstrapping — by growing the company through reinvesting profits in it without incurring outside obligations.
All the profits go you and your partners. That and you keep control of your intellectual property.
Greater fiscal discipline. It’s much harder to waste money or spend excessively when you don’t have it to start with. It’s much easier to avoid unnecessary spending when it’s your money on the line.
The Lean Startup Model
One way to exercise that discipline is to make use of the Lean Startup model. While Lean Startup is not synonymous with cheap or avoiding all outside capital investment it is a customer feedback-driven approach to running a startup that focuses on maximizing efficiency while minimizing costs and risks by using concept validation methods.
Lean Startups make use of the trends of using open-source software and pay-as-you-go cloud computing services to reduce costs and while also using agile software development methods to deliver a basic product with bare-bones package of features to the market. Customer feedback and customer behavior tracking software are then used to drive a continual cycle of improvements in order to evolve the product along lines that that the customers perceive as being the most beneficial to them.
Some successful firms that have made use of Lean Startup and similar models have avoided taking any outside funding, while others have taken on external investors only at critical phases to accelerate their growth.
While self-funding may limit the overall fiscal and expertise resources you have to work with, it can ultimately provide you with more freedom, flexibility, and development time than you otherwise might have. It’s worth noting that there are dozens of examples of of successful self-funded IT and internet startups such as Dell, Microsoft, and Apple whose early self-funding allowed their founders to retain control of their companies for a decade or longer.
The disadvantages of going in alone
Higher rates of failure. Self-funded startups are statistically more likely to fail than statups with outside funding. While the exact cause or causes for this are up for debate, it is worth keeping in mind when risking your money that a) most new companies will fail and b) many of them will spawn thousands of dollars of losses on the way down.
Inability to grow rapidly. If you have a web or mobile app that you believe has the potential for rapid growth or to pioneer an entirely new niche in the market, then it is important to consider that self-funded companies are typically unable to grow rapidly. This is particularly important when it comes to dominating a new niche. If yours is a groundbreaking application you can not necessarily prevent other competitors from following you into the new market slot and competing head-to-head with you, but you can position yourself to grow fast enough to crowd out most of your would-be imitators and secure a profitable position.
It’s also worthwhile to remember that many successful self-funded startups have turned to venture capital funds and angel investors to accelerate their growth after their app proved to have legs in the marketplace. Like self-funding, VCs and angels have their own sets of advantages and disadvantages that are all the more complex because the line between the VC funds and angel investors have begun to blur in recent years, partly in response to a new generation of leaner, meaner startups.