Question

How asking friends or family that can increase your capital ?

Discuss how a person contribute personal funds, along with sweat equity to their venture ?

Discuss how to seed money for a new venture by using bootstrapping method ?

(250words)

Answer 1

Bootstrapping for a startup means, the owners raise funds using their personal finances, and borrowings from friends and family , i.e basically without any external help.

The advantages are several:

1. Risk - There is no debt , hence the risk of repayments, cash generation to repay loans, interest overheads and other pressures are avoided.

2. Breathing space for innovation - There is no wasteful expenditure allowed, however, there is plenty of room to innovate. The founders are typically hands on, and while there is the opportunity cost of funding there is no majore external expenditure, which is saved and hence innovation without such pressures is achieved.

3. Ownership is not diluted - Typically in the starting stages, the startups cannot raise funds at too much of premium, and since a premium is not there on the share price, the investors can acquire a sizeable chunk of the ownership. However if the owners stick it for longer, till revenue generation and growth phase, by being bootstrapped, the dilution at that stage of fund raising would not be that significant.

Steps of seeding money by bootstrapping:

1. Personal assets of the promoters.

2. Loans from friends and family , repayable at more relaxed terms, without collateral / without interest cost some times.

3. Sharing some of the ownership with friends and family , inthe form of equity , to reward their help in your initial stages of growth and struggle.

4. Raise fresh external capital only after considering debt , since the cost of debt is lower than cost of equity (no dilution in stake). Hence if the business can sustain interest payments, after friends and family round , raising capital as debt is better.