Every business after reaching a threshold size needs an influx of capital to scale and to expand the enterprise. However, many times entrepreneurs have to decide on how they would want to grow in the early stages, i.e. faster growth by raising funds or gradual growth by bootstrapping. There are many successful entrepreneurs’ stories which depict the advantages and challenges in both, bootstrapping and raising money through either angels or VCs.
How an enterprise is funded determines the entrepreneur’s control on the business and the rate at which the business is going to grow. On the one hand, bootstrapping might be rewarding for entrepreneurs as they hold the complete ownership of the firm; while on the contrary, going to the investor boosts the company brand as it validates the business potential.
How does bootstrapping force an entrepreneur to perform better?
Focus on product development and execution
Time and money matter for startup companies so that entrepreneurs learn faster and build more valuable products. Bootstrapping allows entrepreneurs to focus on the essentials and drives them to work efficiently and creatively to make the product right. This helps the founding members create a lean, fast moving startup that can innovate ahead of the competition.
Freedom to make decisions
There is no dilution of ownership and no pressure of investors while making a decision or implementing a change in the business. As the founder-owners, entrepreneurs can make modifications to the business model without depending on anyone’s approval. This enables quick decision making and swift execution. Moreover, bootstrapping allows the entrepreneurs to keep the original vision of the business alive without any fear of dilution by the investors.
Reinventing yourself and your business
A taste of running a business brings a drastic change in oneself as he/she learns various skills to improve business efficiency. A person learns how to run a business successfully with limited resources and gains all required skills to run it such as accounting, selling and even housekeeping. With limited funds and workforce, one learns to multitask and explore newer ways to be efficient in doing things. Bootstrapping provides an opportunity to understand every aspect of running a business; hence it prepares the entrepreneur to make better-informed decisions in future.
Better understanding of the business
Bootstrapping forces the founder members to think out of the box all the time. It allows them the visibility to see things that are not working and find alternatives to solve the issues. At the same time, it improves the decision-making ability over a period of time and also helps cutting losses. The entrepreneurs continuously leverage various available options to manage things differently and become experts in optimizing resource utilization. For example, by maintaining the financial accounting by oneself, he/she understands details of the cash-flow, cost & revenue structures and implications of any key decisions on company’s performance. As the business will be in direct contact with the customer, entrepreneurs will know what clients’ expect, learn marketing techniques, develop specific sales channels to reach the target audience and understand the general management principles of running a business.
No dependency on investors
Investors expect regular updates and meetings. The whole process of carrying out decisions becomes very time consuming and distracts the entrepreneurs from focusing on the business. By bootstrapping, there is no need to spend countless hours in preparing for the meeting, rather, entrepreneurs can use the time to concentrate on growing the business. If there is no extra layer of decision makers, then entrepreneurs can afford to move faster.
Early funding raising dilutes the ownership. Without a good experience or a good track record, entrepreneurs would need to sell out a larger equity share to raise funds from Angel investors. By bootstrapping, an entrepreneur can bring a valuable product in the market and prove its success without any extra funding. This will earn a reputation for the founders and will establish recognition for its business. In the long run, bootstrapping opens doors for better investments by leveraging the existing business as the proof of concept to attract more investments.
Sanity Metrics Vs. Vanity Metrics
In a bootstrapped business, the only focus for an entrepreneur is building the product right for the target consumers. So he/she puts all efforts on understanding the market, optimizing the features, increasing the customer base rather than focusing on a metric that makes any investors happy. When bootstrapping, there is pressure to perform, but there is no benefit by depending on meaningless or inflated performance indicators, such as the number of visitors, followers, and subscribers. It looks appealing but doesn’t address the priority of the business. Startups should focus on real metrics such as Cost of Acquisition (CoA) – the cost of getting a new customer, and Lifetime Value (LTV) – the revenue an average customer generates for the business over their lifetime. This is related to how much users are benefiting from the product or service and the number of times they return for the same or different products or services. These metrics could extend to any tangible efforts which promote customer retention and repeat custom. Sanity metrics help to drive the business results and increase customer value and makes them happy.
How does bootstrapping a startup create problems for an entrepreneur?
Most of the businesses find funding as the biggest challenge to convert ideas into reality. By investing own personal finances could drive into serious debts. The downsides of bootstrapping could be as follows:
As the entrepreneurs invest their personal assets, they incur huge financial risk if the business fails. Sometimes, profit earned from existing venture may not be enough to bear the cost for expansion or to meet the current expenses.
Cannot afford innovation or scalability
Entrepreneurs can test the market with limited resources. However, growth prospect will be low, and ROI could take a longer time to achieve. They might feel static and limited with very less scope for faster development. The business might lose growth opportunity or fail to survive due to lack of funds. One will take more time to evolve the product over time and sometimes lose the first mover advantage. If the business involves technology or is based on research and development such as pharmaceutical or biotechnology, then they need very highly skilled people to build the product. Hiring moderate talent could lead to making more mistakes and thereby increase the cost to rectify. This also may allow others to hit the market with the better alternatives while one is still in the process of developing the product.
Lack of support
Many businesses need something more than money which can be a good social network, strong team members, advisors and valuable references to enter a new market. Thus having an investor can play a key role in shaping the business to achieve greater heights. As investors are looking for higher returns, they usually provide their expertise or valuable connections which can prove beneficial in the long run.
Points to keep in mind while bootstrapping a startup
- Entrepreneurs must ensure that the business model makes quick revenue to avoid cash flow issues.
- Startups should focus on public relations from an early stage as it helps to build positive branding and creates a buzz for early adopters.
- Be prepared to take up multiple roles. Find ways to reduce or eliminate expenses by being your own receptionist, bookkeeper, salesperson and financial decision maker.
- On a personal level, sometimes changing spending habits can save several thousand dollars such as cooking your own food, or taking a bus ride instead of driving, avoiding excessive usage of credit cards on unnecessary items.
- Entrepreneurs should participate in various business events and gatherings. This helps in finding collaborators, competitors, meeting buyers, suppliers and spreading the business idea to an audience.
- Entrepreneurs should not wait for the complete development of the product or services to release in the market. It would be better to launch the product with minimum viable features and focus on continuous improvement by regularly testing the product in the market.
- A startup can save time and resources by selling the product first and then start developing the product later. This idea is popular in mobile, IT and manufacturing industries.
Tips to avoid startup cash flow problems when bootstrapping
Invest your own funds as long as possible
As soon as entrepreneurs start a business, funds drain out quickly. They must use accounting tools to track personal and business expenses. This can help in avoiding unnecessary financial leakages. Sometimes there might be a need to make lifestyle changes such as shifting from an expensive rented apartment to room sharing options. There is no excuse for lazy accounting.
Look out for alternatives
Entrepreneurs should find ways to save cost whenever possible. They can compare the options of renting vs buying, using second-hand items rather than brand new, reducing costs by working remotely or outsourcing, by usage of free software instead of expensive software. One can avoid buying a new car or home to add an extra personal debt.
Bootstrapping is a way to test the ability to survive under various business circumstances which may be due to market changes, social requirement, or competition. It is all about how to achieve the primary target or make things happen within a constrained budget, so it forces the entrepreneurs to invent, reinvent, innovate or be creative. If the entrepreneurs survive, it will be self-satisfactory and can be a boost to build a reliable, efficient and customer focused company. The learning from bootstrapping will be really useful while running a large organization which have the tendency of becoming bloated and inefficient.
Good ideas are worthless unless actions are taken to execute them according to the business advantage. Sometimes, a business model needs to be changed or diversified to meet the changing market demand. It is up to the entrepreneur to identify and seize the opportunities as situations arise.
There are many businesses which had a good idea, built a valuable product, worked with the brightest team, but the whole business got wiped out because of cash shortage. It is important to look for investors before entrepreneurs go completely out of cash. Both bootstrapping and funding have their own upsides and downsides. While bootstrapping enables entrepreneurs to have full control of the business; external funding helps them in sharing the risks. One can also go for a combination of these options such as start by bootstrapping a business, achieve initial growth using debts and go for investors to scale and expand. Learning to improvise is an important skill that every startup must learn to succeed.
And By The Way,
I’m the founder of Createl.la, a team of serial entrepreneurs, consultants, developers and growth hackers helping entrepreneurs build their MVP (UX+UI+DEV). So if you have a brilliant idea that you want to bring to life, I’m more than happy to help, just send me an email or a private message.
Thanks for reading,
Founder, CEO @ Creatella Venture Builder
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Also published on Medium.