Why Bootstrapping For Year 1 Of Your Startup Is Best Before You Raise Funds

Entrepreneurs always start with one of the earliest and most critical decisions in their lives – should I bootstrap or raise a seed round for my company? This is one of the foremost questions that you need to answer before kicking off your own company. How you fund the initial capital of your startup will go a long way in determining its chance of success and sustainability along with your own relationship with it.

As an entrepreneur who has invested significantly in my own company, I believe that bootstrapping is the best option and a great learning curve. Let’s be clear at the onset – it will be difficult and will not always be glamourous, but bootstrapping will teach you to become a stronger entrepreneur with a vibrant business sense. Since it is your own money which is at stake, you will look for innovative means to substitute costs out of operations. This will go a long way in determining your skills of running a business. And here’s why:

Freedom In Decision Making

One immediate benefit of bootstrapping is that you are not reliant on outsiders for their opinions. You get absolute creative and executive freedom to run the show the way you want to. You successfully block out an outside voice protecting its investment, you become that same voice.

Strong Positive Vibe

Bootstrapping leaves you with no other option than to generate revenues from the word go. The journey would be long and tedious, but it will also teach you to find better ways of conducting business. A sense of positivity starts bursting out of all the negative circumstances around you. You start looking at revenues as an eagle’s eye which needs to be hit. Your tenacity and grit will make you start valuing money since bootstrapping means every penny matters.

Will Enable Proper Testing

As a thumb rule, a startup needs to sufficiently test its product before betting big on it. With the lack of funds, bootstrappers are forced to start small, test your assumptions carefully and then scale up. This will help your structure your company in terms of product type, target audience, vision, how to reach the target audience, how to service them, what problem will they or are you going to solve and how are you going to solve it.

Smaller Risks To Begin With

As an entrepreneur, you are bound to make mistakes. Just that the mistakes will not cost you a great deal when you are bootstrapping. They will almost certainly be smaller in scale and impact. If the business fails to take off, it is less painful to exit as the cash burn rate will have been low. However, if the business takes off the rewards are not dispersed to third parties. Once there is proof of concept and evidence of demand, it is a lot easier to secure financing at more favorable rates.

Profit Margins

Bootstrapping ensures you to keep your organisation and expenses always under check. This will do wonders for your company’s overall profitability and valuation. In fact, keeping a relatively low burn rate is one of the key aspects of a company’s success. Plus, companies running with low overheads often enjoy a much larger profit margin. If they succeed and begin to consider exit opportunities, a low-cost margin can have a dramatic impact on earnings, which is a common basis for valuation.

Conclusion

The journey of every entrepreneur is different. However, the one constant is that success depends on an entrepreneur’s ability to execute strategically. Bootstrapping is turning out to be an increasingly popular way to start a business, regardless of the economic conditions. Once you start gaining momentum and revenue begins to increase, you may then need to switch out of bootstrapping mode. At this point, it may be appropriate to seek external funding from the likes of VCs.

About The Author

[The author of this post is Sarvesh Shashi, CEO of Zorba – a Renaissance Studio.] 

Note: We at Inc42 take our ethics very seriously. More information about it can be found here.