What Is Bootstrapping?
Bootstrapping is when an entrepreneur starts a company with little capital, typically personal savings (or loans from friends and family) or from the operating revenue of the company, and it continues to grow without external investment.
Is Bootstrapping A Good Idea For Startups?
Founders can opt for bootstrapping their business when they have enough capital to last for at least 12 months to meet the growing demands of the company and expect to generate enough profits to fund the operating and capital expenses during this period.
Why Is Bootstrapping Good For Startups?
- Bootstrapping empowers entrepreneurs to have 100% ownership of their businesses. Even with cofounders, they can have a larger equity share as compared to raising funding through multiple rounds.
- Bootstrapped startup founders can retain full control over the business by being the last decision-makers. They can avoid external pressures and conflicts of interest that come from external funding.
- Founders have the ownership to fully align their startup with their vision and values, making bootstrapping a preferred option for those who prioritise artistic direction and decision-making control.
- Bootstrapping is ideal for founders who intend to run their businesses in the long run or pass them on to future generations.
- Bootstrapping helps founders avoid the pressure from outside investors to provide a significant exit within a limited timeframe, which is typically around 10 years.
What Are Some Tips For Bootstrapping A startup?
In an authored article, Sandeep Aggarwal, founder of Droom and ShopClues, shared some insights for entrepreneurs looking to bootstrap their startups. Here are his key tips:
- Aggarwal suggested that bootstrapped startup entrepreneurs should set realistic goals. They must prioritise superior returns on even small investments, which will help foster operational efficiency and lead to long-term success.
- Bootstrapped startups should avoid taking credit and loans. They should focus on achieving profitability without the added burden of debt payments during their early stages.
- During the early stages of bootstrapping, startups should focus on grabbing as many business opportunities as possible and not turn away potential clients.
- Bootstrapped startups should focus on building a loyal customer base, even if it means operating at break-even points (when revenue and operating costs are equal).
- In the early stages, bootstrapped startups must focus on minimising expenses by leveraging free or low-cost resources such as used equipment and available spaces to support their venture.
- Despite potential financial success, founders should maintain the discipline of running their business like a bootstrapped organisation to minimise unnecessary expenses. They should focus on providing appropriate compensation to employees to keep them motivated and engaged. They should avoid indulgent spending when revenue increases.
- Optimise the workforce by recruiting individuals with multiple skills and reward them with performance-based incentives to enhance productivity. Avoid overstaffing in a bootstrapped firm.
- Leverage social media platforms to gain visibility and connect with a wide consumer base. Invest in social media analysts to maximise business exposure.
- Bootstrapped startups must conduct surveys, discussions and personal research to evaluate the viability of their business idea.
When Should A Bootstrapped Startup Look For External Funding?
As per industry experts, bootstrapped startups can raise external funding. However, they should consider the following scenarios:
- A startup must have proven its business model, gained initial traction and identified opportunities for growth that will require additional capital. If all these criterias are satisfied, it can attract investors to raise funding that can help businesses scale faster.
- A bootstrapped startup can raise external funding when it aims to enter new markets, expand its product or invest in research and development to stay competitive.
- As a bootstrapped startup grows, it requires skilled employees. It can look for funding to offer competitive compensation packages.
- In a competitive industry, well-funded companies give stiff competition. To level the playing field, bootstrapped startups can raise funding and strengthen their position in the market.
However, VC funding involves the risk of founders losing autonomy. To avoid this, bootstrapped startups can go for venture debt funding. Venture debt offers financial help without taking equity.
Bootstrapped startups should assess their funding needs and growth potential and consider the terms and conditions of external funding to determine a suitable approach for their unique situation.
How To Manage Cash Flow While Bootstrapping?
Proper cash management is crucial for bootstrapped startups and small businesses. Here are a few suggestions to save money while being bootstrapped:
- Startups can leverage advanced technology tools to streamline accounting procedures and gain insights into their financials with built-in analytics.
- Founders of bootstrapped startups can support and equip their employees with the best tools available to contribute to the company’s growth.
- Data analytics can be used to identify financial waste and opportunities for monthly savings. Understanding spending patterns can help manage cash flow efficiently.
- One of the challenges for bootstrapped startups is balancing cash inflow and outflow. Instead of using cash to pay for services, startups can explore opportunities to trade services to reduce expenses.
- By implementing these strategies and utilising technology, a business can effectively manage its cash flow, support employees, and continue to grow.
- It’s beneficial to have a steady income, through a day job, during the early stages of a startup to alleviate financial stress.
