“BootStrapping forces you to be honest about your idea. If you have a good product or service, when you share it with others, they will see the value. By BootStrapping, you’re not giving away your equity, but working hard to build a good organization & system to deliver it. If you succeed, Investors will come looking for you.” Peter/CXO Wiz4.biz Blog
BootStrapping Topics: What is it? Dis & Advantages, BootStrapping vs. Fund Raising, Stages, Should you? How to, & Examples
Being an entrepreneur, you have four (4) usual Funding options. These include:
1) Using your own Funds & Savings or Family & Friends.
2) CrowdFunding by using a platform like Kickstarter,
3) Taking a Loan from a financial institution,
4) from Investors by offering Equity,
Now, when we talk about BootStrapping a Startup, we primarily refer to how you can launch your Startup using your own funds. Even though the funds might be limited for most Entrepreneurs, BootStrap financing has many benefits. Here’s a complete Guide to help you BootStrap your Startup without diluting your own “equity” and get into debt.
A. What Is Startup BootStrapping?
BootStrapping is a self-Funding, self-starting mechanism – where the Startup Founders launch their Startup company without external Funding assistance. A BootStrapped company differs from a Financed company substantially – as follows:
1) The company is started by either using the personal Finances of the Founders or the operating Revenues of the new company.
2) The Founders focus on minimising the expenses by relying on Sweat Equity, Lean methodology, quick Inventory Turnover, & a long Cash Runway (amount of time you can survive before running out of $$$).
B. Advantages of BootStrapping
BootStrapping is a very effective form of starting a business. It has the following benefits:
1) It doesn’t involve many Costs –Debt raising involves the monetary cost of interest on investment. Fund raising involves the emotional cost of sharing decision-making power. But BootStrapping is a cheap alternative which doesn’t involve such monetary or emotional costs.
2) More control in the Decision-making process – Since no external monetary aid is involved in BootStrapping, the equity isn’t diluted much, and Founders have more say in the decision-making process of their business.
3) More “creativity” in the Organisation – BootStrapping involves the use of limited resources to fulfill a large number of tasks. This teaches a culture of more creativity where everyone looks for ways to minimize the use of resources in everything they do.
4) Full Concentration on the Core Biz – When there no stress of raising external Financial aid, Founders & employees focus more on growing their business.
5) Makes the company highly “attractive” for future Funding opportunities – The fact that business was able to start on its own, makes it very attractive to future Investors.
C. Dis-Advantages of BootStrapping
No matter how good starting the business with own Funding seems, BootStrapping your business has many disadvantages too. These include –
- Limited Capital – No matter how much a founder invests, it is usually less than what comes from Angels or VCs. This can make the business to lack some important resources.
- Widely-distributed Equity – BootStrapping often results in Entrepreneurs relying on Sweat Equity – which eventually results in equity being largely distributed among employees. This makes it hard for them to make decisions themselves as now others have Capital interest in the business too.
- Less Cash Flow – Many problems can arise if the operating profits of the business aren’t enough to cover for the operating & capital expenses of the business.
- Personal Financial Debt – Usually, the Funding is provided by one or two Founders who feel more financially-stressed than others involved in the business.
- Competitive Dis-advantage – Money can often develop into a great competitive advantage for your competitors which can pose a big barrier to entry for your business.
D. BootStrapping vs. Fund Raising
BootStrapping is basically only you (& maybe your co-founder) using your own resources to build your business. Fundraising, on the other hand, can be considered as “selling” your idea to an Investor who then offers you $$$ to build your business in return for a share of Equity.
E. more Advantages of BootStrapping
Fundraising, even though it brings in a lot of $$$ in, dilutes your Ownership of your idea. Investors join you Board and play a significant role in decision-making. You can, however, focus on the growth of the idea and need not worry about limited resources – which would have been the case if you had BootStrapped. However, many experts believe that you learn a lot more when you BootStrap as you –
1) Focus more on the Profitability – as your business requires Profit to continue.
2) Develop more Skills – by learning how to save money by hiring or out-sourcing work.
3) Become more Creative – which is an essential skill when you have to allocate limited funds to fulfill numerous objectives. BootStrapping helps you to be creative & spend the least – while producing & marketing your offering.
4) Understand the Value of small Goals – because you view success as a ladder where every small goal fulfilled takes you to a higher place. Fundraising, on the other hand, focuses only on higher profit.
F. Stages of BootStrapping
A usual BootStrapped startup grows through the following stages –
1) Personal Funding: Involves launching the Startup either using Personal savings or borrowing $$$ from Family & Friends.
2) Customer Funding: At this stage, the company is earning enough profits to cover the expenses to fund its growth strategies.
3) External Funding: The stage where operating profit isn’t enough and the Entrepreneurs must look for external Funding aid either to “scale” or to execute another strategy. The External fund can be raised from VCs (equity) or Financial institutions (debt), or by going public (IPO).
G. Should you BootStrap your Startup ???
So how do you decide if you require External Funding or if BootStrapping would work for you? Ask yourself these two questions –
- Do you have enough money to fulfil the growing needs of your company until you start earning sufficient profit?
- Therefore, can the company generate enough profits to cover its operating & capital expenses for this period?
If the answer to any of these questions is Yes, go for Startup BootStrapping. Here are some tips to help you “Just do it !!!
H. How to BootStrap a Startup?
1) Pick Team Members who fill in your Skill Gaps
Having a founding Team with “complementary” skills often results in a lot of $$$ being saved, because you don’t have to out-source.
2) Start Small
It’s easier to target a micro-niche during the initial stages of the business. Having less, but more loyal customers bringing in cash consistently, will help you grow eventually. Become the big fish of the small pond before heading to the big pond.
3) Don’t Focus on Personal Profits initially
Try to take as little as possible from your business. Most successful BootStrappers hardly take a anything from their business when it was still growing (because they usually have another source of Income.
4) Learn as many Skills as possible
The more skills you learn, the more $$$ you save. Be a multi-tasker master, but delegate minor tasks to your Team.
5) Be more Creative . . .
when it comes to Resource allocation. Always look for ways how you can assign fewer resources to fulfill the tasks.
6) Develop a good Revenue Model
Funds you have for BootStrapping always end sooner than you expected. Work on your Revenue Model – so you can generate profits as soon as you possibly can to start a good Cash Flow.
I. 10 Examples of famous BootStrapped Startups
Majority of the successful companies (like Microsoft, GitHub, Dell, HP, etc.) we see today were once BootStrapped Startups. Some of the examples of such companies are –
H1. Apple: Started in a garage in the 1970s. Steve Jobs & Steve Wozniak did BootStrap Apple by selling their car and calculator. They even smartly promoted their product initially by creating a buzz at a local meetup at the Homebrew Computer Club at Stanford Univ. Jobs negotiated with Suppliers by calling everyone and telling them about his Vision. He eventually received Net 30 terms – without any proven credit to his name to fulfill orders.
H2. Mail Chimp. In the year 2000, Co-Founder/CEO Ben Chestnut was running a Design Consulting business and had a stream of Clients who wanted Email newsletters created. The only problem was that he hated designing them. So, to spare his team the tedium, he decided to build a tool that would streamline the process and MailChimp – a $400M business now – was born.
H3.. Shopify’s founders were searching for a Shopping Cart solution – when they were setting up an eCommerce site for Snow Boarders. Unable to find one, they decided to scratch their own itch and built a solution on the then red-hot Ruby on Rails framework. It turned out to be a perfect solution for plenty more people, and the founders ran the business independently for six years on the revenue they generated. They ultimately raised money from VCs and later IPO’d, which rewarded them with a $14B dollar valuation.
H4, ShutterStock: Jon Oringer was a pro SW developer + an amateur photographer. He combined this set of skills and used 30,000 photos from his personal photo library to start a stock Photo Service that is currently worth $2B.
H5. Spanx: Shark Tank judge Sara Blakely is the most famous founder on this list – having turned a $5,000 investment into an Oprah-approved approved garment that generates $400M in revenue annually. Her fashion sense earned her a following, but her keen appreciation of the principles of capital efficiency earned Blakely a $B status.
H6. GoFundMe: Viral Marketing is dismissed, rightfully, when it is tacked on to a Biz model, but it can be a powerful driver when properly integrated into a product. Paired with hyper-efficient Conversion Rate Optimization, it can be unbeatable !!! The founders of GoFundMe were able to use these twin forces to BootStrap a business to the point where it was valued at ~$600M.
H7. Craigslist: parlayed an early launch in the first Dot-com boom into a durable long-term advantage. Despite having only 40 employees & not substantially updating the site for decades, Craigslist is the #17 most visited site in the US and is reported to generate hundreds of millions in profits.
H8. SurveyMonkey was founded in the dot-com bubble of the 90s, and tho it wasn’t as disruptive as peers, it was more durable. It survived the Dot-com crash and steadily grew into a nine-figure run rate, only raising $100M 11 years after getting started.
H9. NerdWallet – the personal finance service that promises to help young people save $$$ – lived on a tight budget from the time it was founded in 2009 until it a raised $64M series A in 2015. The company earned a $500M valuation based on $100M+ in annual revenue.
H10. AppLovin: It is shockingly common to hear Founders talk about how they couldn’t sell Investors on an idea that went on to become a $B business. Before selling his company for $1.4B, AppLovin founder Adam Foroughi said, “I couldn’t find anyone to give us an Investment at what I thought was a reasonable starting point valuation (maybe $4-$5M) But by the end of our first year of operations, we were profitable and doing over $1M a month in revenue.”
Comments: Do you have any other ideas on BootStrapping?
fm Feedough & HackMoon 3/20 enhanced by Peter/CXO Wiz4.biz
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