Sourcing for capital is never an easy task for newly founded businesses. Because of this reason, some startups choose to bootstrap during their first year. While bootstrapping helps run the businesses, is it really effective? Are you qualified to do so? What are the drawbacks and benefits? And what can you do when your savings run out? Let’s explore together…
What is bootstrapping?
Bootstrapping refers to the self-starting process of building a business from the ground up with nothing but personal savings and luck. The cash coming in from the first sales is used to run the businesses the next day and this continues until the business can stand on its own. Entrepreneurs can consider bootstrapping during their first year until the startup is qualified to be invested by angel investors.
What are the drawbacks of bootstrapping?
If you are thinking of bootstrapping, you are not alone. More than 80 percent of companies have also done the same, financing through the founder’s personal savings, credit cards, second mortgages, and in one case “a $50 check that bounced”. The median startup capital is about $10,000, so if you have this amount of money, you are good to go.
Before doing the bootstrapping, however, first you need to acknowledge the disadvantages it might have in the process. Generally, the drawbacks include as follows:
- not practical for businesses that need a large investment such as manufacturers or importers;
- can take much longer to grow a company without large investment;
- will likely not be earning any money for quite a while; and
- can easily end up in a lot of debt.
See also: Bootstrapping? Here are some ideas
What are the advantages of bootstrapping?
Not all the gold are fake, there are some genuine ones if you truly look with sharp eyes. Here is why bootstrapping could be the best option for your business:
- Bootstrapping allows you not to spend time hunting out investment, which is daunting and tiring, so you can focus on improving ideas and launching the business.
- You can control your company and are not answerable to investors.
- You will have the experience to manage your company’s money efficiently.
- It forces you to be creative.
- If you survive bootstrapping, you will have a strong, lean, efficient, customer-focussed company.
What should you prepare before bootstrapping?
As a bootstrapper, you need a different mindset and approach. Principles and practices imported from the corporate world will not serve you as well as axioms drawn from successful entrepreneurs.
To help you succeed in your approach, here are tips you can implement adapted from Amar Bhide at HBR:
- With limited capital, you might want to consider starting with a copycat idea targeted at a small market. Imitation saves the costs of market research and a startup entering a small market is unlikely to face competition from a large, established company.
- You should start with quick break-even, cash-generating projects, such as a street stall or part-time consulting. Profit opportunities that might be regarded as distractions in a large company are immensely valuable for you, a bootstrapper.
- Make sure you offer high-value products or services that can sustain direct personal selling. Getting a customer to give up a familiar product or service they often used might be a real challenge. And with a limited budget, you might not be able to compete with established business marketing. Thus, all you can do is to ensure your product or service is top-notch than those of the competitors. Sell the value of your products and customers will come.
- Forget about a professional team because you might not have money to cover their salary. Instead, you can hire an inexperienced cost-effective team or even bring in your own friends. Provide them with opportunities to upgrade skills and build resumes, rather than offering cash or other money-related options.
- Successful bootstrappers take special care to expand only at the rate they can afford and control. For example, they invest in people or capacity only when there is no alternative, not in advance of needs.
- Start from your garage or home to save the cost of office space. Or, you can try to look for another startup that has extra space for you and rent a spot there at a low cost.
- When all are set and your business grows, start scaling with the help of investors. You cannot have optimal scaling without capital.
Read also: Perks & Perils for Startup when Collaborating with Giant Company