Many startup entrepreneurs have lofty goals to be the next Uber or Facebook, companies that achieved their great success by having had the backing of investors. However, aspiring entrepreneurs should know that only 3% of startups actually receive venture capital funding. Therefore, bootstrapping your startup, as many others have done before, can still lead you to great success without having raised money from investors.
When you start your business you need to make sure you have sufficient capital to reach the point of being profitable or cash flow positive. Once savings have been depleted, external funding such as micro loans or taking on credit card debt are alternatives that do not require you to exchange a portion of equity for funding.
As a startup and then later as an early stage company, you need to protect your cash and keep your financial assets sufficiently liquid for you to run your business operations. Without that working capital, your ability to deliver your products and services will diminish over time before ceasing completely.
When you are writing your business plan, you should put particular focus on industry business models and learn how startups in various stages of growth are funded. This will prepare you for the financial stresses that all startups undergo as they grow.
Meanwhile, there are pros and cons of taking investor money as opposed to bootstrapping. A startup may grow quickly enough to attract angel investors. They are high net worth individuals who will write personal checks to fund a startup in exchange for receiving equity. On the pro side, investor money may be timely to keep such momentum growing. The investor may also bring with them a social network of contacts for future investment or also to provide timely customer introductions.
On the other hand, you no longer have full control over your company once someone has been given equity. To some extent you are reporting to someone else. But most importantly, those investors expect your startup to succeed and they will place pressure on you to take on other investors to meet their timeline for success. They want their investment returned in a few years with a positive return. Choosing the wrong angel investor may lead to a range of challenges such as personality conflicts or, if not structured correctly, your early investors may make future funding more difficult down the road.
Bootstrapping has the connation of someone who is judiciously managing their money in a way to retain as much of it as possible for later use. When bootstrapping your startup, you look to cut costs and lower expenses. This can be done in a variety of ways as your startup grows such as exchanging your products or services or even your personal time with an outside party that avoids any use of cash.
Subletting some of your office space is another example. Also, in some industries the entrepreneur’s innovation may be developed by a potential customer. The entrepreneur and the customer work out terms for the innovation’s use after development that requires no equity to be exchanged.
One other way of bootstrapping your startup is to explore creating a minimum viable product (MVP) that enables you to test the market for your product before committing a large amount of capital for its development and production. This preliminary step may save a startup thousands of dollars.
Overall, a bootstrapping mindset for building your startup is one that seeks to avoid or delay the use of investor funding. For an entrepreneur to be successful with this approach, they need to be creative, adaptable and have a broad set of skills that enables them to take on a variety of opportunities that preserves their cash.
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