I am now 6 months into my 3rd start up which feels like a good time to share my experience of financially bootstrapping my latest startup, which I believe has lead me to become a better, stronger entrepreneur, and in turn create a business with a real chance of long term success.
This venture is my 3rd start up, having sold the 1st two, the hat trick is visible on the horizon, though still some way off! This is the first venture I have Bootstrapped and thus far we are on track to emerge from this phase early in the new year.
As I write this article the Bootstrapping category in SavvySME is empty, so here’s to breathing life to this method of funding your startup amongst the SavvySME community.
So what is bootstrapping?
Bootstrapping a startup is fundamentally about developing the business with little or not external funding, spending as frugally as possible and using the business’s internal cash flow, revenue and possibly your own cash, to fund the early stages of getting the business to market.
It’s common for the founders and early employees to not pay themselves any salary from the business, but instead be rewarded with equity in the business. The challenge that arises is that we all have bills to pay, even if it’s the bare necessities of food and accommodation, we still need an income to pay our way and survive.
To overcome this challenge bootstrapped businesses have learnt to get creative by splitting their time between paid engagements for other companies and developing the startup. These paid engagement often leverage the core skills of the bootstrappers (consulting & coding) but are not limited to these, with many bootstrappers taking a range of casual work to pay the bills so they continue in the startup. At last count I have completed 8 short term consultancy roles over the last 6 months, each facilitating the next phase of developing the business.
Who is bootstrapping relevant to?
Not everyone! This is not a conventional approach to starting and building a business and a history of many failed bootstrapped startups tells us that it does not work for everyone. To help you understand if this is an approach that fits your business here’s what we have learnt, most specifically from the last 6 months, of developing our latest bootstrapped business.
The common threads between bootstrapped businesses
Businesses that are relevant to the bootstrapping approach share some common threads, these include:
- Relatively low upfront capital requirements (I started this latest venture with less than $10k of capital)
- Receivable payment terms tend to be short, whilst payable terms tend to be at the longer end of the range
- Revenue tends to be recurring, so you are not constantly spending time or paying resource to chase new sales to keep the lights on
- A significant number of new sales are generated via your current users referring/recommending it to friends and colleagues
The common traits of Bootstrapped businesses
- You work from your bedroom, garage, shed, kitchen table or shared office space
- Your time is split between income earning (bill paying) roles and building your startup, only committing full time to the startup when it can fund your bills.
- Outsource ahead of hiring, we are regular users of Odesk through which we have sourced contractors in the Philippines and Indonesia
- Follow the Minimum Viable Product (MVP) development approach to get your product to market as quickly as possible so you can garner customer feedback prior to evolving the product any further. We had V1 of our product in market within 6 weeks, the feedback we received from this prototype has fundamentally determined our final product build.
- Use sweat equity as a currency to acquire the services you need which you cannot afford to purchase. This worked really well for David Choe who famously accepted payment of Facebook shares for creating graffiti art at Facebook 1st offices, these shares netted him $200m when Facebook IPO’d
- Hire based not only on 1st class capability but on cultural fit and commitment
Advantages of bootstrapping your business
- You retain the significant majority of the equity in the business which will pay dividends should you sell in the future
- As the majority shareholder you control the business and do not need to answer to external shareholders
- Businesses with no external funding are often described as having “Clean Capital Structures” which is a feature future investors will find appealing once you have the business beyond the startup phase
Disadvantages to bootstrapping your business
The “Skin in the game” approach where the founder is responsible for all the costs is not without its risks. In the passed 6 months I have used my personal credit card to settle accounts and shore up short term cash requirements, so be prepared to back yourself with your hard earned cash
Cash flow is king…..however good the idea and the talent is within the business the key business drivers need to be managed and prioritized, this is often not a core skill of an entrepreneur and one that is difficult to outsource in the early stage
Business growth maybe frustratingly slow due to the lack of funds, perseverance is a skill I have learnt over the last 6 months
I hope this article provides useful insight into the Bootstrapping method of funding your startup.
Subject to the feedback the article receives my intention is to publish a follow up article outlining some of the tools we have used to keep our cost in check and bootstrap through to launch.