The noble art of bootstrapping. Taking an idea, using your talent and knowledge and building a worthwhile business without the backing from investors and having little or no start up capital. Unless your fortuitously find yourself in the right place at the right time bootstrapping takes dedication, a strong work ethic and an unswerving eye on the costs.
There is a great sense of pride to be gained in starting from nothing and building a viable business. There are financial rewards too, you do not need to share the profits, or the value of the business if you decide to sell, with anyone else.
But there are risks among others, without access to funds you risk running out of cash and growth is likely to be slower.
Some of the largest companies in the world started out as bootstrapped businesses. Dell Computers, Meta (formerly Facebook) Apple, Microsoft to name just a few. So, bootstrapping does not limit how big you can grow. Although all these companies are now publicly owned and their founders no longer own 100% of the company.
But let’s step back – why are you considering the bootstrap approach? Some reasons may include:
- You lack experience in formulating business plans or in being an entrepreneur
- You feel you lack the skills for product promotion and contacts with suppliers
- You do not know how to raise financing
- You are worried that someone will steal your idea
- You do not want to share income with investors
- You do not want to spend time searching for investors
In my opinion the last two, not wanting to share income or spend time finding investors are the only valid reasons, and they are good reasons, to consider bootstrapping. Concern that someone may steal your idea is real if that is your perception, but it is unlikely. Most investors are just that, investors, and they are not going to suddenly go into business using your idea. And you will pitch your idea under some form of confidentiality agreement.
Let’s look at some of the other reasons.
You lack experience in formulating business plans or in being an entrepreneur. Launching a business without a business plan is setting yourself up for failure. Even as a solo consultant or coach you should have a business plan. Coaching or consulting is an ideal business to start with little or no money. Often you can start while still in a full time career. But whatever business you plan to run, please develop a business plan, that should include a financial plan.
You feel you lack the skills for product promotion and contacts with suppliers. With all due respect, if you feel you cannot promote your product, how passionately do you feel about it? Pitching your idea to investors is a great way to get feedback on your idea and get it refined before you pitch it to your customers.
Why shouldn’t you bootstrap?
The number one cause of business failure is running out of money. Unless you or your family are personally wealthy it is probable that you have limited funds to grow your business. If you understand that growth rates need to be managed to match the available capital you should be fine. Managing cash flow should be your number one priority. Yes, even more important than managing your business. If you run out of cash there is no business to manage. Avoid the growth to bankruptcy trap. This happens when a small business takes on a large lucrative contract or grows too rapidly and cannot manage the cash requirements. Large contracts mean high inventories if you are in manufacturing or high personnel costs if you are a service provider. Your customer may pay late. You have more money going out the door than is coming in. You can no longer pay suppliers or staff and your business closes.
You are taking all the risks instead of sharing some of the financial risks with external investors. External investors, because I would include borrowing from family and friends as bootstrapping. Another word of caution, even when borrowing from family and even more so when borrowing from friends draw up a legal agreement detailing the terms of the loan or investment. One of my clients borrowed from a friend, essentially a loan but when his business was successful the “friend” demanded a substantial payment to settle the “loan”. This was eventually negotiated down but it was still a chunk of change. Resorting to the law can be expensive. As Jerome K Jerome wrote “If a man stopped me in the street and demanded of me my watch, I should refuse to give it to him. If he threatened to take it by force, I feel I should, though not a fighting man, do my best to protect it. If, on the other hand, he should assert his intention of trying to obtain it by means of an action in any court of law, I should take it out of my pocket and hand it to him, and think I had got off cheaply.”
If you are forced, due to cash flow issues. to seek external funding you will be in a weak position to negotiate an attractive deal. You may have to give way to more of your company than you would have had to if you had sort funding at the outset.
When you are on your own, unexpected problems can be very stressful. Many entrepreneurs believe they cannot talk to their employees, suppliers, customers etc about business issues. In any growth story there will be set backs. A solo entrepreneur should consider having a board of advisors the help him or her. They should have a genuine interest in your business as well as a strong desire to help you succeed. Do not go it alone is a common piece of business advice.