In the episode 13 we looked at why entrepreneurs chose to start their business without external investments. Some of these reasons such as not wanting to share the profits with others, and willing to spend time chasing investors are solid reasons of going the bootstrap approach. Others such as not wanting to prepare a business plan, and fear of not having the necessary marketing skills to my mind are less valid. Any start up should have a business plan and you are going to have to market your product at some point.
We also looked at the disadvantages that come with a low investment approach. Primarily the risk of running out of cash,
In the episode I will share the advantages of bootstrapping, an approach that I highly recommend. But there are times when bootstrapping is not the right approach and that is when you need to scale fast because of the business you are launching. We will take a look at businesses that are not should not be launched by your bootstraps.
The advantages of bootstrapping.
The number one reason for taking the bootstrap approach is that you are in total control of your business. There are no external investors to interfere with your plans. You build the business in accordance with your vision, values and beliefs. You do not need to share the spoils of your success with anyone, its all yours. You will not run the risk of getting fired by your investors. You grow at your pace. During Season 6 Show 8 I talked about a pet care company called Baroo whose owners were pressurized by their investors to expand rapidly and this strained their cash and capabilities and in the end the business failed. Baroo’s owners had originally planned to grow organically using the cash from the business to fund growth. Instead, they borrowed to fund the expansion with disastrous results. It’s a lesson worth learning to listen to that episode click here.
Not being beholden to investors allows you to focus on growing your business, increasing sales, developing new products, communicating with your staff.
When you achieve success and are ready to expand your business it will be very attractive to investors. A proven profitable, debt free business is a big draw. Now you will be in the driving seat when it comes to negotiate with investors. You can keep much more of the company for yourself than if you already had investors. You might even be able to ensure you retain control of the business even if you are a minority shareholder. You can become another Steve Zuckerberg who retains a high degree of control over Meta, formerly Facebook.
It is probable that you will become a better businessperson by bootstrapping your company at the start. You will need to be resourceful, learn alternative sources of funds such as Invoice factoring. You will be adept at managing costs and controlling cost flow. A low-cost culture instilled at the launch of your business can drive higher profits and business expansion. Just like Walmart where low cost is ingrained in their business model, part of the corporate DNA.
Bootstrapping is not suitable of all startups. If your business model requires rapid growth then bootstrapping is not going to work. Businesses such as LinkedIn or WhatsApp only become useful when there is a critical mass of customers. What would be the value of WhatsApp if none of your customers, friends, and family were on the platform? This type of business needs to scale rapidly, market heavily, and stay ahead of the competition, This takes a lot of money, and therefore investors.
If the barriers to entry are high, bootstrapping isn’t going suitable. You cannot bootstrap a new airline. Unless you are already wealthy you will not have the funds required. There is an old adage about the airline industry. It’s easy to make a small fortune in aviation, just start with a large fortune.
Your own personality may determine if you are the right type of person to start by bootstrapping. Are you a Sam Walton or an Elizabeth Holmes? Sam Walton was well known for not spending more than was necessary. Elizabeth Holmes, according to the prosecution in her recent trial, was addicted to the jet set lifestyle and high living. Bootstrapping will likely need that you have to reinvest most if not all of the profits into your business. There maybe little left over to spend on yourself. Your rewards will come later when you achieve success.
Attract a mentor or any person who is successful in that business and who will give useful advice.
Use the most of networking opportunities and communicate with a network of personal contacts. In a developed personal network (or a network of friends and relatives), there may be journalists who will write about you or graphic designers who will make a logo or a minimalistic but trendy website out of friendship.
Most importantly develop a cash flow forecast to be sure you have sufficient funds to keep going until your business becomes self-funding. Remember the three rules of starting a business 1) Do not run out of money, 2) Do not run out of money and 3) you’ve guessed it, Do not run out of money.
If you own a general aviation plane it comes with a pilot’s operating handbook. Included in this book are tables that allow you to calculate the distances needed to take off and land under various conditions. For safety pilots are advised to add 50% to these distances. For business survival add 50% to your anticipated cash requirements. In the next