Few businesses have the luxury of taking on venture capital, angel investments or other external funding when they are getting off the ground. So for the majority of entrepreneurs, bootstrapping their business with personal funds is the only way. Here, OPEN Forum experts share best practices and other words of wisdom on how bootstrapping can work.
If you really understand this, you need to plan in advance, says Guy Kawasaki.
“If you know you are going to bootstrap, you should start a business with a small upfront capital requirement," says Kawasaki. "[Use] short sales cycles, short receivables terms, long payables terms, and recurring revenue. It means passing up the big sale that takes twelve months to close, deliver and collect. Cash is not only king, it's queen and prince too for a bootstrapper.”
Well-funded startups may have a higher success rate than bootstrapped companies, but that doesn’t mean your bootstrapped company will flop, says Scott Allen. There are several ways to avoid failure, including bringing on partners instead of full-time employees.
“Payroll is most companies’ biggest expense," says Allen. "Without a big pile of cash, you can’t afford it, period. Find people who are willing to work for equity, or at least deferred salary, when first starting out. Don’t hire any paid employees until profits allow you to pay them. Of course, this means that you have to have all the core competencies for the company covered in your core team. Find people whose strengths cover your weaknesses.”
Even if you have a well-crafted idea, a business plan and an opportunity to secure funding, entrepreneurs suggest bootstrapping as much as possible.
When Marissa Evans of Go Try It On was in the midst of launching her venture, she was advised to “bootstrap the idea as much as I could for as long as I could.” She was also told to “think about any way you can try to prove concept without necessarily spending a lot of money,” she explains in the video.
Self-funding a business often leaves entrepreneurs with a frantic feeling of wanting to get business from any customer possible. But your company won’t flourish if it’s tied up in unprofitable business, says Small Business Trends founder Anita Campbell.
“What surprises me is how many small-business managers have only the vaguest sense which product lines or customers are profitable and which are not–and no real data. Sure it may take some effort to set up your accounting to track detail accurately at the product, service and/or customer level. It’s easier to do this in some businesses than in others. But using today’s accounting software and the help of a good controller, bookkeeper or outside CPA, it’s doable.”
Making money is easier when your business plan is concise, focused and stripped of excess, says the Young Entrepreneurs Council. So stick to the bare necessities, suggests Jared O’Toole, co-founder of Under30CEO.com.
“A lot of projects that go after financing only do so because they have so many features they need tons of money to build them. Scrap all the features and focus on one small core piece. Take a second look at your business plan, odds are many of the things you think you need you really don't to get the first customers in the door. Start getting customers and making money and slowly reinvest it and build the other pieces yourself.” Leave the fancy features for later.
There’s no doubt about it: Starting a business is expensive. But there are always ways to cut costs. Fellow bootstrapper, and Globotrade owner, Rodrigo Gonzalez describes some of the methods he uses to keep overhead costs down.
“I delegate all the overheard I can to the vendors and the manufacturers," Gonzalez says. "Instead of having a warehouse and keeping inventory in it, I have the factory hold onto the inventory for me. They pay the rent and they are responsible for any liability regarding the inventory that’s in stock. They pay their employees to keep the product moving.”
Shira Levine shares more advice from experienced bootstrappers here.
