Many startups immediately focus on obtaining large-scale investors. The focus is so intense, that many make the investors more important than the customers. Not only does this lead to a rocky start, but it can also lead to improper spending of the investment money obtained. I encourage entrepreneurs to bootstrap their business whenever possible, and utilize investors only when the time is right. Let’s dig deeper to find out how this can be done and if bootstrapping is a good fit for your startup.
What is Bootstrapping?
Bootstrapping an idea is really about building and launching your product without external funding. This is actually a common occurrence, contrary to what many websites and magazines may lead you to believe. Bootstrapping usually involves self-funding through investing personal savings, and/or a line of credit (often 30-90 days to allow for revenue to start).
Bootstrapping offers quite a bit of flexibility, including:
- The freedom to control the direction of your product
- The opportunity to build your product during your spare time, while maintaining a full-time job to provide income for your family
- The joy of focusing on what you do best, while hiring specialized help for things you prefer not to do (or lack the skills to do)
- The focus of working for your customer and doing what you enjoy, rather than pleasing stockholders
- The happiness of keeping 100% of your profits
Bootstrapping does have a downside, however:
- The cost of investing your own personal savings, rather than using outside investors
- The hard work needed to constantly build customer relationships, step-by-step, while you slowly build your revenue
- The long days that will be required as you gain customers but are just short of the revenue needed to hire more help
Don’t let these downsides overwhelm you. Just be aware that, like all bootstrappers, you will experience some tough times as well as fun times, but the advantages often outweigh the difficulties.
When Do You Need Investors?
Just because you have a big idea doesn’t mean you need investors – sometimes bootstrapping is still possible. However, there are several factors to consider that may require you to seek investors for your idea. These factors include:
- The need for capital expenditures – if your business requires special buildings, expensive equipment, or other assets that are beyond your current investment capabilities, you will probably need an investor. Note: expenses are things you need for the current taxable year and are not considered capital expenditures
- You are entering a mature market - you may be executing a brilliant idea that requires entering a mature or saturated market. To overcome this obstacle, you will likely need to invest a large amount of money in marketing to create brand awareness
- You require rapid growth – you may need a large amount of people to get the company prepared for going to market, or for acquiring other businesses that contain valuable intellectual property
While these are just three common factors that venture capital may be required for your startup, it may still be possible to bootstrap your business. Consider outside investments carefully, as it often requires giving up a significant portion of your ownership to those outside your company. The advantages, such as accessing valuable investor contacts and experience, may be worth this sacrifice.
How Do I Know If I Can Bootstrap My Idea?
Now that you understand the differences between bootstrapping and outside investment, you’ll need to make some important decisions about how you will launch your idea. The best process is to create a realistic financial projection for your idea, to help you determine what kind of funding you’ll require. Be sure to include line items for manufacturing/development costs, projected revenue, expenses, cost of living, and contingencies/unknowns. A little time spent learning how to create a financial projection will be useful to have the confidence you need that your numbers are both realistic and attainable.
After reviewing your projections, you may realize that you require more investment that you can do yourself. If that is the case, you have three options: 1) simplify the idea to reduce the initial costs, thereby delaying the higher costs until you’ve started producing revenue, 2) seek outside investors, or 3) select another idea.
If you decide to bootstrap your idea, determine if you and your family can live 6 months beyond your projections with no income, in case you fail to hit your projections. Having 6-18 months of savings will help you focus on your product launch and not on your mortgage. If you lack sufficient savings, consider taking a part-time or full-time job and bootstrap your product during nights and weekends to get things off the ground.
Should you decide that you will need outside investment, keep in mind that many investors want to see if you can produce some portion of your idea, market it, and obtain paying customers. Until then, you are an unproven person with an idea. Once you show that you have the capability of executing your idea, they are more likely to consider investing.