5 Ways to Know Bootstrapping Will Work for You
A version of this article first appeared at Inc.com.
Ah, the romance. What panache, what bravery, what spirit. Bravo!
There’s a devil-may-care, us-against-the-world, Steve-Jobs-in-a-garage aura surrounding the concept of bootstrapping that masks a dour reality: In most cases, bootstrapping a new venture (essentially, launching it on a shoestring, using whatever crumbs of “funding” you can scrape together from your credit cards, personal savings, other people, and any coinage down the back of the settee) is a grindingly painful, decidedly non-romantic process with only a limited chance of success.
Don’t get me wrong: I love bootstrapping. When it succeeds, it can be very rewarding for founders, especially in terms of the amount of equity they can retain. Done badly, however, bootstrapping can become a living nightmare–the equivalent of being daily stretched on some sort of a medieval financial rack.
I know of what I speak. In over 40 start-ups, I used bootstrapping often. Some of those businesses succeeded very well, some just scraped through, and two failed. Along the way, I identified five key factors to ensuring that bootstrapping will work for your new venture:
1. Your product/service offering is relatively well defined. It’s a rare start-up that leaps into the market place perfectly formed. One of the keys to success for any new business is to listen to the market, remain flexible, then alter your product or service offering in accordance with market feedback.
There are degrees of flexibility, however, and because of the restricted resources it provides, bootstrapping works best when the path (and time) from launch to market is relatively short.
So from a bootstrapping perspective, there’s a big difference between a start-up that’s, say, “going to do something in the geo-targeting space”, and one aiming to launch an app which will find you a nearby car parking space. While the latter is an ideal candidate for bootstrapping success, the former–with a potentially lengthy period of r&d / trial and error–is better suited to a more robust funding model.
2. You have a small founding team. Bootstrapping is a messy business, even from an accounting perspective.
Funding usually arrives in dribs and drabs, and not always in the form of straightforward cash. Founders often pay expenses personally, use their personal credit cards, capitalize the value of the time they work, use personal assets for company business–just about anything that will get much-needed value into the cash-starved start-up.
This bouillabaisse of funding options is tough to track even when it’s just you, alone. Add another founder and now you don’t only have to struggle with twice the accounting, you’re also faced with the issue of fairness: How does the 60 hours Joe worked for free this week, say, equate financially with the fact that we’re using Priya’s kitchen as the office? And what about the 60,000 air miles Priya just cashed in to get the team to that conference in Vegas?
In my experience, bootstrapping works great with a founding team of one, is manageable with a team of two, and can be made to work (after some spats and hissy fits) with a team of three. With a team any bigger than that, the contortions and tensions of bootstrapping become overwhelming and often derail the entire project.
3. Your labor need starts low and builds flexibly. There’s little more stressful than trying meet payroll in a bootstrapped business.
Trawling your available credit cards (or hitting up Aunt Sarah…again) to find the cash needed to pay a supplier is draining enough. Doing so because otherwise you have to look someone in the eye–someone you persuaded to leave a good job and come work for you in the first place–and tell them they aren’t going to get paid this month, is emotional torture, for both parties.
So if you’re planning on starting, say, a social-media based PR agency, where you can hire people as and when you need them for newly-landed clients, then bootstrapping might well be ideal. If you want to open a nursing home, which needs to open fully staffed on day one, then bootstrapping might not be right for you.
4. Limited capital outlays are required. On a similar note, be wary of trying to bootstrap businesses that require a large amount of capital expenditure, even if they’re not required on day one.
I experienced this painfully some decades ago when (with a partner) I bootstrapped the acquisition of the master license for Pizza Hut in Ireland. Although the initial transaction–acquiring the license–was easily bootstrap-able, once we broke ground to build our first restaurant, the capital needs almost undid us.
5. Your sales cycle is relatively short. As we’ve seen, used correctly, bootstrapping can be a highly effective way to finance your start-up’s early-stage external funding needs. One of the saddest things I’ve had to witness, however (and sadly, I’ve seen it often), is watching a new venture being successfully bootstrapped right up to the point of marketplace viability, only to stumble at the very last moment.
The reason this happens is unfailingly the same: Bootstrapping, which can be effective as a source of initial external funding, isn’t a good way to provide working capital once trading has begun. The daily drip, drip, drip of financing your supply chain needs isn’t something that can be met by classic bootstrapping methods.
So if you’re entering a market with long sales cycles (big-ticket hardware, for example, anything in the construction industry, traditional publishing) either find another source of funding, or if you’re committed to bootstrapping at the outset, make it a goal to find some form of working capital funding (like factoring, for example) as soon as possible.