5 Ways to Benefit from Bootstrapping
You've got the beginnings of what could be a beautiful product, and are anxious to introduce your idea to the market. There's just one hangup: funding. Or more precisely, the lack thereof.
If you're short on funds, but don't have any offers of venture capital for your start up, it may be time to strap on your boots, financially speaking.
Bootstrapping refers to the method of fueling a business with your own funds together with incoming cash from customers that purchase your product. It can lead to big results (think Microsoft, Oracle, and eBay -- all started by bootstrapping). In fact, it may be an even better option than accepting early venture capital funding from others.
“If you have money, you tend to spend it quickly,” says Ellen Thompson, CEO of 4Walls, a social-media management company, and the founder of five startups (all bootstrapped). “If you don’t have any — or don’t have a lot — it forces you to go a little more slowly.” Limited resources can help you make well-thought out financial decisions, rather than letting the funds fly out of your pocket for potentially unnecessary purchases.
Here are five ways you may benefit from bootstrapping:
- You retain more control. Chances are that one of the reasons you’re starting a business is to have some autonomy. As soon as you bring in outside investors, however, you’ll generally have to let them share in some of the decision-making. Going solo gives you the time and freedom to get an in-depth feel for your product and your customers — and act accordingly.
- You improve cash flow. Setting up an office may seem like a step in the right direction, but it’ll bring recurring expenses, such as rent and overhead. What's more, you'll likely have to enter into a long-term, legally binding contract. A better plan: Work at home. Thompson says that she knows an entrepreneur who runs a million-dollar eBay business from his garage. Sure, he’ll eventually need to find a commercial space, but holding back has allowed him to boost his cash flow. He's now in a much better position to move the business forward than he would have been if had he moved into commercial space sooner.
- You learn more about your target market. You may be eager to hire a sales force to start selling your product or service, but rushing in can have negative consequences. Entrepreneurs often aren’t quite sure how to sell their offerings, or if they’re even what the market wants, Thompson says. By donning the sales hat yourself, you’ll figure out how to pitch your wares — and gauge the market’s response. After you’ve made a few big sales, it may be time to recruit a sales team.
- You can test concepts (without losing your shirt). Let’s say you have an idea for a website. A solid approach may be to do as little as possible to launch the site and see how people respond, Thompson says. If the site doesn’t take off, you’ll have saved yourself countless hours of time and the investment required to set up a larger operation. If the site does take off, and you find yourself in a position where you do need to raise capital to keep the site going, getting funding will be a much smoother process. Here's why: You've proven that your product does well in the market, says Thompson, which will make it more attractive to investors. Also, because you've done initial legwork on your own, you'll have a better idea of how to use incoming funds to keep the business headed in the right direction.
- You can ultimately turn a greater profit. Consider this: If you start by investing $10,000 and later sell the business for $10 million, that’s a better payoff than if you gather $2 million from investors and then sell for the same amount. Bootstrapping at the beginning may be a little painful, says Thompson, but the less you have at the start, the more likely it is that you’ll be happy with the end result.
Rachel Hartman is a writer who frequently covers topics related to small businesses. Her work has appeared in The Costco Connection, Wells Fargo Conversations, Pizza Today, Bankrate.com, InsuranceQuotes.com, CreditCardGuide.com, and many other outlets.