BootstrappingBootstrapping in Business means starting a Business WITHOUT External Help or Capital. It means funding your Business through Internal Cash Flow and by being very cautious of Expenses.
The PROS and CONS of Bootstrapping your STARTUP
Every year, countless Startups fail to take off because of one single reason : FUNDING ! It doesn't matter how brilliant, unique, and potentially world-changing your idea is if you can’t manage to raise funds for it.
VC's ( Venture Capitalists ) prefer to invest in ideas that will produce big returns, usually in the range of hundreds of millions of dollars – thereby disqualifying a huge number of Startups from even getting close to approaching them.
Angels invest smaller amounts, and so it’s easier to get Angel Funding if you are starting with an unproven market, but even then, you’ll need to prove to them that you and your idea are capable of showing growth and capturing that market, so that you can eventually aim for VC funding, or show the kind of innovation that typically leads to acquisitions.
There is a multitude of cases in which neither of these options is viable, and in our current economy, the number is growing. So what do you do ? Pull yourself up by your bootstraps, of course.
The definition of Bootstrapping varies from startup to startup – some Startups feel that Bootstrapping means that they survive on nothing but customer revenue – for some others, Bootstrapping covers Loans, Grants and even Angel Funding.
Karen E. Klein of Businessweek gives a handy checklist of the term usually means.
” Bootstrappers typically rely on savings, early cash flow, and penny-pinching to fund Startup companies, rather than seeking external funding in the form of loans or investments,” she explains. Like any other funding mechanism, Bootstrapping has its benefits and disadvantages. We shall look at a few of them here.
VCs and Angels will always try to get you to turn over a profit at the earliest, so that you can make a fast exit. This means that you lose control over what you want to do with your company and have to dance to their tune. Your original vision can get compromised, sometimes severely. It can also hurt your long term growth because all businesses are not designed to work on the “grow big or go home” model. Bootstrapping will enable you to grow your company at your own pace, keeping greater control over its trajectory, and you can focus on your product, rather than just the profits.
More Profits for You
It’s simple mathematics – fewer investors means less people to share the profits with at the end of the day. This means that you can cut corners where you find it necessary, and have higher margins once your product starts selling. Most investors will also need you to be a C-Corp before they invest in you so as to protect themselves financially. However, as the head of a C-Corp, you will find yourself in the unenviable position of being taxed twice, which can be avoided if you are a partnership or a LLC.
VCs and Angels might back out if they see you pivoting, but sometimes, you really do need to change direction. According to Nanxi Liu of Enplug, “Being in bootstrap mode actually makes pivoting easier. With a lean operation, the costs for dropping ideas and moving in a new direction are minor, whereas the sunk costs that come with pivoting with money can be nerve-wracking.” However, this is a controversial opinion, since there are others who disagree. Ashkan Karbasfrooshan, CEO of WatchMojo, says, “ With no safety net ( let alone a warchest ) on your balance sheet, you can’t really pivot if your business is hitting a wall. Even if you’re doing well, money is your lifeline, so lacking it may starve even the most promising of bootstrapped companies, preventing you from investing in growth or supporting your clients.”
Bootstrapping means that your resources are limited and you have to do whatever you can within that budget. You can reinvest only once the cash starts flowing in. As a result, your growth is slow, and you will have to adjust accordingly, thinking of the long term picture. This, however, is not possible for Startups in the web and software industry, which are typically very fast moving.
When you are Bootstrapping, everything rests on you and only you. So if you make a profit, you gain a lot more, but if you fail, you stand to lose everything. Many Entrepreneurs can’t afford to take a salary when they are Bootstrapping, and then if their Startup fails, it means that they will not only have lost all their money, they also spent a year without any income. Finances while Bootstrapping are a nerve wracking proposition – with funding, on the other hand, the risks are shared and relieved of the pressure, you can focus better on growing your business.
Lack of a Network
Investors give you not just money but valuable advice and support as well. Some of them will even take great pains to help you if they believe in you and your vision. Moreover, they have already accomplished what you want to, so they know better than you how the industry works; they are also well connected. By Bootstrapping, you miss out on a large network of well connected people who could help you with valuable industry-centric advice.