Fast-paced growth, competing demands and limited resources are just some of the challenges startups face today. To overcome these roadblocks, businesses must adopt a bootstrapping mentality.
Bootstrapping is a business strategy where you run your company entirely with your own money. It involves assuming full financial and operational responsibility for your company in the form of starting up and operating the business with equity capital that you have.
The concept is not new, but more businesses are adopting this method of growing their startup. Bootstrapping is particularly useful in a recessionary period or when startups have difficulty accessing external financial resources.
Here’s how you can successfully bootstrap your venture.
What is bootstrapping and why is it useful?
Bootstrapping is a great way to start a business because it forces you to be resourceful and efficient. No one will be handing you millions of dollars, so you have to dig into your reserves and make smart decisions.
Bootstrapping allows you to prove your concept and create a product that customers want. It allows you to learn what works and what doesn’t before you have a large investment to lose or make costly mistakes.
With bootstrapping, you also have the opportunity to work on a product that solves a real problem for your customers. You can also work with minimal overhead and minimal staff. This means you can get a product to market faster and with less expense than if you were investing large amounts of money into the business.
According to Neil Patel, bootstrapping is the top funding source among startups although looking at external sources particularly in later stages is needed (picture below).
You can read more about the definition of bootstrapping and why it can be useful for startups in this blog post.
Step 1: Plan your bootstrapping strategy upfront
A lot of startups fail because they don’t have a plan in place before they start. This is especially true of bootstrappers who are trying to run a business entirely out of their own savings.
If you don’t have a financial plan in place, then you are putting all your eggs in one basket and that basket might not be big enough to support the business’s growth.
It can be disastrous for new business owners to fail to predict their cash flow, so it’s important to include in things like credit card processing fees, insurance, and benefits when determining a company’s current state of play.
The numbers above demonstrate that when starting a business, there isn’t necessarily a proper or wrong amount to raise. Many global businesses were started with just $20,000 in savings.
You should spend time drawing out an outline of how you plan to fund the business’s growth. It’s also a good idea to outline how you plan to generate revenue.
Step 2: Hire only when you absolutely need to
One of the biggest mistakes that bootstrapping startups make is simply hiring staff to do the work that they can easily do themselves. This is especially common in tech companies where it’s assumed that staff are a source of growth for the business.
It’s important to remember that hiring people is a big expense that comes with a lot of risks. You have to pay their wages and benefits, provide training and manage their performance.
You don’t know whether they will work out or not. One possibility is to outsource work to freelancers, contractors or other agencies that you can manage remotely. The advantage is that you have fewer risks because you are not relying on the staff member to perform.
Another possibility is to hire interns versus hiring experienced professionals. As we weigh here pros and cons of hiring interns in this blog post, we suggest bootstrapped startups to start hiring (many) interns and give them clear instructions to follow to do the job.
Lastly, while bootstrapping, many founders need to learn to do various things themselves. A vast range of abilities, as well as enthusiasm, resilience, perseverance, and fortitude, must be developed by those founders. These are typically necessary to enable a bootstrapped business to function.
Step 3: Work with what you have
No business can grow without investing in their long-term growth. Only 40% of all new enterprises are apparently making a profit, while approximately 77% of small businesses largely finance themselves through personal savings and financing. with 30% making a profit and another 30% continuing to lose money.
Bootstrapping is the process by which an entrepreneur launches a self-sustaining business, markets it, and expands it with the help of few resources or financial backing.
For example, you might have the money to hire five new staff members to increase your team. However, you will have to pay their wages, benefits and bonuses for as long as they are working for you. This will eat into your profits, so you need to consider how long that will take.
If you want to be in a position to grow the business, you need to be financially prudent. This is another reason why bootstrapping is a great way to start a business. You don’t have to invest large amounts of money into the business right away.
Instead, you want to wait until you have a product that is selling and customers who are using your product. Once you have this, you can invest your profits back into growing the business.
Step 4: Track performance metrics regularly
It’s important to track important metrics to see how your business is performing over time. Some metrics that are important to track include: How much money are you making? How many customers are you servicing? How many sales calls have you made?
The advantage of tracking these performance metrics is that you can use them to benchmark your business against your peers and see where you need to improve. You will be able to see at a glance what your competitors’ performance is like so you can make strategic improvements.
For bootstrapped startups, several customer-related performance metrics such as Customer Acquisition Cost (CAC), Retention Rate and Customer Lifetime Revenue can help to grasp a clear picture of costs versus revenues per customer.
Related to financials and cash flow performance metrics such as Burn Rate, Monthly Recurring Revenue and Cash Runway could be very informative when bootstrapping. A decent list of key metrics for startups can be found here.
Step 5: Don’t be afraid to pivot if necessary
Many startups try to stick to a business model that doesn’t work. For example, you might have started out selling shoes online, but then discovered that there isn’t a large enough market for this product.
As a result, you will need to pivot and focus on selling your product to a different market. Particularly in times of recession or crises many startups are forced to pivot in order to survive as we explain in this blog post how they do it.
In order to build your business, you must be willing to try new things and even change your course. The market, consumers, competitors, and investor data or information you have gathered up to that point might be a valuable source for the company’s future course.
The advantage of pivoting is that you don’t have to invest huge amounts of money and time into something that won’t work. It’s better to pivot and move on to something else.
Conclusion
Running your own business is hard work. It requires a huge amount of dedication and patience. Bootstrapping can be a great way to start a business, but it takes a lot of hard work and commitment.
You have to be willing to make sacrifices so that you can focus on growing your business. Bootstrapping is also a long-term strategy, so you have to be prepared to wait before you see any profit.
