There’s no doubt that the current economic recession has been rough on business owners and startups alike. As a result, many are asking themselves if now is the time to launch their company and invest time, money, and energy into it.
If you’re also curious about which strategies are working for your competitors, this article is for you! The following analysis reveals several insights about bootstrapping in a recession that can help you make more informed decisions.
The authors of this article share their personal experiences as well as advice from fellow entrepreneurs who have succeeded in building thriving companies during difficult economic times.
Read on to discover what you need to know about bootstrapping in a recession and what you can do about it.
What is bootstrapping?
Bootstrapping is a business model in which a company does not rely on outside funding to fund operations. Instead, the company receives cash as profit from its operations.
This is done by raising money from investors, in later stages, only if the company can show a profit.
Bootstrapping is a viable strategy for startups that have the ability to generate revenue through revenue-generating products, services, or franchises.
Bootstrapping doesn’t work for all companies, because to succeed in the long term, you typically need to have access to outside capital to grow your business.
There are several ways to bootstrap a startup. One of the most common forms of bootstrapping is to run an existing business as a separate subsidiary.
There are other ways for bootstrapping your startup. You can launch a crowdfunded campaign, use free or economical services, or seek potential partners. You may also borrow money from your family or friends.
Why launch your startup bootstrapped?
Many business owners are drawn to bootstrapping as a means to launch their companies with less risk. No outside funding means full control of company decisions, particularly compared with VC-backed startups and perhaps less danger of failure.
Bootstrapping in a recession also means postponing external funding to later when the startup is more valuable. Many high-potential startups decide to postpone external funding rounds until they really need to scale their business.
But bootstrapping also has its drawbacks. Bootstrapped companies require a lot of effort to turn a profit and growth can be slow. To meet their costs, they must charge for their products or services.
When the economy weakens and customers’ discretionary spending shrinks, charging for products or services becomes harder to do profitably. Most bootstrapped companies also suffer from a lack of resources. Bootstrapping is just not a scalable business strategy as scaling need a lot of resources and support from more experienced stakeholders.
You might be able to build a successful company from it, but it’s less likely to be a large, impactful business if you purely bootstrap the business in all stages of the startup life cycle. If you’re trying to launch a large, global company, bootstrapping might not be the right strategy for you if you try to grow and internationalize very fast.
Strategies working for bootstrapping in a recession
You may be surprised to learn that some of the most successful companies in the world were built in tough economic times such as Disney, Microsoft and Airbnb. The key is for the founders to stay positive, maintain their focus on core values, and find ways to turn their challenges into opportunities.
These are some of the strategies that are currently working for bootstrapped companies:
– Focus on quality over quantity: In an economic environment characterized by budget cuts and higher prices, companies have to make extra efforts to stand out in their respective industries. If your product or service has a unique value proposition, you may be able to attract a certain number of customers even during a recession.
– Market selectivity: Being selective about the market segments you target is another way to focus on quality over quantity.
– Focus on the customer experience: It doesn’t matter how much money you have in the bank or how great your product is if no one has the opportunity to use it. If your product is relevant to the customers’ needs, you may be able to create a demand for it even in a recession. Engaging with your customers and offering them a good experience is another way to make your product stand out.
– Clear image of your runway: You should have a clear picture of your burn-rate and know the details of your expenses, at least the main items. Any expense that does not contribute to your focus or to your unique value proposition should be cut.
Not-so-working strategies for bootstrapping in a recession
You’ll want to avoid bootstrapping strategies that are not currently working for your competitors. Here are some of the not-so-working ones:
– Low-priced offerings : Often times, the first products or services a startup offers during a recession are cheap offerings. During good times, these products may be all you need to cover your basic, necessary expenses. But in a recession, when discretionary spending is curbed, these products may not provide enough income to cover your costs. If this is the strategy you’re considering, you might be better off finding a different way to cover your startup expenses.
– Cutting validation and market research budget: When the recession hits startups, they might think of cutting budget for various activities they conduct. However, when it comes to product design or testing the product or idea in the market, the validation should be carefully conducted as it is crucial for the future success of the startup.
– Complacency and stopping innovation: The worst thing you can do when the economy weakens is to become complacent and stop innovating. Bootstrapped companies, especially those that have to cover their expenses with revenue from low-priced offerings, are likely to experience business disruptions. They might have to cut prices or delay their projects. A good way to stay flexible and be resilient is to be prepared for disruption. This means creating a business continuity plan, hiring a reliable manager, and having a financial backup plan.
Bottom line
The best approach to bootstrapping your startup depends on your specific business model and goals for the company. If you want to launch a small, local business or grow a small, local business, bootstrapping is a great way to go.
If you want to launch a large, global company, bootstrapping is not likely to work or maybe only partly works. As with any business model, it’s important to assess your specific opportunities and challenges before making a decision.
Bootstrapping might be right for your company if you know you can execute well and create high-value products or services that customers want.
