Maximum research, planning and analysis of your prospective business are imperative for bootstrapping.
Before starting a business, regardless of whether you are a fresher or have been around for a while, you need money to materialize your business prospect. And for raising this initial fund for your business, there are plenty of sources, like loans from banks, equity capital and many more. And one of the most interesting and proven successful methods of raising capital for your business idea is ‘bootstrapping’.
The dictionary definition of bootstrapping says it is the process of self-initiation that can be performed without any external input. Put it in the business context, it is the method by which an entrepreneur starts a company with little capital, relying on money that s/he has private access to, such as personal savings, other than investments from outside sources.
So, a bootstrapped business is the business which is started from personal funds or some sort of a basic income when setting up and building a business from scratch, without attracting investment or only having a minimal outside capital. Bootstrapping stands out from other fundraising methods as it excludes banks and equity sharing prospects form the business setup chain, which helps small businesses in the overall process. This form of financing allows the entrepreneur to maintain more autonomy and control over your own business.
Creating the financial foundations of business is a huge attraction for future investments.
It is important to know what kind of business can be bootstrapped.
Well, you can bootstrap any business that doesn’t need a huge amount of setup stake. The best business models that can be bootstrapped involve less money. For example, a digital marketing company can easily be bootstrapped, as the major chunk of business setup can be covered up with less money, in comparison to, say, setting up a franchise of a brand as it will require a lot of money upfront.
A bootstrapped business is characterized by a heavy reliance on internal finance sources such as credit cards, mortgages, and personal loans, which means that the business will have limited financial sources. So, to successfully grow the business, you need to put in place a competent development strategy in which all potential risks originating from limited funds, as well as other aspects, are calculated. The funds available must be allocated to the most essential segments of the business model. You can do a SWOT analysis for your business before going forward.
Phases of Bootstrapping
Bootstrapping has to be done in a planned and most articulate manner. So, there are a few stages that a business must go through for bootstrapping.
Below are some proven methods that are proven to be helpful for new businesses and entrepreneurs in the early stages of the bootstrapping their venture:
Novice/ Beginner Stage
The novice/ beginner stage is marked by utilizing your personal savings or borrowed/invested money coming from friends, family or acquaintances.
For example, you can find a business after charting out the blueprint and continue your main job until you arrive at a point where you can successfully sustain from your venture and make profits.
At this stage, you begin to utilize the money coming in from customers/clients, run the business operations and grow it to make more profits.
At the credit stage, you begin to focus on financing specific activities such as hiring employees, upgrading equipment, infrastructural investment for the office, etc. At the credit stage, you can also start to take out loans or find venture capital seed money funding for expanding business operations.
How to do Bootstrapping – The Strategy
First of all, create a business plan. Maximum research, planning and analysis of your prospective business are imperative for making any kind of a pitch for bootstrapping. It will help you organize your thoughts, things necessary for your pitch and understand the vectors of movement involved in running a business. For example, you can focus your pitch around your business idea, which can either be a product or a service that solves someone’s problem, as it will highlight the worth of problem-solving and uniqueness while resonating with the target audience. Here, the SWOT analysis you did earlier will come in handy.
For bootstrapping your business, you have to seriously rely on your personal sources, relations and goodwill. The primary step in bootstrapping involves using networking opportunities and communication with a network of personal contacts to the utmost levels. You have to present your business prospect in a way that seems appealing and well-measured to the listener. It should come across as well researched and analysed. For example, you can explore your personal network of friends and relatives, and ask them to help out in any way possible, even if it means not giving money, but some sort of services in their free time. Like, if you have someone who works as a journalist, s/he can help spread the “word of mouth” about your needs through their vast channels. Or if any of your friends is a graphic designer, s/he can help you in making a logo or a minimalistic for your business.
Apart from the above methodology, key bootstrapping strategies also include the following:
In this financing method, when you buy any property or materials necessary for your business, you deal with the seller directly and agree to pay the sum in total or part at the point of business. This is a mutual agreement between you and the seller and does not involve a bank or any financial intermediary, thus reducing extra costs.
For example, a seller puts up a shop for sale for Rs. 15,00,000. A buyer is interested in buying but cannot pay the whole amount at once. So, the buyer and seller can agree upon an amount that the buyer pays directly to the seller on a monthly basis with a certain interest. This is how owner financing works.
Working Capital Management
Working capital is the amount of money used to cover all short-term expenses of your company like inventory, short-term debt repayment, and day-to-day operations known as capital expenditures. You can cut costs on these operations without hampering the processes and reinvest the saved capital in business operations and expansion.
For example, if you run a retail business, you will have a massive spike in sales during certain times of the year, such as the holiday season. You can invest the profits made from these times in your business again.
Increasing Accounts Payable
Accounts payable is an important figure in a company’s balance sheet as it is indicative of the growth and purchasing capacity of your company. If an accounts payable increases over a period, it is indicated that the company is buying more goods or services on credit, rather than paying cash and that is a positive sign of your growth. Thus, you should focus on increasing the accounts payable of your company.
Subsidy finance can be availed from the many schemes and provisions outlaid by the government or any firm to support new and small businesses. This form of financing ensures strong support for financing your business and gives you much space for growing the business. For example, subsidies can be in the form of direct incentives like cash grants, interest-free LOANS etc. or indirect incentives like depreciation write-offs, rent rebates etc.
Why choose Bootstrapping- Advantages
Bootstrapping is mostly the option chosen by new entrepreneurs as it gives them a leeway to create a business from scratch and along with it a way to attract an investor or investors in unusual ways. As bootstrapping of finances is not done through formal banking institutions and financial entities, it means that if the business fails, the entrepreneur will not be forced to pay off loans or other borrowed funds. And if the project is successful, then s/he will save the capital and be able to attract much more and bigger investors.
Creating the financial foundations of business is a huge attraction for future investments. Investors like angel investors, specialized funds or venture capital firms are more confident in financing an already secured business that reflects a promise and commitment of profit. As bootstrapping allows you to fully focus on the key aspects of the business, such as sales, product development, etc., there are big chances of successfully expanding business with the bootstrapped funding and raising more funds in future.
It is important to note that the “bootstrapper”, i.e., the entity providing you funds for your business is entitled to have access to all developments as well as ideas used during the development process of your business. Despite this, you have the ultimate right to make the final call and have independence from investor opinions. You can make all the decisions independently, and this enables you to create something unique, realize your dream, test the business idea’s strength, and be independent of the investors’ interventions.
For bootstrapping your business, you have to seriously rely on your personal sources, relations and goodwill.
What to avoid while Bootstrapping your Business
There are some points that need to be kept in mind while chasing the bootstrapping strategy for raising funds. Below are the points to be kept in mind as to what NOT to do while bootstrapping:
Do not give up a large number of shares in exchange for bringing on investors through bootstrapping. The sale of shares to raise funds is called equity financing. You can raise money by selling proportionate amounts of shares to investors for short-term working capital needs like paying bills.
Bootstrapping also does not mean taking out huge loans to start for your business either. Credit loans can, again, be taken for typically a short term to fund specific growth activities such as buying equipment or to smooth out cash flow dips. If you are bootstrapping your business, sizable credit loans are taken at a later stage and not immediately upon starting up.
What can be the disadvantages of Bootstrapping?
Like the two sides of a coin, bootstrapping too has its advantages and disadvantages. The following can be the drawbacks of bootstrapping if it is not done with extreme planning and caution:
Your business’ growth can be difficult through the bootstrapped funding if demand exceeds the company’s capacity to offer or produce services or products.
You, as the business owner, will have to take on almost all financial risks instead of sharing them with investors who invest in supporting the company’s growth.
With limited capital and investment, the attraction of large investments and fully implementing one’s ideas can be a humongous task.
Mental health and stress-related obstacles can also prove to be disadvantageous. You will regularly face stressful situations arising from unexpected circumstances.
Successful Bootstrapped Businesses
There are many famous and successful examples of businesses that used bootstrapping strategies for starting the business. In fact, all the stories that we hear about Apple, Google and Amazon starting out from the garages are the successful examples of bootstrapping.
Apple started its journey from bootstrapping funds for the company. Steve Jobs and Steve Wozniak founded the Apple Computer Company, now Apple Inc., in 1976. They raised funds from local businesses and their parents, making Apple the biggest success story of bootstrapping.
In a nutshell, bootstrapping is one of the most efficient ways to start your new business with much leeway for exploring and being creative in your ideas. Entrepreneurship comes with significant risk and it is the risk you have to take to be successful.
Read about Business Liabilities, a topic similar to bootstrapping, to know more about the process of setting up a new business and running it successfully.