It is hard to comprehend how Infosys Technologies Co-Founder, Narayana Murthy started the technology services bellwether by pledging his wife’s jewellery and by borrowing a few lakhs of rupees to start the much-celebrated organisation. It is a tight rope walk for first-time entrepreneurs to take the leap of faith from a stable salaried job to a maze of entrepreneurship.
But when you decide to do it, it is highly advisable to be extremely disciplined on cash management and reduce dependence on external resources to stabilise your start-up. Bootstrapping is all about how start-ups should manage with their cash flow and expenditure to a large extent and strengthen their finances prudently.
Narayana Murthy, when he started out with Infosys, the office was in one of the extended rooms of his flat, where the six sharp minds put together the future of Indian software services industry. Murthy did not go out to hire an office, let alone a fancy one, nor looked at being at a tiny fashionable address. That trait of being highly conservative with cash management has been among the key DNA as Infosys grew into a multibillion-dollar global conglomerate heralding the technology revolution in India.
It is a high-risk leap of faith and it is to be taken with much caution. The life of an entrepreneur is not all rosy and one should not be carried away with the talks of how entrepreneurs who have made it big with few lakhs of rupees. For every successful story, there are scores of failures and one needs to take calibrated steps.
Sridhar Vembu, the founder of Zoho has consciously avoided diluting equity for a long time and built the global corporation on smart management of resources with existing cash flows.
We must have read on the various successes of entrepreneurship, but the grind they go through on a daily basis is humongous. It is similar to the discussion we regularly have – Bill Gates and Mark Zuckerberg dropped out of Harvard to become successful entrepreneurs.
But we usually tend not to talk about how tough it is first to get into Harvard.
In the same way, we need to understand how many of the start-ups relied on bootstrapping to the full extent to become successful.
Consider an example – that of Zoho, the Indian poster boy of Software as a Service. Sridhar Vembu, the founder of Zoho has consciously avoided diluting equity for a long time and built the global corporation on smart management of resources with existing cash flows. Bootstrapping calls for deep faith in yourself, your idea, relentless execution of the plan, and having customer-first as the important focus.
Staying Lean Is Tough
Once you are convinced that your idea is indeed a differentiator, it is time to think about how to manage the funding of your start-up.
You need to be clear of not having a comfortable salary being credited to your bank account before 10th of every month. It is a difficult proposition and it is more difficult if you have a family depending on your salary month on month. You have to come to grips of being highly focussed to the goal of stabilise the business and avoid various traps of spending beyond your means.
You have come clear with your family about moving out of the job and how the family needs to align with your vision. It is extremely important for you to have built a corpus for you or for your family until you start revenue generation and then eventually hit pay-dirt. Be it for education or healthcare needs, it is extremely important that there is supporting income which will take care. It is always good to allocate a certain portion for exigencies of your corpus and not to dip into that corpus. After doing that, get on with planning a budget for your start-up.
Please do not fall in for fancy offices or even shared-offices, splurging on public relations or paid social media paid propaganda. Be smart in creating flanking discussion subjects for keeping social media active on the problems which your solution is trying to solve.
Do not fall in for fancy offices or even shared-offices, splurging on public relations or paid social media paid propaganda
Keep it simple. Keep it straight. Work out of your home or if you want the fancy, do check out the garage or basement to have the ‘aura’ of a company called HP, which literally was started in a garage. Ensure that your workspace and time is respected even from family members so that you get to be laser focused on the work and deliver on the prototype in quick time.
It is essential that you keep networking actively and keep exchanging notes with peers and mentors who have faith in you. Emotional support is another aspect which is highly essential.
Budgeting is an aspect which calls for focus and discipline. It is one to create a budget and it requires a totally different level of commitment to stick to it. Be ruthless on discipline and stick to it until you have a certain level of validation in the marketplace. It is certainly not that you can care two hoots for budgets later, but that initial discipline will work wonders with your organization and it will gain respect from investors at a later stage.
After you have allocated certain resources for the organisation, ensure that if your partner is in for the same, bring in the equity proportionate to his effort or time. Even in close friendships, ensure that the investments and share allocation is legalised and there are no confusions.
Is Bootstrapping Sustainable?
In any given discussion, there are many ways in which people will put forth their points of view. Bootstrapping has its own advantages and in certain situations, it may prove to be a challenge.
There are many clear advantages. You and your team who have ideated the start-up will be in-charge and you can work clearly on the vision you have for the execution. If you have planned to work at least for two years of your start-up with a clear road-map of bootstrapping and depending on revenues which the business can generate, you are in clear control of your strategies, with able guidance from your mentor. While this is not to mean that external funding professionals are an obstacle, there can be challenges in aligning with your execution strategies which, in certain situations lead to differences of opinion.
However, there will be challenges when you are bootstrapping your start-up. The single biggest aspect is that with limited resources you will be strained on pressing on the pedal of aggressive expansion when an opportunity opens up. It is, indeed, a price to pay but bootstrapping will empower you not to take knee-jerk actions and build your mettle through rigorous strategies. Even if you pass on a certain opportunity, you should be sure that you can create one, if you are convinced of your vision and your execution strategies.
One of the biggest examples that prove businesses could be built and sustained with resources which you can shore up is that of QuickHeal, the software security product company from India. For a good 15 years, founders Kailash Katkar and Sanjay Katkar did smart management of their business and did not have to look for external funding. Have conviction in your idea, sharply address the issues at hand and focus on relentless execution with a sharp eye on finances and bootstrapping will certainly benefit you in the long run.
Five Ways to Stay in Control
Institutionalise Stock Options: Be extremely careful when you take decisions on hiring team members. Spend a good amount of time with potential hires and assess their mettle. Job-hoppers who come for the fun of a few extra thousands must not be encouraged. You need to filter them out and look for career-oriented professionals who are passionate. Doling out fancy salaries is a good strategy to attract talent, but it is advisable that you align with passionate professionals who see value in your idea and are acceptable to work on stock options along with a base level decent salary. In this way, you can be broadly convinced of their outlook and the team will sweat out for execution. Be frank, be honest with team members about stock options and legalise it properly to show them confidence.
Build Customer Confidence: Diligent execution of your products or services at customer locations is extremely important to gain the confidence of customers, even if it is a beta-test site. Troubleshooting on an immediate basis, addressing concerns and gaining from the product behaviour experiences are good strategies.
If you can gain confidence from your customers or even potential customers from the beta-testing phase, there are many professional organizations who can offer you advance payments on your offerings, with which your cash flow management can be highly efficient.
Be smart with your vendors: Managing vendors is a science. Plan sharply on just-in-time concepts to save on precious credit days and manage inventory smartly. There are a plethora of vendors who are available on tap with top-notch quality specs and it is advisable you have a bank of information on them. It is pertinent to rotate credit strategically and avoid paying marginally higher costs by tightly managing the credit cycle.
Opt for receivable financing/capital funding: New-age financial technology platforms as well as traditional banks offer attractive receivable financing offers. It comes at a cost, though, but is certainly an option which can be kept as a reserve, in case you need to activate it. Let us look at an example of invoice financing.
As a running business, you have to get paid by your clients for your products/services and usually all clients work on a credit cycle, depending on how you negotiate and finalise a transaction. Based on the invoices which have been signed off by clients and until you wait for the payment to be credited to your bank account (the credit cycle varies from 10-45 days), you can cash out on the invoice with a financial institution which can pay the invoice value at a certain cost. This will empower you to have cash in hand so that you can negotiate better with your vendors, who usually offer discounts on upfront payments. As a vendor to another organisation, you can also negotiate a similar structure for upfront payment in lieu of a certain percentage of discount instead of going in for a loan. It is advisable not to depend on high-cost but easily available debt. Manage your cash flows smartly and avoid all lures which could be disastrous.
Sweat your assets: An important aspect of bootstrapping is how effectively you can sweat your assets and get the maximum return on the capital employed, instead of going in for costly equity or unsecured high interest debt which can be a drain on revenues. You can smartly look to sweat assets due to which the cost of resources will be drastically reduced.
When to Opt for External Funding
Delve deep into your resources to stave off external funding as much as possible until you have a decent monthly revenue coming in. Make sure that you have an active, revenue-generating client base for at least 18 months before you even start thinking about possible external funding. When you feel that you are able to add clients at a good pace without sacrificing revenues and are able to balance out budgets at a decent clip, start exploring possibilities of funding for a stronger go-to market strategy roll-out.