August 3, 2017
To new entrepreneurs, bootstrapping seems both exciting and sensible, and there’s a reason it’s become so popular as a means of funding and growing a new business. The theory is simple: rather than relying on angel investments or venture capital to fund a business, you’ll go it alone, piecing together the money you need independently, and continuously reinvesting in your business with what little revenue you earn until you’ve assembled an independent, functioning business.
There are a few big advantage to this model. For starters, it requires less reliance on outside forces and you’re in charge of gathering the resources yourself, so you don’t have to convince some major player to gamble on you. For unproven entrepreneurs or especially risky ideas, this angle is appealing. It also gives you more personal freedom to make the decisions you want in your business.
Unfortunately, there are also some major downsides to bootstrapping. These seven are some of the most prominent you’ll encounter, but there are always strategies to overcome them.
Estimating Costs Accurately
When you’re bootstrapping, you need to be highly aware of your business costs. You’ll have a harder time scrounging up your initial capital, and you’ll need to be aware of your operating costs—precisely—to determine whether it’s feasible to self-sustain in the early stages.
This requires diligent and accurate estimation of your business costs, which is easier said than done. There are dozens of variables you won’t be able to account for until you encounter them for yourself, and no matter how careful you are, something can slip through the cracks. Consult with someone experienced in startups in your specific niche if you can.
Gathering Initial Capital
Of course, one of the biggest hurdles is getting all the capital you need to initialize the business in the first place. Fortunately, thanks to our modern technology and favoritism toward entrepreneurship, there are far more options than there were in eras past. You can self-rely to some extent, tapping your personal savings, friends, and family members, but the big draws for bootstrapping now are crowdfunding platforms like Kickstarter and IndieGoGo.
Investing in the Right Growth Areas
Once you get up and rolling, you’ll need to expand the business, but since you won’t have a large pool of cash to work with, you’ll need to do this in bits and pieces. Choosing the bits and pieces to upgrade first, and which ones to set aside for later, can be daunting, and it has a huge impact on how your business develops. Frame your work in the mindset of a “minimum viable product.” Only invest in what’s absolutely necessary at first.
Maintaining Cash Flow
With limited revenue and limited existing capital, your cash flow is going to be tight, and you’ll have to watch it closely if your business is going to survive. That means monitoring your expenses carefully, following up on all your invoices in a timely and consistent manner, and keeping rigorous control over the timing of your incoming and outgoing payments. You can also try to secure a line of capital or a personal business loan to cover you for times when you start flirting with negative flow.
Securing Reliable Revenue Early On
Revenue is what’s going to keep your business alive. Businesses funded with VC generally have reserves that allow them to finish their product development and refine their systems before they ever go to market- you won’t have that luxury. Instead, you’ll be forced to secure a reliable line of revenue early on. If you can, try to sell a major client or two before you even start building your business.
Overcoming the Inevitable Cash Emergencies
No matter how carefully you plan or how dutifully you estimate your business costs, there will be emergencies and unexpected developments that threaten your financial projections. Without a lump sum of funding to tap into, how you handle these situations could make or break your business. Again, one of the best options here is a line of credit or small business loan, but no matter what you choose, you have to have an “emergency” financial plan if you want to survive.
Getting to the Next Stage of Growth
If you want your business to grow indefinitely, you need to overcome the initial “bootstrapping” stage. That means establishing a sustainable foundation, with enough revenue that cash flow becomes a non-pressing concern. It’s tough to make this transition, but it’s a major milestone you’ll need to reach to keep growing.
Bootstrapping isn’t for every business, and it isn’t for every entrepreneur, but if you know what to expect, and you’re prepared for these significant challenges, it is a viable way to turn your idea into a dynamically changing, full-fledged business. Weigh the pros and cons of self-starting against injections of capital from existing sources carefully, and be wary of the pitfalls you may encounter along the way. At the end of the day, you need to do what’s best for your business—and what you feel most comfortable with.
Read more advice about raising capital from VCs at TechCo
Did you like this article?
Get more delivered to your inbox just like it!