If you are reading this, you deserve many congratulations for taking the entrepreneurial route. In its most distilled form, an entrepreneur runs a business making and selling a product or service profitably. To get started, with the exception of very few businesses, an upfront investment is required. One of the most popular (and in many cases, the only option!) ways to get this investment is bootstrapping.
What is Bootstrapping?
In simple terms, bootstrapping is the money that an entrepreneur invests from his/her own pocket or from family and friends. It is not organized funding from some agency like a VC. In most cases, when a new business is getting started, this might be the only option available.
Why should an entrepreneur bootstrap?
While starting off, any business’ prospects are uncertain – they all exist as an idea in the entrepreneur’s mind. As things progress – initial market research is completed or a product / service is made ready – a clearer picture emerges about the business. Until at least this stage is reached, an entrepreneur usually has no other option but to bootstrap. This is good as the early stages of any business requires a lot of flexibility and the founding entrepreneur / team needs the freedom to experiment, refine and finalise on what the business is going to do.
How much is needed to bootstrap a business?
This depends on the expenses planned for the business and the time envisaged before the business starts generating revenues profitably. Typically, an entrepreneur should have at least enough funds to cover the expenses for the next 6 months and a good plan to either get more money after that or start generating enough revenue.
Advantages of bootstrapping
The biggest advantage is the entire company is owned by the entrepreneur. This offers (a) flexibility and freedom and (b) speed to deicide and get things going in whichever way the chances of success are perceived to be high. The longer a business can run without external funding while generating revenues, the greater its value is likely to be and the resultant higher valuation means the founding team can get more (funding) by divesting less (stake), thus retaining more control.
Bootstrapping brings an immense focus and discipline on spending which is beneficial to any business. Every planned expense is checked multiple times for necessity and every rupee is measured for effectiveness! Hiring is measured, expensive offices are avoided and free services are liberally availed of!
Disadvantage of bootstrapping
A growing business is perpetually in need of money – either for capital investments or a high flying marketing campaign or working capital etc – bootstrapping usually has its limits. This implies that the rate of growth could be slower than what is considered possible with greater capital investments.
E.g. 1 – When we started DilSeBol more than 6 years ago, we decided to bootstrap from our own savings. We did this for about 3-4 years and our rate of growth was slow and steady as opposed to spectacular – a classic example of retaining complete control but possibly sacrificing some bit of potential growth.
E.g. 2 – A couple of months after we launched DilSeBol, another company (say “X”) launched doing exactly the same things we were doing. However, they took the route of getting funding which meant they had a much bigger marketing budget to acquire customers and popularize themselves – a classic example of giving up some control to achieve growth.
E.g 3 – However, “X” today is very different from what it was when it was launched. Having given up more and more control in pursuit of growth, they ultimately had to change and pivot to an entirely different model – a classic example of a possible forced changed in the business model due to having less control in the business.
How to Bootstrap?
The most common way (which we at DilSeBol also did) is to spend our savings from previous employment etc in establishing the business.
Another option for a few people is to work a regular job and also start their business simultaneously where permitted – in such cases, they might make an ongoing monthly contribution from their regular pay to the business.
Once the business is running, even trade credit can be used judiciously as a means of capital to bridge the working capital requirement.
As revenues start coming in, most of it is typically reinvested back to the business, which is another form of bootstrapping.
Ultimately, there is no one way to build a business – so get started, explore and do what works best for you. And if someone comes up to you with an offer to invest in your business, go for it – while bootstrapping has its benefits, having a smaller % of something is better than having a larger % of nothing! Good luck!
Disclaimer – These are the author’s personal views – they are not the views of www.DilSeBol.com or any of its investors / associates
ABOUT THE AUTHOR
Ravi Kumar - Ravi is the Co-founder and Director at DilSeBol.com. He is an expert on business strategy, online marketing, web business development and e-commerce. He has done his PGDBM from IIM Ahmedabad.
Ravi’s profile on FounderMates is here.
Contact Ravi for advice related to Business plans, Internet marketing, Sales and Marketing plans, Cash flow analysis and Market size estimation by signing up as an Entrepreneur here.
To read related post on Bootstrapping a startup, click here.
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