Not all startups need (or want) to raise venture funding. In fact, there are a number of benefits that come from bootstrapping your startup.
Before we dive into the benefits of bootstrapping your startup, however, it’s important to clarify what it actually is:
To bootstrap, your startup means to finance your company’s creation and growth without taking on board external capital.
What this essentially results in is the founder, or co-founding team, committing their own personal capital to establish the company’s initial operations. The ongoing capital requirements of the business are then funded from company cash flows.
As a result, it is important that the team get the company to a cash-flow positive (or ideally a profitable) position, before the initial capital they personally committed runs out.
Once this point is achieved the company can essentially be bootstrapped in perpetuity (assuming of course sales/profitability don’t take a hit).
Why Founders Bootstrap Their Startup
While there are many founders who opt-in to bootstrapping their startup, more often than not the company founder is forced to adopt this approach (at least initially) because of the following reasons:
- It can be difficult to raise external capital for a pre-launch, pre-revenue idea without the founder having deep domain expertise.
- If the founder/founding team haven’t previously run a successful business and/or achieved an “exit” they don’t have a track record to point to.
- Investors want to see that the founder/founding team have “skin in the game”, with their own money at risk as well.
- The cost of launching a company is now relatively small so there is an expectation amongst investors that you at least achieve a milestone or two on your own.
As a 3x Entrepreneur and the Founder and CEO of Task Pigeon, I have gained a strong appreciation for the process of bootstrapping your startup or company. While my goal is to achieve a level of growth that makes my company attractive for investment I have been bootstrapping the business personally since launching late last year.
I, therefore, wanted to pull together a resource that highlighted the benefits of bootstrapping your startup.
Benefits of Bootstrapping Your Startup – You Understand The “Cost” Of Money
When you bootstrap your startup you gain a strong appreciation for the “cost of money”. Not only do you understand the impact of a missed sale, but you equally appreciate how each dollar saved can extend the runway of your business.
Developing this ability to operate a “lean and mean machine” is not only attractive to investors, but it also forces you to be more creative with your marketing efforts.
With $1 million in funding, it would be easy to throw some money at Facebook ads. Bootstrapping on the other hand and you might focus on reaching out to influencers, building a content marketing campaign or pulling some form of PR stunt to build awareness for your startup.
Benefits of Bootstrapping Your Startup – If You Run Low On Capital You Know How To Go Into Survival Mode
Whether you choose to bootstrap your company indefinitely or eventually take on external funding there is always the chance that things go pear shaped. Sales could decline dramatically, or an external event could blow up your forecasted expenditure.
In many cases, a startup that has become reliant on VC fundings, and only knows how to operate when they have piles of cash in the bank can quickly hit the wall.
They might not understand how to operate on an oily rag, or possibly think it is too hard to do so.
If you have come from a background of bootstrapping then you are in a much better position to make the adjustments required and go back to operating in a more lean and efficient mode.
Benefits of Bootstrapping Your Startup – Customers Are Your Lifeline
All startups care about attracting customers and growing sales. But if your ability to fund the company for another month hinges on closing a deal then I can’t help but believe that you will fight a little harder (even if it is on a subconscious level).
If we then add in the time element of a sales cycle as well, it is easy to let days or weeks slip by if you still have a large cash reserve. If on the other hand all the expenses are being paid from your personal bank account, then each day that customer is still “thinking about it” is another day of expenditure you have to front yourself.
Benefits of Bootstrapping Your Startup – You Can Potentially Retain A Larger Stake In Your Company
If you are looking to raise external funding at some point in the future then I am sure you understand the principle of dilution. While you will own a smaller stake of the company than before, that stake should be worth a larger amount (in dollar terms).
That said, there is nothing wrong with trying to minimise dilution or get better terms from your investors, as long as it doesn’t put the entire business in jeopardy.
By bootstrapping your business you can place yourself in a position of strength. If you are cash flow positive (or better yet, profitable) then raising money is not a life or death outcome. It is something you are pursuing to scale and grow faster.
If you don’t “need” the money then you can take the time to find the right partner for you and your business. You may also potentially raise on better terms, especially if you have significant traction or revenue.
Benefits of Bootstrapping Your Startup – You Develop A Deeper Understanding Of The Business
When you bootstrap your startup, especially in the early days, you won’t have the funds available to hire a Head of Marketing, or Customer Service or Sales. You and your co-founding team will be forced to perform all of these functions yourself.
This is a major benefit that should not be overlooked. It literally puts you on the ground with your customers and allows you to understand their frustrations at a much more granular level.
Compare this to a startup that raising funding straight out of the gate and hires a sales team and customer service representatives. Any information the founders receive is going to filter through a number of people before it reaches them.
Over time you will have to hire for these roles, but gaining exposure early on is critical to understanding what your customer wants and how your business operates on a daily basis.