Basics of bootstrapping: A guide to starting a business on a budget
Working with little-to-no cash while trying to launch a new business is called bootstrapping – and it’s no easy task. Here are some guidelines around how to bootstrap your early stage venture effectively.
The road to running a successful business venture is wreathed with challenges – many of which come as a result of the business founders having almost no access to capital.
Funding is the oxygen that early stage businesses need in order to survive. Without it, even the greatest business ideas can’t take off.
Even those who might have a solid amount of money saved up and are prepared to sink their savings into their new business – until the business model is validated, investing these funds into such an early stage venture is incredibly risky.
So, if you’re thinking of starting a business, unless you’ve got an investor who is ready to bankroll your every move, chances are you’ll have to take the bootstrapping pathway.
Bootstrapping is a term which is used for founders who are working on an early stage business venture without any (or very little) external sources of capital. It involves keeping to a shoestring budget and an almost frugal mindset right up until the business generates enough revenue to become self-sufficient.
Alternative sources of funding
Before getting into the nuts and bolts bootstrapping, it’s important to make mention of the different types of early stage funding that is available for businesses – as well as the downsides that come along with them.
A common way of raising money at the early stages of a business is through angel investors, venture capital firms and/or high net worth individuals.
While this form of capital raising can indeed take away the need to bootstrap, it doesn’t come without its own set of strings.
Raising money from these types of investors means that the founder will need to give up a percentage of their ownership of the business – a move that can be quite costly at such an early stage.
Another way to raise funds can be through government grants. The Australian and New Zealand governments have a number of grant schemes that assist businesses through in funding their early stage ventures, and those schemes can often be quite lucrative.
The unfortunate downside of government funding is that the schemes are mostly administered in the form of a rebates or require for there to be matched funding provided upfront.
This being the case, more often than not, a startup founder will have no choice but to bootstrap their way through that challenging early stage of establishing a business.
Bootstrapping a startup effectively is task that requires a fair amount of consideration, sacrifice and insight.
How do you breed the next ‘unicorn’ startup with very limited access to cash? Well, considering the following three things should definitely act as a good start.
1. Sell your staff more than just a wage
Hiring high quality talent is crucial when building a business. If you’re bootstrapping though, it probably means that you can’t offer money very much to your early stage staff.
The question is, how do you bring on high quality staff without depleting all of your resources?
To answer this question, I reached out to Alex Retzlaff, founder and CEO of a new startup venture called Emits. Retzlaff has a wealth of experience in building businesses from the ground up – Emits being his seventh tech startup venture to date.
When offering advice on how to solve this issue of balancing a low budget while trying to bring on high quality staff, Retzlaff explained that it all comes to down to what it is that you’re selling to your prospective staff members.
“I sell the idea of a great work culture with heaps of room for people’s intrinsic motivation to power much of their working day,” Retzlaff told The Pulse.
When pitching your business to high quality potential staff members, Retzlaff suggested that offering them to work in an environment that has “a clear purpose” and involves building a business “alongside equally talented and motivated team mates” should act as an incentive for these people to take the plunge and join your venture.
2. Know when to start capital raising
In an ideal scenario, the stage after bootstrapping would be generating enough revenue to make the business self-sufficient. But most of the time this is not what ends up happening.
It most cases, after the bootstrapping phase, the business then goes out and raises funds from investors – using their existing revenue as part of their pitch to win the investment.
According to Retzlaff, one of the most important parts of bootstrapping is knowing when it’s safe to leave the nest and look for investment.
Based on his experience, Retzlaff explained that once the business finds a “product market fit” and is backed by a “predictable and scalable revenue model”, the business can be considered ripe enough for a capital raise.
Notwithstanding the above, Retzlaff warned founders that looking to raise capital from VCs when the business isn’t mature enough for it can be a big mistake and encouraged first-time founders to “delay capital raising as much as possible” in order to maintain control over the business.
“The only exception to this rule would be for a serial entrepreneur that specialises in the rapid creation of startup businesses.
“Such a person may wish to a capital raise really early on so they can tap into a particular opportunity where time is of the essence.
“I’ve met such entrepreneurs in the past and for them it would be counterproductive to bootstrap the venture for too long.”
3. Know when to draw a salary, and how much to take
Bootstrapping normally means that the business founders opt not to draw a salary from existing revenues.
But – this can only last for so long. Eventually, every founder aboard the bootstrap train ends up needing to pay themselves too.
Part of bootstrapping effectively is knowing when it’s safe to start taking a salary – as well as being aware of the appropriate amount to draw.
While Retzlaff did make it clear that this concept is “entirely circumstantial”, he believed that much like capital raising, founders should delay drawing a salary for “as long as possible”.
But, when the time does arrive for a founder to begin taking a wage, Retzlaff suggested that they ask themselves the following three questions before doing so:
a) “What income does the founder need to stop worrying about money and focus on building value?”
b) “Has the company taken external investment and hence does the founder need to follow a particular process of negotiating their salary with a board, co-founders, and so on?”
c) “If there are co-founders in the startup, how are they (comparably) contributing to the venture?”
Considering these questions should form a balanced approach to finding the right time to draw a salary, as well as how much to actually take.
There are no magic buttons that founders can press in order to build a new business. But, if the founder can manage to bootstrap their venture and still hire the right people, know when to start capital raising and be strategic about when to start drawing a salary – all the other pieces should fall into place nicely.
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