Understanding the Art of Bootstrapping
By Dr. Pranav Saraswat
Research by the US Bureau of Labor Statistics showed that nearly 6 in 10 businesses shut down within the first four years of operation. The major reason behind failed startups was poor fund management. For any new startup, sourcing fund is a big challenge. This is where bootstrapping helps.
Bootstrap is a situation in which an entrepreneur starts a company with minimal capital. An individual is said to be bootstrapping when he or she attempts to found and build a company from personal finances, or from the operating revenues of the new company. Compared to using venture capital, bootstrapping can be beneficial as the entrepreneur maintains control over all decisions. On the downside, however, this form of financing may place unnecessary financial risk on the entrepreneur.
Companies such as Microsoft and Apple were financed by venture capitalists but shaped by entrepreneurs. But most entrepreneurs struggle alone. In fact, bootstrapping a business can be both financially and emotionally rewarding. The bootstrapping approach is about sticking to a simple rule of thumb: keep your head above water for long enough for the business idea to begin generating cash flow, then use the cash for further development of the company.
As Mr. Guy Kawasaki argued in a lecture at Stanford University’s Entrepreneurship Corner, bootstrapping is something “that should always be in the DNA of a company, even if it has 10 million dollars in the bank.” When resourcesare scarce, it is much easier to focus on the essentials and avoid wasteful expenditure that well-funded entities often get into.
Bootstrapping is beyond being lean and conserving cash. It is a repetitious process with quick cycles without excessive external capital. It implies that during the initial stages of a startup, all you have is a couple of assumptions that you quickly want to apply and decide which ones to keep. Early stage capital takes too much time away from building a product and validating the market.
So why should you bootstrap? These are the main reasons:
Validate the market
- You do not have the money or want to judiciously spend your own money by first validating that customers really have a problem, are willing to pay to solve the problem and would consider your product/idea as the solution.
Peace of mind
– Bootstrapping is not free. You are investing sweat equity and opportunity cost. But relatively speaking, it gives you peace of mind as there are no investors to deal with.
– Another benefit of bootstrapping is that you learn your lessons fast because it is your money on the line. A person tends to work harder when it involves his/her own money.
There is always the fear of being seen as a failure if things do not work out. It’s important to live with this fear and use it to motivate you. According to Mr. Paul Graham, venture capitalist, “Founders are more motivated by the fear of looking bad than by the hope of getting millions of dollars. So if you want to get millions of dollars, put yourself in a position where failure will be public and humiliating.”
The turnaround in business could take longer than expected, with more mistakes and missteps than what you had anticipated. If you hold out longer, your chances of success will increase. The first aim should be to be profitable enough to survive. For a bootstrapper, cash flow comes before growth and growth before profit. Mr. Graham outlines this approach in his article “Ramen Profitable.”
Focus, focus, focus:
Do only what you can do well. The rest is superfluous or can be outsourced. In a bootstrapped startup every priority is a first priority. In the land of the lind, the one-eyed man is king. In other words, concentrate on your strengths, know your product and outperform other startups in your sector in the competition of ideas.
(Dr. Pranav Saraswat is assistant professor - finance at the Asia Pacific Institute of Management, New Delhi. He has authored two books and published research papers in various national and international journals.)