I’ve bootstrapped businesses from scratch with personal capital and I’ve also raised millions from a PowerPoint presentation and then launched a business (which, hint, can be a terrible way to do it — but that’s a different story for another time).
Not all startups can be bootstrapped, but if your business has low capital needs at the beginning then bootstrapping might be your best option.
But, why bootstrap? Isn’t it better to raise external funding first so you have a nice-sized war chest to back up your business? Don’t 82 percent of businesses fail because of cash flow problems? Running a business is difficult, and choosing to self-finance instead of finding investors does ramp up the difficulty. Although going lean is tough, it teaches you valuable lessons that you’ll carry with you across your next ventures. When you succeed at bootstrapping, you’ll feel unstoppable. Learning to be self-reliant is a good idea. With venture capital funding for tech startups going into a global decline, venture capital might not always be an option.
What are the lessons you’ll learn?
1. You will think very carefully about scarce resources.
Whether your company is made up of five people or 500, internet businesses will always have scarce resources. You will never have enough money, engineers, time or talent. I’ve never met an internet company executive that complained about having too many talented engineers. Learning how to do more with less is one of the most important skills of an entrepreneur. Every decision will come with the sacrifice of something else, so you’ll need to fully understand your financial state at any given moment. Hiring, especially early on, will feel like the biggest decision of your life.
2. You will be forced to try to validate your assumptions quickly in front of the customer.
This is what I call scrappy validation of assumptions — a process of continuous learning. It’s a focus on rapid iteration and a nimbleness that you should never lose as your business grows. When you have an idea you want to test out, don’t throw time and money at it and turn something around six months later to show a customer. This is where the scrappiness comes in. I say instead of six months, show me how you can validate this idea in three weeks. That could be calling 20 customers or putting the prototype idea in a PowerPoint and doing a roadshow to get feedback and validate the customer need quickly.
3. You don’t own your company until the first dollar of profitability.
The most important thing bootstrapping taught me is that if I can’t make payroll in six to 12 months, I don’t own my company. I’m going to get crammed down and potentially kicked out, and there’s nothing I can do about it. When you’re profitable, you don’t have to raise money. That’s when you own your company. It’s not a percentage. It’s when you’re not beholden to someone else for capital. That’s a lesson also born of living through two downturns of the internet — and it’s why I focus so much on profitability.
Bootstrapping makes you appreciate your business more because you have so much personally invested. It creates a culture where exceptional performance becomes the norm and team members are fully accountable to each other to meet this goal. Lean times may be rough, but it will make each success that much more rewarding.
First posted on Entrepreneur.com. and Vunela Medium blog