MaRS Library Bootstrapping—stretch funding for startups and other ventures
“The odds of raising venture capital are equal to the odds of getting struck by lightning while standing on the bottom of a swimming pool on a sunny day.”—Bill Reichert, Garage Technology Ventures
If your startup is not ready to accept outside investment or cannot access outside investment, a “bootstrapping” financing strategy may prove appropriate for your business. Bootstrapping is a common sense approach to building a business by spending as frugally as possible at the launch and using the business’ assets and possibly your own personal assets to fund the early startup stages.
Bootstrapping may also be used at later stages of a company’s development to stretch cash investment and funding to a time when the business generates sufficient cash flow, or until it can attract additional equity investment or borrow from a traditional lender. Experts say that a significant majority to of startups (75% to 85%) use some form of bootstrapping to help finance their business. With planning, bootstrapping will be only one stage in your business’ development.
Advantages to bootstrapping
- Your share of the business may hold more value since there will be less equity or debt from others to consider in future investment rounds or when you sell the business.
- You may find it easier to raise capital once your business has further developed its technology and has a sales track record. With no outside debt or equity investment, the clean capitalization structure may appeal to potential investors.
- Without loan repayments or obligations to maximize value for outside investors, you control all business decisions. This can be a great way for you to test the entrepreneurial waters.
Disadvantages to bootstrapping
- Entrepreneurs can find bootstrapping difficult and frustrating. It takes discipline to ensure that the business keeps sufficient cash flow, particularly in tough economic times.
- This funding method does not suit the faint-hearted as it involves some risk-taking on the part of the entrepreneur, who may need to use or pledge personal assets for loans to meet the short-term cash requirements of the business. Would you be willing to use a credit card or personal loan to fund your business payroll and other expenses, if required?
- A bootstrapping strategy often yields slower-growth businesses due to the“low-cash diet.”
Businesses and startups that can employ a bootstrapping model generally share some characteristics. These include:
- low upfront capital requirements
- short sales cycle (less than a month)
- short receivable payment terms, with longer payable terms
- recurring revenue
- word-of-mouth advertising that effectively generates sales
- Start your business at home or share an office.
- Start out part-time.
- Start as a service business, using your cash flow to develop your product.
- Hire young, inexperienced, “affordable” team members with talent and energy.
- Understaff your business and outsource activities where possible.
- Ship early versions of your product and test with customers in the field, rather than perfecting the product before shipping the first release.
- Barter for services and products, using sweat equity with your initial team.
- Buy used, cheap equipment for internal company use.
- Leverage government programs, recognizing several programs require a cash investment for matching purposes.
- For upfront proceeds, consider licensing a non-core technology or an exclusive right to use a technology in a specific field or geographic region.
- Speed up customer payments using advances or discounts on early sales of the product.
- Slow down supplier payments by negotiating supplier credit.
- Use personal credit cards or operating lines, as required.
- Attract an external board of directors or advisors, for credibility with customers and suppliers.
To succeed at bootstrapping, you need to develop and execute a plan, set and communicate goals regularly with your team, and ensure a single point of accountability (that is, you, the entrepreneur who is funding the business). If you’re not “wired for details,” add a part-time seasoned COO or CFO to provide the necessary supervision to help you do well.
Regardless of the startup’s financial position, smart entrepreneurs always use some bootstrapping tactics to manage their business’ cash flow. They know to:
- ride out challenging periods in the funding market
- reduce the overall amount of outside investment required
- delay outside investment until market conditions improve or the business achieves certain milestones, increasing its valuation
McCune, J.C. (1999). Bootstrapping: Cutting corners and pinching pennies to finance your business.Retrieved April 9, 2009, from http://www.bankrate.com/brm/news/biz/Cashflow_banking/19991101.asp.
Guy Kawasaki (2008, 25 November). The Art of Bootstrapping. How to Change the World. Retrieved April 9, 2009, from .
Kawasaki, G. (2004). The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything.Toronto: Penguin Canada.