To bootstrap or not to bootstrap?
Post #4 - Bootstrapping
So, to bootstrap or not to bootstrap?
Firstly; what exactly is bootstrapping? And then, why should you take this route?
Bootstrapping simply refers to a business that uses all its revenue (every single cent) to reinvest in the business in order to fund its growth, as opposed to getting outside funding or seeking investors. I appreciate that the former is not always an option, especially with tech start-ups where there are large upfront costs, but, it is still worth considering if it’s possible…
The first caveat here is - Yes, I bootstrapped my business so am probably quite biased, but, what I wanted to talk about in this post was the advantages and disadvantages of bootstrapping.
First, the pros…
- Bootstrapping is great for getting a basic product off the ground and into the market quickly
- It means that while you’re still refining the product and getting feedback from customers, if you’re bootstrapping, you still have a revenue stream coming in to live on (in my case, with twins on the way, this was somewhat important!)
- Bootstrapping also teaches you how to manage cash-flow and to how to get the most value for every dollar you spend. Whether it’s an employee, marketing, office space or travel costs, it’s great for teaching you what accountants like to call, ‘fiscal responsibility’
- Bootstrapping also allows you to retain ownership of your business without diluting your shareholding - which, along with cash-flow, is probably one of the greatest advantage to it
- Finally, it allows you to really test whether or not your idea/ product is going to work
The cons…
- Bootstrapping a business reduces the speed with which you can scale up, quickly
- It limits the quality of the talent you can initially persuade to join your crusade
- The constant worrying over cash can lead to short term decision making and distract from building a business
Overall the benefits, in my opinion, greatly outweigh the negatives. In the early years, every time I was offered investment and thought about how I might spend it, I realised months later with the benefit of 20:20 hindsight, that there were significant challenges with the particular business strategy and it would have been a waste of the money, as well as unnecessarily diluting my share. The catch 22 is because of my obstinate refusal to take investment, there have also been a number of times where I’ve had to turn down opportunities to grow the business faster, because of a lacks of funds.
The beauty of bootstrapping is really in the harsh viability testing it provides for your product... and I deliberately use the word harsh, rather than fair. It is a harsh test and maybe there are some products that with a little investment could have got off the ground. Having said that the number of start-ups looking for investment just to stay afloat and pay off existing debt rather than to invest in growth, is a testament to the phrase “harsh but fair” when it comes to bootstrapping. At the end of the day, if ultimately you can’t create a basic product and convince someone to pay enough to make ends meet while you refine that product, then you should probably pivot and pivot quickly. So, how do you convince someone to take your product?
This brings me to the importance of sales… but first, you have to make sure that product is a painkiller, my next topic.
If you like this blog, find it useful, or think it’s interesting, please share it and if you have any questions at all please feel free to comment – I am always open to a conversation.
Having literally just gone through this process Craig I think there are 3 key factors. First is cashflow - most cashflows have peaks and troughs as revenues are rarely consistent and as you grow both the peaks and troughs get bigger. The issue is when the troughs get so big you can't manage through the process without creating severe risk and pressure that hampers or threatens the entire business. You can use bank loans and overdrafts for a while but in our case ( and many others) we didn't have any fixed assets to secure as all our assets are in our IP and client goodwill. The other consideration is how many clear cut opportunities you are having to let go due to lack of funds and resources - there's a big difference between a few potential vague opportunities and 9 or 10 very achievable growth opps. Finally you don't want to take the investment until the last possible moment as the larger the valuation of the business is then the less you will need to dilute your share in order to get the required funds. So it really comes down to when in your opinion those three factors all aligned.
Agree with your comments Charles. I prefer bootstrapping for many of the reasons you mention. The big question outstanding for me is around growth. When or is there a right time for external investment to drive quicker growth?
Exactly Stephen and that's why a MVP is so important- not only does it ultimately enable you to develop a winning product but you can use the incremental revenue it generates to drip feed your bootstrap pockets while you get the market fit right :)
Totally agree and great insight Charles, my preference would always be to bootstrap if I could - part of the problem is knowing actual product market fit and subsequently the depth of bootstrap pockets to get to sustainable revenue - and how long that might take... :-)