Startup funding can be a struggle – money still doesn’t grow on trees.
But then again, we do make money with the help of trees. See, humans are resourceful. We know that in order to keep moving forward we must keep innovating and working hard.
This resourcefulness is evident in the area of startup funding as well. Over 70% of startups are actually self-funded. Less than 1% get funding from venture capitalists or angels.
It’s possible to launch a company without extra funding but it’s also possible to launch and raise money later. Indeed, it can be a good idea to spark the success without the help of external money so that a bigger flame can help you later in the form of investments.
But how do you ensure your startup won’t fail due to lack of funding? Is there a way to start without extra funding and increase your chances of being funded later on?
The answer is ‘yes’.
In this guide, I’ll explain to you the process, which is called bootstrapping. I’ll first go over the basics and the benefits before laying out a five-step process for bootstrapping the startup until you’re ready to raise money.
What is bootstrapping
So, what is this bootstrapping?
The short and simple definition of bootstrapping means launching the business without a lot of capital.
More importantly, in the startup world, it often means launching without external capital. It’s a situation where you don’t have external investment or source of capital helping you launch the business but everything comes within you.
A good way to look at bootstrapping is to understand it’s about using the existing resources at your disposal to start the business.
It’s about growing organically – you are creating a profitable business but without getting into debt or carving out pieces of equity to hand to investors.
Investopedia has put it well, stating that:
“Bootstrapping is the minimalistic business culture approach to starting a company – which is characterised by extreme sparseness and simplicity. It usually refers to the starting of a self-sustaining process that is supposed to proceed without external input.”
Of course, this doesn’t mean you wouldn’t put any money into your startup or use outside help.
Many entrepreneurs will use some savings to launch – this is common in bootstrapping.
But as you’ll see later, it is more about using the human capital to your advantage. You’ll use your own resources (labour) to get the business up and running.
You’ll most likely use outside human capital too. You’ll get a co-founder or team members to help the business grow – but no one is putting cold hard cash into the operations.
This is what bootstrapping is about.
The benefits of bootstrapping before raising money
Bootstrapping – when you think about it – can seem rather difficult.
You need to launch a business with minimum capital, focusing mainly on the human capital of running a business.
So, why bother? Shouldn’t your energy be better spent trying to convince investors to invest?
There actually four key benefits to bootstrapping a business. Each of these benefits will not just help in launching a business successfully but also improves your chances of landing investment further down the line.
Let’s examine the four benefits:
|You validate your product||Bootstrapping forces you to focus on the bare essentials – especially in terms of the product. You don’t have the resources or the time to come up with a product that’s super technological or complicated. Instead, you focus on the essentials of what makes people buy your products.|
|You validate your business model||You also gain more understanding of the business and how to create a model that works. You need to be efficient and utilise the limited resources to maximise productivity and profit. This will help you understand what actions yield the best results.|
|You are free to make decisions||With bootstrapping, you are not giving away equity in your business. Put it another way, you are keeping 100% of the control in your hands – you will be free to make the decision. You don’t have to consult investors on anything you want to change in the business. You will be better able to pursue your vision without consulting with other people at every turn. Not to mention that you might become richer when your business hits it big since you haven’t diluted equity.|
|You make the business investment ready||The three benefits all boil down to the fourth one – you make your business more investment ready. You have a working business model, with a product customers love before you pitch to investors – you show the investor your hard work and ability to lead the business|
Aside from the above, you are also being cost-effective. You are not getting into debt to pursue your dreams. Sure, it might not work out and you’ve lost time working on your project, but no business project is wasted time. You will learn – especially about the process of bootstrapping.
Your focus will be on getting the business to work, not on trying to locate an investor who might just invest.
You see, finding an investor takes time. If you want to be successful in raising money, you need to be willing to put in the effort.
The time you spend on searching for investors, refining your pitch, pitching your business and negotiating a deal is time away from growing the business. It’s time away from refining the product and marketing the business.
With bootstrapping, you focus on the essentials – you concentrate in ensuring your business model works and your product is something the audience wants.
Once all that is sorted, pitching to an investor is a lot easier.
The steps to bootstrap before talking to investors
So, bootstrapping is a smart business decision.
But what is the most effective strategy? How do you bootstrap your startup in a way that allows you to raise money from sane investors later down the line?
The below represent five tried and tested steps to bootstrapping your small business. By taking these, you increase your chances of fundraising success later on and ensure you don’t spend any external capital to launch a successful business.
Step 1: Validate your business idea
The most important thing for any startup is to validate the business idea. After all, no amount of investment is going to keep a bad business idea going for more than a few months.
If you can show your business idea is a solid one, you can get people on board.
How do you validate your business idea while bootstrapping?
Start with market research.
The first point is to define your ideal target customer. You need to know:
- What are their needs
- What are their problems
- What are their expectations (about your product)
- Where are they
- How can you find them
- What do they like and dislike
- What is their age and gender
- What is their spending power
When you answer these questions, you get a better idea of the person who’d be buying your product. You also get an answer to the kind of product they’d buy, how much they’d be willing to spend and what are their reasons for buying.
How can you find the answer to these questions without spending a fortune on market research?
Here are some channels you can use without putting in a lot of money:
Now, you also need to validate your business idea by knowing it inside out.
It might sound a bit obvious but I’ve met plenty of startups that get into the business believing they have a good product without knowing anything about the industry or the target market.
Yes, you might have worked in the technology sector for 10 years. But you still don’t know everything – no one will ever know everything.
But you want to get closer to knowing as much as you possible can and this means continuously developing your skills.
The most important thing to figure out right at the start – and one that’s inexpensive to do – is to consider if you are passionate about the topic or not. Are you just looking for anything or is this business idea something you are madly passionate about? Remember, you are bootstrapping – you will need to work hard and it won’t succeed if you’re not passionate.
When you know the idea makes you giddy and excited, start learning more about it. You have to keep expanding your knowledge in three areas:
- The industry and product – Read industry specific blogs, follow the news, explore and understand your competition.
- The startup industry in general – Explore the startup world, talk to other startup founders and entrepreneurs, follow entrepreneurs on social media and understand the journey and the process.
- The bootstrapping industry – Expand your understanding of bootstrapping by reading posts like this on the topic.
Learning to do different things is cheaper than hiring someone else to do it.
Take accounting as an example. You can save thousands of dollars a month at the start by doing your own taxes rather than outsourcing it. Learning small business taxation isn’t even difficult – it’ll probably take you just a few long afternoons to know enough to survive at the start.
Step 2: Identify the human capital
The second step is super important.
Remember how I said at the start that bootstrapping is largely about maximising the human capital since you’re avoiding the use of external resources. Well, after your business idea is validated, you must identify the human capital you need to move forward.
The first important human capital to identify is natural, well, yourself.
It might sound silly but you do have to go on a bit of a journey of self-discovery. As I eluded above, you need to be passionate about the project.
Bootstrapping – or just running – a business is going to be full of ups and downs, hard work, sleepless nights, hardly any money and sometimes even lack of human interaction.
If you are not in business in a field you love and cherish, then you will never make it work. Well, it won’t be enjoyable, at least.
Now, your second most important human capital to identify is the people around you – the startup team.
You want to do this because startups with a co-founder tend to raise 30% more investment, grow the customer base three times as fast, and are less likely to scale too fast.
(On a side note, while you are looking for a co-founder you might want to find a female – unless you are a woman. Research has found startups with a female founder perform better than all-male teams.)
You are working with limited capital so you need to maximise the human capital. To get someone work as hard as you do from the get-go.
What are the important steps to finding the right co-founder and maximising human capital? You need to:
- Find someone with complementary skills. If you are good at coding your product, don’t find another coder but look for someone who knows the marketing side of things, for example. Essentially, you need to cover the weaknesses. Find someone who takes care of your weaknesses – if you don’t know anything about finances, get someone with good financial acumen.
- Pick someone who is passionate. You need the other person to be just as passionate about the industry and product as you are. Remember that it won’t be easy.
But wait. What if you don’t have any money to pay them?
Indeed, you probably shouldn’t at the start. You are, after all, bootstrapping.
But that is why the above points matter – you need someone who gets what you are doing and is willing to work hard with you.
Of course, you can’t just have a no deal situation with a co-founder or team members. With a co-founder, the easiest is to split the equity. 50-50 works the best but feel free to explore other scenarios if you feel like it.
With other members, again, you should consider simply trading labour for equity.
For tips on hiring, listen to this podcast conversation between Andrew Youderian and Bill D’Alessandro.
Step 3: Start generating money
You know your business idea can work and you have enough human capital at hand. It’s time to start generating money.
The step is all about the key to bootstrapping. It’ll hopefully show you that you don’t need to dip into your savings account to start a business.
Nonetheless, you do need to make money to support the business and yourself.
You have two routes to generating money for your business:
Both methods will help you start generating the income you can then reinvest in the business.
You should focus on creating an MVP or consider using a so-called hollow MVP.
As the next step will show, the emphasis is just to sell the most basic product to customers and use it as leverage.
Generating money isn’t just about selling and collecting money. You need to make sure you are able to generate enough revenue in a quick timeframe but also consistently.
For this, choosing the right business model is imperative. You tend to have two options to choose from:
- Subscription based model – benefits from more regular income and can generate a lot of revenue over time.
- One-time purchase – the advantage is that you get a larger amount of money at once.
The right option will depend on how badly you need money to move the startup forward and the kind of market you are operating in – i.e. what are customers more likely to prefer.
Step 4: Offer the core product and analyse customer behaviour
Now, you might have created an MVP during the previous step – if you generated income through this mean.
Nonetheless, by now your attention must turn to offering the core product to customers.
In bootstrapping, the emphasis is on creating the most stripped down version of the product as possible. This has two obvious benefits:
- It saves money. You can build an MVP without spending a lot of money – a simple prototype can cost just a few $100s, depending on your product.
- It helps you refine the product. You also get to test your products USP much better and use the feedback to refine the product.
Both points essentially mean that you don’t end up spending a lot of time and money building a product that doesn’t work properly or isn’t what the customers want. You don’t take a top-down approach but you slowly build a better product from the ground up.
You want as many people to try the core product as possible – whether or not they are paying for it.
When people are using the product, you need to use the momentum to learn more about why they are using it, what they think about it and how they are using it.
You can do this by:
- Monitor customer behaviour – If you have a technology product, you can see when the user engages with the product (app, for instance) and what they do with it.
- Survey the customer – Ask directly through email or phone queries, have polls on social media or the website.
As well as focusing on customer behaviour in terms of using the product, you also want to examine how you are gaining customers. What does your customer traction looking like? The below talk by Leah Busque, the founder of Task Rabbit, makes important points about customer traction metrics:
Step 5: Reinvest your money
Throughout the process, you will need to ensure any kind of income you are generating goes back into the business (after you’ve made sure you’ve eaten and paid the rent!).
Bootstrapping is not about taking a profit – it’s about building the business up to the point where profits are flowing to you. Right now, they won’t be.
So, what are the smartest ways to reinvest the money? You have two good options:
Validating your investment readiness with bootstrapping
The above steps will help you bootstrap your startup until you are ready to raise money from investors.
Essentially, the above has helped you validate your business idea (what your are trying to sell) and your business model (how you are trying to sell it). By the end of the steps, you have a business that has:
- Traction with actual customers
- Income from selling the product
Now, you essentially have two options at this point.
You could start seeking funding to scale your startup operations further and much faster.
Your other option is to continue with step five. To slowly reinvest the money you are making in scaling the business – improving the product, marketing more widely and scaling your productivity and team. Overtime, this should help you start generating enough income to scale faster and start turning in profit as well.
What do you think would be the best option? Is there a certain point after which fundraising is the only way to go?