Bootstrapping is the term used to describe the process of starting a business with no outside funding. Many famous entrepreneurs bootstrapped their now well known businesses when they were first launched including Bill Gates (Microsoft), Michael Dell (Dell Computers), Pierre Omidyar (eBay), Paul Simon (YDE) and Richard Branson (Virgin) to name just a few. These entrepreneurs used a combination of different tactics to get their businesses off the ground without outside capital.
Here are some of the tactics you can use to get your new business off the ground with little or no outside funding.
1. Break the Golden Handcuffs
Many talented individuals who have a desire to start a business are scared of not meeting the car repayments on the BMW, not paying into the pension fund and not meeting the repayments on the holiday house. The reality is that starting a business takes sacrifice. Unless you are willing to make a sacrifice, entrepreneurship is not for you. If you do want to launch a business in the future, set a deadline for when you wish to start and begin cutting back now. Learn to live on less and put money aside so that you have some of your own funds when you do break away.
2. Back Yourself
The greatest believer in your business idea is you. If you are not willing to put a large chunk of your own money into the business and make the necessary financial sacrifices to get the business off the ground then no one else will be willing to back you. Once you have put your own resources into the business, your most likely source of support is the people closest to you. They know you, trust you and want to see you succeed. Paul Simon, in launching the first YDE store in a back alley shop in the centre of Cape Town, borrowed R10 000 from his mother’s retirement policy to get the concept off the ground. He never borrowed money again nor did he take on any outside investors until he sold the store 10 years later to Truworths for an undisclosed sum in excess of R200 million.
True entrepreneurs become jacks-of-all-trades in the start-up phase of their businesses. There have been accountants who became designers, engineers, copywriters, marketers, programmers and salespeople. There is no such thing as sticking to your specialty and only doing what you are trained for if you are launching your own venture. The more you do, the less you need to pay someone else to do so teach yourself to engage with new activities and tasks so that you can get your business off the ground. When you are making millions, then you can hire an accountant, outsource the design, engage a PR firm and get a freelance copywriter in but until then you and your management team will need to train yourselves to fill many of these roles.
4. Work in Parallel
Selling your time or delivering a service usually costs very little and translates into quick cash. Therefore, it is sensible in the early stages of a business to do some sort of consulting work while you are building the business and its products. Selling time means that you can have income in month one and you can use that income to acquire what is required to get the rest of the business off the ground.
5. Keep the End in Mind
Consulting is a good way to generate cash flow in the start-up phase of a business. The risk is that the entrepreneurs become too dependant on consulting or too greedy. They sell more consulting time without ever developing the product that can be sold independently of the consulting work. They then get caught in the cycle of just doing more and more consulting work and the business becomes totally dependant on them selling time. Selling time means hard work for the entrepreneur and fewer opportunities to sell the business in the long-term. If you do opt to consult to generate cash flow, always try to work towards productising your offering so that you don’t need to be present to deliver your offering. This means that you can be on holiday and still earning money or your business will be far more attractive to a buyer because they get a viable product that they can take over and sell.
6. Get Going
Too many entrepreneurs want to raise hundreds of thousands of rands before they have done anything. While your business is still a concept that only exists on paper it is unlikely that anyone will take notice. The reason that Facebook was able to raise $25 million in venture capital was that Mark Zuckerberg had already built his first version of the Facebook platform and had already attracted users. It worked the same way for Sergy Brin and Larry Page of Google. They put up a test site on Stanford University computers and asked their friends to try it out before they had any investor interest in their multibillion dollar search algorithm. If you want to get people interested in what you are doing, start doing it, build something tangible that they can see, try and experience in order to get them to buy in.
Be careful of analysis paralysis. Many people spend so much time planning that they never actually get into business. MBAs and CAs are notorious for overanalysing an opportunity. Often they build so many models, do so many excel spreadsheets and engage in so much discussion that they never actually get to the market. This leads to nothing. There comes a time in the process of building a business when one needs to draw a line in the sand, decide it is worth doing and just start building the product or delivering the service.
7. Ship then Test
Many people want their product or service to be absolutely perfect before they ship. Microsoft has never done this. They ship their software before it is perfect and adjust and update along the way. Certain products or services don’t need to be perfect before you ship. Quality assurance processes are critical for other products. If MSN messenger does not work absolutely perfectly, it can quickly and easily be fixed and no one will die. If Boeing ship a product before it has been perfectly refined and tested, the ramifications may be far more serious. Ask yourself: “Would I let my mother or father use the product or service in its current state?” If the answer is yes, ship it.
8. Sell (upfront)
If the product or offering that you are creating in your new business is appealing enough, you may be able to make some sales before the product is produced. The money that comes from these sales can be used as a form of capital in the development of the product. Anyone with a compelling enough product and some innovative selling skills can sell their product or service – even before it is developed – and use that cash to develop the product or service.
Dell computers allow users to create their own PC via their website; they then get customers to pay for their PC before they even start building it. After receiving the payment they begin building the computer and ship it to the customers 10 days later. This gives the company massive cash flow advantages and enables them to hold minimum or no finished goods inventory. How could you sell your goods or services and collect the cash before you have even begun to build the product or deliver the service?
In launching a new business, you will almost always make use of suppliers. Your suppliers are the people giving you a product or a service. If you are retailing coffee, your suppliers are the people giving you coffee beans and mugs. If you are starting a website, they may be providing you with server space. It is very useful to try to negotiate payment terms with suppliers who allow you to pay them 30 or 60 days after they have delivered the product or service to you. This is not always easy but you may be able to convince them by being a tough negotiator or by offering them something in return for favourable payment terms.
As you grow as a business and your negotiating power with suppliers increases, this becomes a more realistic option. Pick n Pay is brilliant at it. They get suppliers to supply stock, they then sell that stock to customers four to six days later (on average), customers pay in cash as they buy the goods and Pick n Pay pays the supplier 90 to 100 days later. This means that they have the suppliers’ money for 90 days before paying it over.
As a smaller business you may need to incentivise suppliers to give you extended credit terms. Such incentivisation can come in many forms: One online marketing company gave their client a free monthly campaign in return for favourable credit terms while other companies sometimes select their suppliers on the basis of their credit policy.
Swapping and sharing are two of the most logical yet overlooked tactics for bootstrapping. It makes no sense for a start-up business to buy its own printer or delivery vehicle or rent its own boardroom or manufacturing facility. Clever bootstrappers will link up with other small businesses and share resources, thereby minimising the outlay and maintenance cost for those resources.
Bartering is the oldest way of doing business. People have bartered for years, swapping their wares and services for the wares and services of others. This is one of the most powerful tools for anyone looking to launch a business on a really small budget. Offering your product or service to another business in exchange for something that you need creates a real win-win relationship for both parties. You land up getting what you need to start your business at a lower ‘cost’ than normal and more importantly for a zero cash outlay and the other party gets something they need for much lower than the market price.
Craft a verbal proposal for suppliers, offering them something of value in exchange for something they have that you require to manage or launch your business.
The most critical thing that you can do in bootstrapping your business is to manage for cash flow and not for profits. Over 70% of the start-up businesses that fail are profitable. They don’t fail because they are not making profits; they fail because they run out of cash. They don’t have anything left in the bank account to pay suppliers, employees or other creditors and therefore need to file for bankruptcy. Cash is the short-term economic driver of a business, so do everything you can to keep your cash balance in the black.
Starting your business with mounds of capital can make your business fat, lazy and unresponsive. Starting your business with minimal capital will make you lean, responsive and focused on meeting the needs of customers. To unleash your true creativity in starting a business, launch the business without outside capital. This will force you to put the foundations in place for a business that can last long into the future.
Tips For Successful Bootstrapping
Here are a few tips to help you launch a successful business through bootstrapping.
1. Forecast from the bottom up
Most entrepreneurs forecast top-down: “If 1% of South African car owners install our satellite radio systems, that’s 94 000 systems.” The bottom-up forecast: “We can open 10 facilities that each install 10 systems a day.” Guess which forecast is more likely to happen?
2. Forget the “proven” team
They’re overrated. Hire young, inexpensive, hungry people with fast chips, but not necessarily a fully functional instruction set.
3. Focus on function, not form
Bootstrappers focus on function: computing, getting from Point A to Point B and knowing the time of day. All the chair has to do is hold your butt. It doesn’t have to look like it belongs in the Museum of Modern Art.
4. Under staff
Many entrepreneurs staff up for what could happen, best case. Bootstrappers under staff, knowing that all hell might break loose.
5. Go direct
The optimal number of mouths between a bootstrapper and her customer is zero. Sure, stores provide great customer reach and wholesalers provide distribution. But e-commerce was invented so you could sell direct and reap greater margins.
6. Position against the leader
Toyota introduced Lexus, claiming it’s as good as a Mercedes-Benz but half the price – Toyota didn’t have to explain what “good as a Mercedes-Benz” meant. How much do you think they saved? Find out how deep the rabbit-hole really is. The equation is simple: amount of cash divided by cash burned per month.