Bootstrapping Basics Entrepreneurs Need To Know

Over the last five years approximately 600,000 entrepreneurs pitched first tier venture capital firms in North America and about 15,000 received funding. Your chances of getting funded are 2.5%. This is a fact. Many of those that were funded became quite wealthy and many more failed. Venture capital firms are looking for home runs not base hits. 

To begin, let's say you're having difficulties raising capital for one of a multitude of reasons. You lack an experienced management team with a track record of prior success, your product is still in development, the service you've created hasn't been market tested and you still haven't refined the sales process. Or, your company may simply not be a "VC deal" or a "home run", that is, something that will go public or be acquired for a bazillion dollars. Finally, your organization may be a non-profit with a cause like the environment or autism. Does this mean you should give up? Not at all. 

I could build a case that too much money is worse than too little for most organizations, not that I wouldn't want to buy a NBA franchise one day to emulate Mark Cuban. Until that day comes, the key to success is bootstrapping. Bootstrapping refers to a group of metaphors that share a common meaning, a self-sustaining process that proceeds without external help. The term is often attributed to Rudolf Erich Raspe's story The Surprising Adventures of Baron Munchausen, where the main character pulls himself out of a swamp, though it's disputed whether it was done by his hair or by his bootstraps. Regardless bootstrapping sounds a lot more businesslike and appealing than hairstrapping. What follows is some practical advice for bootstrapping a start-up or small business. 

First, focus on cash flow, not profitability. Generating revenue and profits is the key to survival. If you could pay the bills with theories, this would be fine. The reality is that you pay bills with cash, so focus on cash flow. If you know you are going to bootstrap, you should start a business with a small up-front capital requirement, short sales cycles, short payment terms, and recurring revenue. Service oriented businesses or new products in hot market segments come to mind immediately.  

Next, forecast from the bottom-up. Most entrepreneurs do a top-down forecast: "There are 150 million cars in America. It sure seems reasonable that we can get a mere 1% of car owners to install our satellite radio systems. That's 1.5 million systems in the first year." The bottom-up forecast goes like this: "We can open up ten installation facilities in the first year. On an average day, they can install ten systems. So our first year sales will be 10 facilities x 10 systems x 240 days = 24,000 satellite radio systems. 24,000 is a long way from the conservative 1.5 million systems in the top-down approach. Guess which number is more likely to happen. This is one of the most common mistakes I see entrepreneurs make. Stop dreaming and let's get real. 

Hire an affordable mentor or small business coach to offer guidance based upon relevant experience. Most likely they've bootstrapped their own businesses in the past. They can provide you with valuable objective advice steering you around potential pitfalls and hopefully save you money, along with time, by keeping you from making the same mistakes as they did in the past. They also aren't going to want equity in your business just by having their name attached to it or request a seat on your board of directors.  

Most start-up small business entrepreneurs don't have a "proven team" and you can't create experience out of thin air. Proven teams are often over-rated anyways. Especially when most people define proven teams as people who worked for a multibillion dollar company for the past ten years. These folks are accustomed to a certain lifestyle, and it's not the bootstrapping lifestyle. Hire young, cheap, and hungry people. Employees with passion and desire along with low overheads are going to be much more likely to stick beside you during the inevitable ups and downs your business will face. Once you achieve significant cash flow, you can hire adult supervision. Until then, hire what you can afford and make them into great employees.  

What type of business is best for bootstrapping you ask? One path to take is to start as a service business. Let's say that you ultimately want to be a software company: people download your software or you send them CDs, and they pay you. That's a nice, clean business with a proven business model. However, until you finish the software, you could provide consulting and services based on your work-in-process software. This has two advantages: immediate revenue and true customer testing of your software. Once the software is field-tested and battle-hardened, flip the switch and become a product company. You'll also have obtained a list of satisfied clients and developed important industry connections which can be priceless.  

During the start-up stage be prudent and focus on value. You don't need the fanciest office furniture, phone system or computers. Look for the best value, haggle and shop around for the best deals. There is no shame is negotiating pricing and terms on almost anything related to your business. Sometimes the best isn't always the best either; it's just the most expensive. 

When it comes to employees make sure new hires have multiple skill sets and can handle stress because if they can't they're going to crack or go crazy lowering overall moral in the process. You are the visionary and leader of the company. Your employees need to believe and put their faith in you. Take your time; hire carefully. At times you'll be asking your employees to do three jobs at once, while learning a fourth, and eating lunch that day at their desk because there's so much work to be done. Your employees look to you for leadership and make sure to lead by example. YOU are the first one there and the last one to leave. Every day.  

Go direct and sell, sell, sell. The optimal number of mouths (or hands) between a bootstrapper and customer should be zero. Sure, stores provide great customer reach, and wholesalers provide distribution. But ecommerce was invented so that you could sell direct and reap greater margins. By taking this route you'll also learn more about your customer's needs. Stores and wholesalers fill demand, they don't create it. If you create enough demand, you can always get other organizations to fill it later. Why would a store or a wholesaler put time, money and effort into selling your product or service if you can't? If you don't create demand, all the distribution in the world will get you nowhere fast. Sell, sell, sell and if you're not good at selling one of your first hires better be a superstar in that department. 

In summary, focus on creating revenue, retain a qualified affordable mentor/business coach, forecast from the bottom up, pick the right business model for bootstrapping, focus on value when purchasing goods and services for your business, take your time to hire the right people and sell, sell, sell. For a small business or a start-up nothing happens until someone sells something to someone. Period.