When most people speak about a Startup’s funding approach as “bootstrapping”, they often are referring to the Founders putting some time and capital into the company. This is actually an incorrect use of the term in Startup “speak”, as that Founder input is still an investment. And though it’s usual that Founders put some cash into their companies or minimally defer taking anything out, it’s still actually investment. Just not an external investment. It is a type of Seed Funding.
I recently attended a Marketing Communications workshop where as part of the initial discussion, the workshop leader Janice Rudkowski @helianthusinc kept asking questions as to why we want to get paying customers, until as a group we actually saw the distilled answer: That you want to get paying customers to obtain cash, so that cash can be re-invested in the company to get more paying customers. This is in truth the proper definition of bootstrapping.
Understanding this also helps Founders to see the purpose of seeking out external capital investment in the terms of Angel or VC funding. In my humble opinion (IMHO), a Startup’s best time to seek out external capital investment is when that boot strapping strategy does not bring in enough cash to scale beyond the existing business parameters. If the company has bootstrapped for a time, then they are in a position of strength to talk about how the business has been performing to date, what they want to see in terms of growth and what capital they need to get there.
There seems to be a lot of stuff out there IMHO about funding, pitching and how to raise capital, in comparison to the amount of information and advice on how to bootstrap. I think it’s just sexier to talk about it. Getting VC capital means you are cool, bootstrapping means you are slogging it out. Yet, in truth, the vast majority of new Startups don’t get funding. As well, a key reason why a lot of Startups fail isn’t’ because they don’t have a good business idea, it’s because they run out of money trying to take it to market. So finding better ways of doing bootstrapping well can make or break a company.
One of the best things that a bootstrapping Startup can do is to embrace Lean Startup principles. I love the second tag-line title that Ash Maurya used for his book Running Lean – Iterate from Plan A to a Plan that Works. It only makes sense that if “the customer” is your main source of cash for investment, then the company should be customer-centric. Incorporating iterative lean methodologies that focus on finding a product-market fit that the customer will pay for is one of the best investments a Startup can make.
Another key advantage to bootstrapping is that it allows the Founders to focus on the business, rather than focus on running a fundraising campaign. If one of the initial investments of Founders is time as well as capital, then the use of that time is vital. To run a successful campaign to get VC Capital takes a lot of time, preparation and effort on the part of the Founders. A Startup seeking funding needs to have the capacity to have both an outward facing CEO Founder, and inward facing COO or CTO Founders to accomplish this successfully. That outward facing CEO needs to also understand that time spent in front of investors is time not spent in front of the customer!
Of course bootstrapping is hard. It means making really tough financial decisions. It means having all parts of the business setup to have to justify its spend in terms of how it will improve new or existing customer business – development, marketing and promotion, sales. It might mean missing out on some opportunities for growth, if the company doesn’t have the staff or resources to deliver on them. There can be risks around being stretched too thin. It can be hard to recover from the mini failure steps that inevitably will happen along the way. It means the Founders need to have the capacity of embracing a great deal of risk.
I think some of the best Startups do embrace both strategies. They generally start off with some Seed capital, either external or from Founders. They look for ways to bootstrap revenue, and do as much as possible on as little money as they can. They may seek out VC Investment, when they need in order to Scale. The Founders may have a private Exit Strategy, on how and when they want to sell the business. And they go back and forth across these different ways of getting and using money, balancing priorities and seeking the best timing.
Photo Credit: Microsoft Clipart