Funding is one of the biggest challenges most entrepreneurs face. Whether they take out loans, crowdfund or accept investments, startup founders often find that they need some kind of outside financing to make their business dreams a reality.
But some entrepreneurs choose to self-fund their operations, investing their own money into the business. This is known as bootstrapping, and if you have the resources to do it, you will benefit from complete financial and creative control over your business. There are no equity stakeholders demanding that you move in a certain direction, or lenders looking for their loan payments each month.
The downside, of course, is that your business budget is dictated by your own personal finances. Bootstrappers are on the hook for every last cent invested in the business, and without the right financial-management skills, you could end up driving yourself into serious debt.
If you’re thinking about funding your startup out of pocket, here’s some advice from business leaders on how to make it work.
The advantages of bootstrapping
Any financing path comes with pros and cons, and bootstrapping is no exception. It’s true that this method will put severe constraints on your budget and increase your personal liability, but there are also plenty of advantages to self-funding. Our expert sources weighed in on why bootstrapping might be a good idea for you:
“Bootstrapping allows an entrepreneur to have complete control over your business without sharing ownership with outside investors. You can manage the pace and iterations of your product, marketing and sales efforts, whereas outside investors may push you to pursue revenue before your product is ready to go to market.”
“A bootstrapping founder can prove value without having to give up equity for expensive money. You give yourself the shot of actually driving revenues and greatly increasing your valuation before funding, and maybe never taking money, which would be the best thing a business can do.”
“You don’t need anyone’s approval (except yours and your partners’) to spend your money in support of a certain direction or initiative. You’re not subject to the whims and influences of investors who pop in and out of your business without the day-to-day knowledge you’ve got as the leader. You’ve got the freedom to add people to your team as the cash flow can support it, which means you don’t over-hire and then have to let people go.”
“Bootstrapping allows you to focus on the essentials. Having a massive sum of money and investors demanding that it be spent can lead to waste. When bootstrapping, you learn to be more analytical in terms of what you spend money on. Learning this skill is crucial to any entrepreneur.”
“Bootstrapping forces creativity. It drives you to work efficiently and intelligently in order to maximize profits and fund future growth, and to manage that growth carefully.”
Building a business on a budget
To make bootstrapping work, you need to be financially disciplined. Here are a few best practices to help make your self-funded startup successful.
Lower your hiring costs (at first). When you’re pouring your own money into your business, you’ll want to keep costs as low as possible. This might mean wearing more hats than you expected, at least in the early days of your business. Buff advised learning everything you can about all aspects of business — such as accounting, product development, Web design and advertising — so you can hold off on hiring someone for these tasks for a while.
“This affords the owner the flexibility to build a revenue-generating foundation without incurring unaffordable fixed costs at the start,” Buff told Business News Daily. “It also allows you, as the owner, a better foundation for determining what skills you should look for when building your team.”
For the tasks you really don’t have time to do yourself, Miles recommended outsourcing the work. Freelancers, independent contractors and other outsourced workers can put more power behind your business without the expense associated with hiring a regular employee.
“You can find virtual assistance to help you with administrative support, bookkeeping, website creation and maintenance, content marketing and creation — nearly anything you need to get your startup on the path to success,” Miles said.
Choose your team carefully. When you are ready to expand your full-time team, you’ll need to take extra care during the hiring process. Employee turnover is expensive, and you don’t want to waste your precious resources on a bad hire. The best thing you can do is create a team with the “full package,” whose strengths cover all the basics necessary for business success.
“Surround yourself with people who think differently from you and have different skill sets,” Tolka said. “This will ensure you have a well-rounded company that can do all of the key functions for generating cash flow.”
Johnston recommended forming an advisory board to serve as an additional resource for your business.
“Develop relationships with the leaders in your industry, and ask them to serve,” he said. “Contradictory opinions from sage board members are often more valuable than customer and market feedback.
Create a repeatable, scalable process that works. Tolka noted that bootstrappers need to analyze every spending decision carefully and don’t have the luxury of splurging on the “bright, shiny things” that other businesses might invest in to help them grow. Instead, you need to focus on what you do really well, and continually build upon it to scale your business.
“As you see the full sales and implementation process work in the real world, take the lessons from each stage of the chain to continually improve,” Tolka said. “What could you do better in the sales process? How are customers struggling post-purchase? Bootstrapping helps you create this feedback loop out of necessity.”
Save and plan as much as you can. Starting a business often brings unforeseen costs, so entrepreneurs should save their cash — more than they think they’ll need — long before they launch, Miles said. Heckler agreed, noting that early planning is the key to success, especially if you plan to take investments down the road.
“You never want to end up in a situation where you have a great idea, built a valuable product and hired a good team, but then run out of money or do not know when to close your wallet,” Heckler said. “Plan, plan, plan. That means putting all the wheels in motion to raise money far before you need it. Identify your top investors, get to know them, engage them. Then, start to look for that funding before you get near empty.”