Bootstrapping a Company (Part 1) - Why & When
Building a company without investors comes with many advantages - like keeping all of the shares and remaining free in your decisions. And still: "bootstrapping" is not a silver bullet.
In this first post of our two-part series, we'll explore why & when it makes sense to build a company without investors.
(A) "Sorry, no funding for you."
There's option (A): you don't get any funding. The reasons for this can be countless. E.g. the market or target group you’re approaching is too small. Maybe because you’re approaching a very "long-tailish" market. Or you’re limited to a small regional market. You won’t get an investor to put a six-figure amount into your idea for a cup holder for left-handed fly fishermen.
Another reason can be not having the kind of track record that an investor would like to see. E.g. having successfully built & sold a dozen companies previously lets an investor have faith you can do it another time.
(B) "No funding for me, please!"
And then, of course, there's option (B): you don't want any funding. Because you actually like that you don't have to get approval for a decision from anyone else. Or because you want to save yourself the time and hassle to search for investors (and, later, to keep them informed).
But before deciding to bootstrap a business you should answer two critical questions:
Is my idea suited for boostrapping?
Your business idea shouldn't require heavy capital needs to start. When building airplanes, you'll probably need one or another ridiculously expensive machine - and you won't be able to finance these from your piggy bank.
Also, your idea must allow for early revenue: when having no outside money, all you live from are your savings and your new business’s revenues. Before your first airplane is ready to be sold, you might have already run out of cash...
Another factor to keep in mind is the risk you’re running. For an investment-backed startup, you’re welcome to take a 1 in 10,000 chance of creating a 20 billion dollar business. However, for a startup you’re running completely with your own money, you’re probably better off taking a 1 in 20 chance of creating a nicely profitable business.
Am I suited for bootstrapping?
Bootstrapping requires you to be frugal. If you're used to an expensive company car, a roof garden office, and your very own personal assistant, it might be hard for you to bootstrap. It even influences your possibilities for hiring in the first years: you probably won't be able to afford people with lots of years of experience and might rather have to go with junior employees.
Bootstrapping means to budget sparingly because you can only spend what you've earned (or saved - but this source is limited...).