It may be slower, less sexy, and counterintuitive, but you can be better off growing your small business by bootstrapping rather than seeking outside capital. Bootstrapping can make the business owner focus on profits and cash flow, and it frees him or her to spend time on selling and on solving problems that are keeping the company from making a profit.
Bootstrapping can also be better for employees. They work at a firm where there is a clear and absolute line of authority and they are taught a surefire way to sell a product. Also, more shares are available for them in employee stock option plans.
Overall, bootstrapping can force you to be more realistic, to not waste time and to be better prepared for the long run. After all, you're in control and accountable -- not an investor. If you follow these five rules, you should be able to bootstrap your idea and get it up and running.
1. Get Operational Quickly
One of the best things you can do to reduce risk is to begin selling immediately. Hopefully, you'll generate revenue right from the very beginning. If you can find a product or service that will sell immediately to large num¬bers of customers, you can use those sales to finance your startup, using the receivables as collateral for a loan.
2. Understaff
In the beginning of a company's life cycle, the entrepreneur must be the chief salesperson, chief marketing officer, chief fulfillment officer, chief financial officer and the person in charge of cleaning the toilet every day. To bootstrap successfully, entrepreneurs must sacrifice their own vanity and do all of the jobs that previously had been done by a large support team.
3. Keep Growth in Check
It may seem counterintuitive, but slow, steady growth is preferable to fast, explosive growth. The second outcome usually requires a tremendous influx of capital. Growing organically is maybe not as sexy, but it's more likely to produce a company with no debt that is able to weather recessions and crises.
One option is to start a business on the side that requires your time in the morning or evening before or after your normal job. In year one, you might make $10,000 in sales. In year two, aim for $100,000 in sales and $15,000 in profit. And in year three, perhaps you'll be able to afford to pay yourself $50,000 from the $300,000 of sales. This slow-growth plan reduces your risk and makes sure that you have active health insurance the entire time.
4. Forecast from the Bottom Up
Decide in advance how much you want to make during the first year of your business. Assume for instance you want to make $50,000 in profits and that from each sale you make $1,000 profit. That means you'll need to make 50 sales during the year, or about one a week.
Forecasting from the bottom up gives you the ability to meet your sales goals and therefore to control your startup costs and growth rate. You know, for example, that for every four customers you meet, you sell one unit. This means you must meet with four customers every week. To generate four customers, you must make one hundred telephone calls to get the appointments.
Using this method, you can back into your sales and profit necessity by calculating the number of calls you must make or advertisements you must place. If making one hundred calls in a week is impossible, at least you will know and be able to work backward from that point.
5. Reconsider the Traditional Business Plan
The low-risk, bootstrapping entrepreneur doesn't need start out by writing a detailed business plan. He or she starts small, with one or two sales, slowly building with little if any debt and using his or her day job as a cushion, creating a sustainable, profitable business from day one.
Using this formula, the only person who would read your business plan is you, and you already know what the plan is. Planning is important; spending weeks writing about it is not important. Later in your career as an entrepreneur, having a formal business plan may be a good idea as you venture into larger companies and indeed want to use someone else's money to do so. But for now, that's not necessary. Spend that time selling.
More than anything, remember that the details of a business are less important than simply getting your business off the ground. Nothing matters but getting that first paying customer, and then another and another. Every sale builds on itself. In the long term, what matters is not the fancy office or title. It's the profit that you will use to pay your bills, grow the business even larger and secure the self-made future you always wanted.
Life insurance as low as $14/mo for $250,000 or $21/mo for $500,000 of coverage. Contact MetLife®
Comments:
the whole concept is fine but needs some fine tuning, I suppose. because if you concentrate on marketing somebody else project the you never take off on your own start up. But one factor is absolutely true that never borrow money for a start up. because a start up needs 360 degrees application in many cases. by borrowing you end up in making loses before you actually are operational. Secondly rightly said that the venture must think of vanity and sacrifice some for the sake of your venture. it is like a lady bearing all the labor pains for giving birth. so is our new venture too. hence one must be laborious to reap rich dividends later.- AarKay
I never heard the word bootstrapping till I developed my own training company www.face2facetech.com.The decision to grow organically has always been the strategy.It pushes me to work much harder as the capital's from my hard earned savings and profit I made through the business.The indirect effect create the 'entrepreneur's mindset', fuel my energy and help me live my purpose of having a business in the first place.Thank you so much for formalising my belief in bootstrapping. And yes 'traditional' business plan still has a place in any entrepreneur's handbook!
In my experience, it has been frustrating to see valuable money wasted on unnecessary resources. Bootstrapping keeps you accountable and able to make sure that you are making pragmatic choices. I found a great resource that helped me keep track of my sales. These templates make it easy for me to see exactly what is going on with my business and make better choices about how to move forward. Evelynehttp://www.oneclickstatements.com/free-spreadsheet-templates.html/?c="entrepreneur-04"
Yes! Yes! Yes! Bootstrapping is the way to go. It's a bit slower, however, you take more time to make sure the moves you make are good one's...then you act on them quickly! It cost me $3,800 and 8 months to complete 12TICKS.COM (http://12ticks.com), but it's my baby and I love the response I got when I released it. The people who came actually loved the site. Now, I'm simply driving traffic to the site and gaining momentum. I'm not afraid to admit that some things cost money on my site. It's nominal but still. LOL Alvin
I agree with this article. I boot strapped JobMuncher (www.jobmuncher.com) and am able to run it with little to no debt versus outside funding seeking hockey stick growth to get their investments back.
Perserverance is number 1
Something else to consider when you're looking at bringing on investors is that the less money your business is making, the less money an investor is going to pay you and the greater chunk of your business they're going to take. Successful bootstrapping in the beginning will pay major dividends on the backend. Rob Carpenter www.milehighbusinessplans.com
Very good article, I have been growing Cruise & Associates for 20 years now and I will say you forget to do things like bootstraping your business. Once and a while an article like this reminds me that we don't always need those extras and we can survie with out. Robert F. Cruise, EA www.cruise-associates.com
The V/C market is in the toilet, bank's are only putting money out on the street only if you put up over 50% of the loan balance up-front and angel investors are all running from the very real possiblity that any number of bank's are gonna' get burned when the inevitable Fed Open Market Comittee starts hinting at a interest rate increase. That and the very fact that Congress is gonna', like it or not, have to start eliminating subsidies to offset the budget deficit and the picture for V/C money is all but gone for the next 2 years at a minimum. Bootstrapping is the only way to go. And, if you think about it, would you really invest in a company if the owner didn't, or couldn't, explain every facet of the business ? If you haven't done what's necessary, 1 on 1, then how can you explain it to a customer, much less an investor, that is responsible for your sales, referral marketing and expansion plans ?
Love this article! This is exactly how I started my business A&O PR. The whole time I was getting my business off the ground, I was beating myself up because I thought I was supposed to have the extensive business plan and the meetings with investors lining up. As it turns out, bootstrapping it has allowed A&O to grow organically and realistically and has forced me to see early on where we needed to devote time and energy to increase profitability rather than resting on my laurels.
thanks i read your article i thought i was doing something wrong but you are correct, i have been working with my own advertising agency for 2 years and is paying the bills by now, ok i will now get desperate and keep looking for business that i can help in they advertising field, good job
Great article. As you state, the financial aspects are one of the hardest hurdles to overcome. Joining a startup when it is slightly more developed you can get over that initial hurdle. I have a website, http://www.startupgrads.com . Our goal is to help business find young, eager employees and vice versa.
Good article, a bit obvious, but helpful for anyone starting out their research. I'm currently bootstrapping my startup and blogging about it at www.twodogsandastartup.wordpress.com , writing about free tools we find and use.
Two reasons why I like bootstrapping: 1. It forces you to really think about the decisions you make and how you invest/spend you money because it's your money not someone elses. 2. It gives you more control over your idea and dream. I think the five rules above are important to remember for any entrepreneur and small business owner. http://twodogsandastartup.wordpress.com/
I'm currently on a bootstrapping mode so you're in good company. I have to say it's tough- where you wear a lot of hats and be a one-man team, even if you have a handful of staff. Outsourcing tasks offshore has helped me cut costs. I'll take your last advice at heart, thanks!
love 1 to 3... but 4 should be reconsidered. i refer to my business plan frequently... it's the centerboard to my operations. not etched in stone but a constant reminder of where we are going and how we will get there!
Good post. I appreciate #3, but I would advocate for growing AS MUCH as you can within your capital limits. Don't hold back for holding back's sake There are other means to finance growth, including customers (via deposits or special discounts for fast payment), vendors, partners, and other stakeholders. You can give up options or equity in exchange, and also negotiate good terms, as well. Thanks!
These are great tips for starting a business! I like the simple, don't think to hard or too extravagantly approach to getting a start up off the ground. When I was starting my business, it was important to stay organized but not spend too much time obsessing over every minute detail. I found a great website with free excel templates that allowed me to stay on track in a fast and easy way. Below is the URL, and the best part is that I still use them and they are continually updating their library. I hope this helps! Janet http://www.oneclickcommissions.com/template-entrepreneur-05.com
"You may say I'm a dreamer, but I'm not the only one" - JL
14 years ago we started following this rules, and now our company is 400 FTE
Bootstrapping is for dreamers! Big guys make money faster and easier with proper connections on the PE/VC market! Wake up!
Great Post! I feel like it is my duty as a smb owner to bootstrap everything! Oh and I have zero problem cleaning the bathroom should the occasion arise!