eCommerce and fundraising are the new buzzwords. Everyone seems to be wanting in on the action. The glowing press coverages, rock star status and proclamations of the new ‘Entrepreneur God’ has everyone wanting to turn to eCommerce and get funded. Many founders and entrepreneurs think that they only way they can create a successful business is by getting funded right from day one.
They forget that somewhere in the middle of all of that is the need to create a business. One that is sustainable and long lasting and not dependent on funding after funding. In a recent 2014 study, there were some startling observations around startups and funding. In the data generated by the Kauffman Foundation's Firm Survey, one of the longest and largest studies ever of privately owned startups, researchers concluded that lower levels of startup capital don’t significantly alter a company’s chance of survival.
The study also revealed that almost every company in the Inc. 500 - the 500 fastest-growing companies with $2 million or more in revenue - used bootstrapping to get where they are now. Therefore even though it may seem like "everyone" is VC-funded these days, less than 1 percent of startups in the U.S. actually raise capital this way which implies that the vast majority are self-funded. Or as it is known, bootstrapped.
So what is bootstrapping? Simply put bootstrapping is where you as an entrepreneur start your company with your own finances. This could include help from friends and family but is basically your own money. The risks are huge. If you do not have the right financial management skills and the knowledge to create a process-based organization and a positive work culture right from the start, you could end up not only failing but more damagingly with serious debt issues. On the other hand, if you can pull it off, the rewards are huge. To be successful, there are some things that an entrepreneur must do:
Have a fast revenue generating business model
Most entrepreneurs fall into the trap of creating a marketing company rather than building a self-sustaining business. You need to develop your business model where you are generating real cash and profits as much as possible. If that means forgoing the trappings of glitzy ads and media, so be it.
The faster you generate cash, the higher probability of your business surviving and growing. For an e-commerce company, don’t get into a price war unless you can generate positive margins. Focus on your fulfillment processes to ensure you can compete with other established brands in providing customers a stellar service.
For customer acquisition, focus on certain markets instead of the entire country if need be and try figuring out the best channel to do so. It could be acquisition through social media, emails, affiliates, online ads, radio and so on. Or even through personal touchpoints depending on the products that you sell.
Don’t get into TV advertising because not only is it going to be very expensive but you are probably not geared organizationally to handle the traffic which would impact your brand and end up being more damaging. Develop the ability to choose a good revenue source over one which is not, even though it might look attractive at the start. And try avoiding getting into inventory as much as possible!
Focus on cash discipline with a monk’s zeal
Separate your personal and business expenses. It is advisable to incorporate the company right from day one. It’s a small expense but a crucial one and helps you maintain a clean record from both a business management as well as a regulatory environment. Your business account needs to be monitored daily – what is coming in and what is going out and slated to go out. You cannot falter on this discipline. Once you do this, you would realize you have an amazing power to control the growth of your company. You would know exactly how much you can spend every month to grow your business and allocate funds accordingly.
Be very frugal in everything
Don’t hire if you don’t need to. Learn as much as you can to run your own business. And then hire only those that you really need. Have a comfortable working space that makes you productive and not an expensive place that bleeds you financially even though it might be a great place for your friends to have coffee in! You are paying for all of that through your personal investment in the company and the company’s revenues so make sure every paise is being spent only if it’s needed to be spent.
Bootstrapping is a mindset. It teaches you discipline and forces you to constantly sharpen and hone your business model and product offering. That leads to the creation of very strong foundations that in the long term would help you meet your financial metrics and actually give you more negotiating power while raising funds. A financially stable company would always be more powerful in front of the VC’s then one which has nothing to how by way of achievements.
You would have all the control and leverage to take your company in the direction that you want to. And remember, the minute your balance sheet gets strong, you might not even need external funding as your company revenues themselves would open access to capital from your banking partners. That’s why a little patience in the beginning and financial discipline would allow you to focus on something very important – creating your successful business.