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Bootstrapping and its Advantages for Start-ups

The idea of bootstrapping is to grow a company from scratch, using 'sweat capital'
Bootstrapping and its Advantages for Start-ups
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India is ranked among the top three countries globally when it comes to start-up funding, with the number of technology companies in the start-up ecosystem likely to exceed 10,000 by 2020, according to the IT and BPO industry leader, Nasscom.

In 2016, the country garnered close to $4 billion in funding from a little more than 1000 start-ups and although the figures were about 50 per cent lower compared to that in the previous year, in the first six months of 2017, VC and seed capital funding for the country’s start-up firms bounced back with total investments exceeding $5 billion.

5-10% Start-ups Receive Private Equity Shares

Based on existing data, the total number of start-ups setting up shops in India range between 8000- 10,000 a year, of which only about 5- 10 per cent receive funding from private equity investors.  However, about 50- 60 per cent of them wind up within the first 3- 5 years of operations.

There are a number of reasons why these companies fail starting with dearth of good ideas, bad management, lack of skilled employees, unexpected slowdown in the economy, absence of innovation, new entrants backed by large investors and change in Government policies being some of them.

With VC investments flowing in selected businesses and most start-ups being overlooked, bootstrapping is an alternative which some of the start- up firms should consider.

How Company Grows Using ‘Sweat Capital’  

The basic definition of bootstrapping is to start a business venture without depending on any form of external funding. The idea is to grow a company from scratch using “sweat capital” and since the founder or founders are completely in charge of operations, they are not answerable to investors.

All businesses require some amount of minimum capital to kick-start business and in the case of bootstrap, the founders bring in the base capital and in the event of a shortfall could look for secondary sources of income including bank loans, overdraft and even pursuing employment temporarily until costs and revenues breakeven.

Some of the key advantages of bootstrapping a start-up business are-

  • The firm belongs to the founder in totality
  • Develop creative strategies and solutions
  • Speedy improvisation
  • Attract young talent at realistic costs
  • Ability to maximise revenues with existing resources
  • Robust marketing of products and services
  • Customers are top priority

From the very beginning, self-funding companies should follow a lean model as founders burn their own cash.

Bootstrapping Call for Discipline

Bootstrapping puts into place a certain level of discipline which a lump-sum investment from a third party cannot bring. Over-spending on marketing or promotions does not always help. Power of organic growth and word-of-mouth is superior than anything print/tv/google ads or any other traditional ads might bring.

The basic principle is to provide an honest service at the most competitive of all rates. The money saved for not splurging on promotional activities can be re-invested in innovation and building new technology.

Corporate Giants that had a Humble Beginning  

There are a number of corporations like Infosys, Microsoft, Apple, Disney and many, many more that had a humble beginning with extremely small capital and insignificant office space, but were led by entrepreneurs with a clear vision and well thought out ideas and strategies which have catapulted them into highly prosperous organizations.

Irrespective of the category of the start- up, the ultimate goal should be to become a successful organization whether by bootstrapping the business in its initial stages or seeking external funding.

All start- ups once they are successful in the initial stages tend to be in a solid position to negotiate terms with external investors if they consider additional funds during expansion or stake sale.

Human tendency generally leads us to become lethargic until we get to a situation where we are forced to put in additional efforts, improvise and walk that extra mile; bootstrapping tends to achieve just that.