Bootstrapping a New Venture

 

Successfully raising startup funding for a new venture calls for a celebration. The simple fact that a high net worth individual, corporation or institutional investor believes in the idea enough to invest is quite exhilarating. The idea was not too silly after all and the vision has been “validated”.

Third party capital enables the founders to invest further in product development, people, marketing and equipment. However, securing early stage capital does not guarantee success even if it does reduce the risk of failure. Many startups spend all the third party capital and still fail regardless of the potential exhibited. The dot com bubble era of the late 1990s is an example of what can happen when startups receive too much money too early.

Bootstrapping

Bootstrapping in the context of startups is a strategy that calls for survival without external financing. The startup funding is solely derived from the founders’ private assets, personal debt, and reinvested profits. The bootstrapping model requires extremely frugal or disciplined spending on carefully prioritized needs. The approach also gives entrepreneurs the leeway to build the product and business in line with their own vision rather than that of an external investor.

Personal Challenges

Entrepreneurs do not always require substantial capital to launch a basic version of their new products and service. The founder needs to conjure up a basic business plan that accurately reflects the desired bootstrapping intention. The future financial projections and forecasts should show that founders’ capital and customer revenues are both sufficient to grow the business.

Consequently, bootstrapping founders choose to make a significant sacrifice to launch the business. They commit their personal savings and wealth to the project, and decide not to bring in external investors in the short term. Such founders often downgrade their standard of living as a result.

Sell As Soon As Possible

The earlier the sample product or service is available to customers, the shorter the bootstrapping period and the higher the likelihood of success. Entrepreneurs should avoid unnecessarily delaying taking their product or service public. Such delays are usually ill-fated attempts to perfect the offering instead of getting invaluable customer feedback to improve specific aspects of the product. By a tragic twist of fate, scarce resources are wasted resources because the entrepreneurs spent more time in product development than in interacting with customers.

Even a limited launch or to a specific group of people would provide invaluable customer feedback which will prove to be vital to the overall success of the startup. It wouldn’t matter if the product doesn’t come in a shiny box or lacks the finishing touches. Many consumers are willing to participate in early trials and are helpful if they realize that the Company is willing to further improve the product to meet customer needs.

Raising Capital Only When the Time Is Right

The earlier you raise venture capital, the greater the percentage of equity you give up. This is because there is an inverse relationship between startup risk and company valuation. Bootstrapping philosophy therefore suggests that startups should target customers before capital. With a decent prototype in hand and an interested consumer base to cater to, the entrepreneurs can begin to generate small amount of sales.

Such sales help to validate the concept and enable the startup to achieve product-market fit. The perceived business risk is lower, and the financial projections would be more believable. Thus, the business’ valuation increases dramatically (if you’re a good negotiator). The entrepreneurs would have landed on the path to growth without having lost shareholder control by raising external capital too early.

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