Bootstrapping is a technique used by individuals in business to overcome obstacles, achieve goals and make improvements through organic, self-sustainable means with no assistance from outside. It basically means to found or start a business using personal assets (such as savings, sweat equity, low operating costs, and fast cash sales turnaround) in the absence of any external financial input and also maintaining operations without the need for financial support from the outside.
Bootstrapping is undertaken by entrepreneurs in ventures where they know they don’t have sufficient resources from the outset and that these must be acquired, e.g. finance, knowledge and business relationships. A bootstrap is an attempt to acquire any of these with costs involved, financial and non-financial, minus the costs of acquiring funding or investments to support these resources.
The main resources every new business needs are threefold and consist of finance, knowledge and relationships.
These are all the tangible, monetary assets relating to business ventures. Some businesses are more asset intense than others and need quality equipment to launch into the marketplace.
This includes the experience and skills of those driving the venture as well as employees and any advisors used. Intellectual property counts, together with the skills and experiences that are gained along the way and the methods by which these are achieved. The knowledge gained includes areas such as best practice and specific outcomes when targeting customers, the wider business arena and the product or brand itself. The methods used include policies and processes that build the business structure and the ways in which efficiency is improved.
Relationships in startups cover areas such as business contacts brought in from all those involved in the business, its presence online and the cohesion, morale and drive of those who make up the core team. Relationships extend to those with stakeholders, outside bodies including the press, regulatory authorities and professional memberships. Harnessing credibility with third parties is an important area and developing a brand is essential. Building relationships hinges around securing the most powerful ally of any business, not just startups, and that is gaining third party trust.
Why is bootstrapping a good idea?
Bootstrapping is vital because it protects equity put into the business by founding members. Founders may look to secure equity funding when starting a business but this takes its toll on the interest they hold in the equity and can signal a loss of decision-making powers by creating outside control that must be obeyed. Businesses need to decide if equity available is needed. If it is, whether it’s worth the sacrifices.
Innovation is often driven by necessity and bootstrapping creates an element of risk, which can give rise to innovative thinking and creation, with great efficiency and success. Evidence of successful bootstrapping in the past is also a good signal to give out to potential future investors when the time comes to apply for their help, as they will see the hard work already invested in the business and are likely to trust the business’ commitment when it comes to allocating their funds wisely.
In some resource-intense business likes print e-commerces, sending out the right message to future investors, showing the business has the gumption to not only survive but thrive without outside help at the start will help to attract future outside assistance.
Devising a bootstrapping strategy
Bootstrapping is made up of decisions and opportunities taken to develop a strategic business plan. Decisions taken cover actions, policies and procedures, as well as a structure to minimise cost, improve efficiency and deliver objectives within a favourable time frame.
Decisions to put a venture into an improved position to benefit from bootstrapping are known as bootstrapped decisions and examples are deciding to implement a more streamlined process and relocating to a new area and/or premises. Bootstrapping is taking advantage of external elements that can be levered to gain resources without needing to harness and spend valuable funds. Such opportunities can be large and small, the smaller ones focusing on perhaps just one of the three resources, such as securing funding, and the larger bootstraps covering all the three resource areas of finance, knowledge, and business relationships, good examples being crowdfunding or embarking on strategic business partnerships.
Conditions necessary for bootstrapping
There are four main elements that enable a bootstrapping strategy to go ahead and give it meaning.
Firstly, startups need concise business cycles from launching to exiting the bootstrapping arena. This timeframe has shortened in the last decade for several reasons, such as the opportunities the Internet provides (open source tools, global platforms to target customers, cloud technology, and other online facilities, like Dropbox, Evernote, Onlineprinters, etc.). Shorter business cycles demand streamlined processes and require less aggregate investment. On the other hand, it’s paramount to find and capture timely funding that isn’t necessarily based on the more common venture capital approach and/or acquiring other resources.
Secondly, in these lean times, failing and picking yourself up again is often seen as a way to improve but bootstrapping opportunities must be categorised as both good and bad. The good are, for example, finding funding sources that have an in-depth knowledge of your business niche and are a good match in terms of having the same objectives, so leaving room for the company to grow without preventing future fundraising and decision-making by the business itself.
Thirdly, when it comes to bootstrapping, investment must include knowledge and relationships, not just money. The ability to gain resources that aren’t linked to financing, without using financial capital, is an example of a good bootstrap.
The fourth element of bootstrapping relates to making profits and controlling the organisation. Wealth-oriented business owners, who can accept smaller profit shares, often get greater financial rewards than those who try to take total control and go for larger profit shares.
Additionally, bootstrapping can give business owners the chance to grow their business by acquiring critical resources while having time to get up to speed, giving them the opportunity to maintain equity interest and control over decisions. Bootstrapping strategies that reduce the amount of capital investment that’s needed reduce the time taken for the business to come to fruition, thereby speeding up when business owners can take their profits.
Developing a bootstrapping strategy
Taking into account the three essential resources that startups need, the different bootstrapping methods and the current climate in the startup arena, startups should formulate a detailed bootstrapping strategy to reap the future benefits.
A well-constructed bootstrapping strategy will show the best path to take into the future before it’s necessary to secure the additional funding that will improve the likelihood of success for a startup.
Finding, choosing and deciding when to implement the best bootstrapping moves calls for strategic planning, a wide-view perspective and keeping an ear to the ground for opportunities, since every startup is unique with constantly changing needs as it grows and develops into the future.
Image Source ©istock.com/ jackaldu
Our book recommendations on bootstrapping strategies
- Bootstrapping Your Business: Start and Grow a Successful Company with Almost No Money
- Bootstrapping Entrepreneur: 100 Free Online Tools for Startups and First-Time Entrepreneurs
- The Ultimate Guide to Bootstrapping – How You can Build a Profitable Company from Day One