Bootstrapping, the act of avoiding external investors, means going solo in the financing department, all the while keeping expenses to a minimum.
Many business schools widely promote the use of external investors. They teach you to write a lengthy, in-depth business plan and then pitch it to investors. This isn’t always an option for many entrepreneurs, however, nor is it always the smartest route. Finding outside investments, like venture capital or bank loans can be tough, not to mention time consuming.
Getting a small business loan from a bank is difficult because startups are risky ventures, and banks are not known for their risk taking. That’s not to say that small-business loans aren’t out there, just don’t hold your breath. Small business grants from the government work similarly. They’re hard to come by, and the time it takes to search for them could be better spent working on the business itself.
Most startups try to go the route of venture capitalists or angel investors (also known as angels), but these two types of external investors can also be a tough sell. Venture capitalists invest billions, but they do so for only a select number of ventures. They’re generally interested in larger investments and are more willing to invest money in companies that already have a solid base. An angel is typically an affluent inpidual who provides capital for startups. The problem with pitching an angel is that it can be very difficult to find the right one and then actually grab his or her attention.
Financing your business the conventional way—with someone else’s money—involves spending a lot of time chasing deep-pocketed investors who are statistically not likely to be interested. Bootstrappers, on the other hand, focus their energy on making money and being smart with it. Along the way they tend to learn more about money management and finance than those who start out with loads of someone else’s cash.
Bootstrappers get financing in several different ways. Some of the more common forms are credit cards, second mortgages, personal savings, or friends and family. This may sound risky, but there is a reason bootstrapping is increasing in popularity.
Bootstrappers maintain a customer-focused mentality from day one. Externally-funded business owners are often fooled into thinking that they already have a business because they can pay salaries and rent, but the truth is you only have a business when you have paying customers. Bootstrappers have nothing but their customers to focus on. They also build cost-effective businesses right off the bat. You can't waste much money when there isn't much money to waste. Bootstrapping is a solid investment for anyone with the determination and brainpower to find a way to make it work.
Tips to ease the process:
Plan ahead for your startup needs by establishing good credit. Being an entrepreneur is risk enough for many creditors; don’t give them another reason to deny you.
Cut your overhead costs down to the bare essentials. Every penny you unnecessarily spend cuts into your ability to succeed.
Do it yourself as much as you possibly can. Even if you don’t know a lot about a particular subject matter, you can always read up on it.
Plan for success, not for failure. Planning ahead for failure seems like the smart thing to do, but by removing all possibility of failure from your mind, you’ll be more likely to succeed.
Getting things right is important, but it’s still more important to get them done than get them perfect, so don’t be afraid to be a little “reckless” in that regard.
Don’t write off the use of external investors. For some startups they’re the right choice, but so few startups have that choice. Instead the majority of them are forced to start with little or no money. Don’t be discouraged if you’re one of those entrepreneurs, it’s probably a blessing in disguise. Bootstrapping is a risky venture, but the payoff is usually worth it in the end.