No matter how successful your startup is, you’ll always need to pay bills and ensure healthy future cash flows. Times of plenty can lull you into thinking funds will always flow into your bank account, because that’s been your reality so far, but the cruel reality is that capital sources can dry up overnight with no warning.
To weather uncertainty and maintain emotional equilibrium, it’s good to temper your exuberance and confidence with a dose of realism. One way to do this is through bootstrapping.
Bootstrapping is a double-edged sword: Because you have little or no dependence on investors or stakeholders, you won’t give up much of your company in exchange for money, but the downside is that you have less money to invest in growth.
There’s also a hybrid model that gets less attention and bears mentioning.
An investment colleague of mine in the life science genomics space received $150,000 in angel funding. She later sold her business for hundreds of millions of dollars. She could pull off this extraordinarily successful exit because after the initial angel round, sales of her unique DNA sequencing and genomic services funded the business. With the success of her technology, she was able to rapidly scale the business within the U.S.
If you decide bootstrapping is the best choice for your situation, you should first figure out if you’ll self-fund or seek small amounts from angels.
Don’t be tempted to hop on a plane at a moment’s notice to meet potential customers in glamorous locations or for meetings in far-flung locations.
These five key business strategies and principles will set you up for success:
- Pick team members wisely
- Establish your business model and go-to -market strategy to generate cash quickly
- Adopt a frugal mindset: always watch expenses and negotiate costs
- Be prepared to take on many roles, including those you feel are menial.
- Only outsource what’s absolutely essential, such as legal and accounting
Pick your team wisely
Your first employees are among the most important stakeholders in your business. It’s critical to select people who are invested in the mission and success of your business. They should want to work for a bootstrapped business, as not all will. Look for people who want to be part of the business rather than someone for whom it’s just another job. The right hires will indicate they want to be part of a sustainable business model.
You should offer equity vesting over time as a key financial incentive. Because your team will earn this incentive over their tenure with the company, each individual will likely be even more invested in your business’ success.
Select employees who can wear many hats, and seek out talent from diverse backgrounds to bring in varied perspectives. I built and ran a startup in food safety diagnostics that I sold to a multi-billion dollar S&P 500 company. We had people across ages, sexes, ethnic backgrounds, education, and geographies. This diversity was critical to our success, because we were doing business in 100 countries. It required us to have a deep understanding of the marketplace and cultural dynamics of each country.
In addition to wearing many hats, your team should take on tasks that don’t meet their main job descriptions. Regardless of how talented they are, steer clear of superstars or those who only want to focus on their narrow job description; these employees will not be a good fit and could end up giving you a lot of grief. At my startup, we only hired people who were committed to the company’s mission and growth and were willing and able to take on different tasks.
Look for evidence of grit when hiring. The hard truth is that in building any business, there will be peaks and valleys. When you hit a valley, it can be difficult to stay inspired and engaged. Valleys will test everyone. You want people who, like you, will persevere and view building the business as a marathon, not a sprint.
Make your first hires in technical, sales and marketing. Select individuals who understand your company is market-focused, and are committed to developing and going to market with a product that fits it best. Innovative technical professionals are vital for technical product development, but people who want to develop a product first and find a market later will do a disservice to your company. Steer clear of them.
For sales and marketing professionals, choose seasoned talent with extensive proof of sales and marketing success. These individuals will be critical for gaining traction rapidly and bringing in cash. When scouting for sales or marketing, ask for a candidate’s prior successes with other organizations.
Finally, assemble a board or team of advisors to guide your business. Invite individuals who have experience and expertise to augment your staff.
Establish a business model and get to market quickly
Bootstrapping a business means relying on cash flow from sales to fund expenses and growth. Learn about your market, know the trends, where they’re heading, and respond accordingly. The goal of your go-to-market strategy is to identify your best customers and lay out a roadmap to successfully, efficiently and profitably reach them.
Create a customer persona that represents the people who will derive the most value from your product or service. Then, decide on the customer acquisition channel that’s most likely to produce the highest ROI. To determine ROI, look at impact (number of paying customers if your plan succeeds), confidence in the plan (success rate), and how much time and money will be needed for the plan to be successful.
Choose a business model that optimizes cash flow. With a bootstrapped business, your ability to grow requires reinvesting profits into the company. So, intentionally focus on keeping profits flowing smoothly from the start.
My business used a direct sales approach in the U.S. and Canada. For our go-to-market plan, we secured speciality industrial distributors outside North America that sold to the food and agricultural market. Within a few years, we were doing business in 100 countries.
Getting to market quickly requires a deep understanding of your customer, the best way to reach them, and channels to secure sales quickly and sustainably. Several companies I’ve invested in are in the consumer products area. These firms invest their content and financial resources in social media advertising that precisely targets their ideal customer. They balance paid media with social media influencers and e-commerce through Shopify and Amazon, a strategy that has the highest likelihood of securing immediate sales in the U.S.
Watch expenses and negotiate costs
When you’re self-funded, every penny counts. That means you need to be clever and creative when figuring out how to achieve your business goals, and where to spend your limited resources.
While this may seem like a high bar, it’s a good thing. It requires you to exercise restraint and invest only in what’s absolutely necessary. Which of your sales and marketing channels will give you the most bang for your buck? Which employee benefits are critical for attracting and retaining talent? Which area of the business is a priority for investment?
You’ll be surprised by how much you can do with limited resources. Don’t shy away from negotiating for discounts with vendors. If the amounts on your invoices scare you at first, ask for installment payments to help even out your cash flow.
Don’t be tempted to hop on a plane at a moment’s notice to meet potential customers in glamorous locations or for meetings in far-flung locations. Your bootstrapped business likely will not survive such big, optional financial outlays.
Adopt the many roles mindset
Embrace a frugal mindset about staffing. You may not be able to hire all the staff you think you need, nor invest in extensive research and development, or saturate marketing channels with your messaging and content. You and your team must be prepared to take on multiple roles with different responsibilities across many functions. When hiring, look for a Swiss Army Knife — people who can do more than one job well.
For your business to succeed, your team must have a strong work ethic, drive and shared vision. Each team member must know what it will take to succeed, and they should have deep expertise in the product or service, and equally deep experience in the market.
Outsource only essential work
You should only outsource functions that are absolutely necessary and require specialized skills when needed. For accounting, hire or contract with a part time accountant, and ensure you purchase or verify that they use the right accounting software to ensure all your records are clear and precise. Contract with a lawyer who has extensive experience with entrepreneurial ventures, can provide solid references, and is reasonably priced.
Don’t hire a marketing director who will only work with the largest and most prestigious agency, because you don’t need that kind of capacity at your scale. My company paid 25% of what a large agency charges by working with boutique agencies that understood our business.
Invest in your business the bootstrap way
Bootstrapping doesn’t mean you don’t invest in your business. You just invest wisely by making capital-efficient choices, finding ways to spend less on product or service development, and scaling your business so that it doesn’t compromise results. Your business will be profitable sooner because you’ll have lowered expenses while achieving your goals.
In the life sciences sector, laboratory equipment to develop world-class products usually costs more than $1 million. Instead of buying new, we furnished our entire laboratory with top-quality used lab equipment for a grand total of $150,000 — a mere 15% of the cost of new scientific instruments. Similarly, we decorated our entire office with gorgeous furniture that was just two years old for less than five cents on the dollar.
When a life sciences company around the corner from us went out of business after burning through $25 million in two years, the timing was perfect for us. We needed more lab equipment and office furnishings, so we purchased their entire office and laboratory instruments at a fire sale price of $25,000. If we had bought it all new, it would have cost at least $500,000.
As a business, we had more than 10,000 customers, 70% gross margins, 25% bottom line, and a majority market share in our market. Bootstrapping was a successful financial strategy for our company.
Don’t for one minute think bootstrapping is a dirty word. The opposite is true. Successful bootstrapping shows that you have a proof of concept and a sustainable business model. A significant upside is that if you choose to raise funds in the future, because the product-market fit and business model have proved profitable, fundraising will be that much easier.