The myth still exists that it takes outside funding, sometimes massive outside funding, to launch a successful high growth firm.
If you have a very capital intensive or labor intensive business model you will need a large base of funding to get off the ground. But for most start-ups, you may be able to adjust your business model enough to cut the funding you need, while still making a successful launch.
One example comes from an e-mail I received about launching a children’s indoor play center. Such facilities can take a lot of cash to launch due to the cost of facility rent and equipment costs, and the aspiring entrepreneur had no ready source of cash.
My response is that there are no ready outside sources of cash out there for new start-ups like this. The only real options are to use money from your savings or to tap into friends and family who would be willing to invest.
If the entrepreneur wanting to start the indoor play center cannot raise the money to launch the program fully formed, there are other options. She could start with a much smaller scale that fits in with the money available. Or she could develop the program she wants to run by partnering with a local facility like a YMCA. Or she might be able to save rent expense by partnering with a local church to use their space.
The point is that some modest tweaks to the business model may bring costs way down and still meet the need of the market. Once the bootstrapped launch of the play center is cash flow positive, all kinds of options for growing and expanding emerge.
John Wark sent along a great example of how bootstrapping did not stop a new venture called Logik from making the Inc 500. Logik is one of the firms featured in a series at the blog 37signals called “Bootstrapped, Profitable and Proud.”
According to the interview, Logik launched with only $20,000 from savings and credit cards (NOTE: I am not a fan of using credit cards to start businesses). It was profitable within nine months. And did the bootstrapping limit their ability to grow, as it often commonly assumed?
“Financially, we’ve been very successful considering our size relative to the
competition (most have close to or well over 100 employees, we have 16)…. [F]rom 2005 to 2008 we grew revenue by 1,067% from $373,866 in
2005 to $4.4 million in 2008 with about $3 million in profit. We did that with 8
employees, a ton of servers, niche software, and 1 dog. This, minus the profit,
is all public information now. We were ranked
#181 overall on the 2009 Inc 500 survey and #1 for eDiscovery companies.”
And Logik is still bootstrapping their venture to this day. This is a great series at 37signals and is worth following for all you aspiring bootstrappers out there.
If funding is your barrier to starting your new venture, play with the business model to see if you can still create a value proposition that the market will be attracted to. You might be surprised how much start-up capital you can save without hurting your ability to launch and grow.
This is a good post! As recent as this summer, I did something similar. I partnered with one of the YMCA’s Urban Youth Development Programs for the launch of my venture. Now there are several other programs and organizations interested in long-term partnerships and searching for additional sources to help fund the venture.
I think it is important to note that the idea of partnerships was not in my original business model. The idea came from classmates and colleagues as we picked apart the business plan to make it better.
Jeff,
I love this post, and I’m glad to see it be a recurring theme on your site. I work with high growth entrepreneurs and this is a common complaint; almost to the point that some of these entrepreneurs would rather abandon their business than try to bootstrap.
There is also the misconception that you can only bootstrap IT companies.
Admittedly, there are some companies that simply DO require high amounts of capital – if I’m a medical device that has to go through the regulatory process, then I probably am going to require some capital sooner or later. But even here – maybe there is a way to design an lower tech device that doesn’t require approval and could be engineered and manufactured for a much lower cost.
What I take away from this post is instead of throwing your hands in the air when you aren’t successful with that grant application – sit down with your business plan (and maybe your local incubator director – shameless plug) and get creative on how you can move your company forward without tons of money from someone else.
Excellent summary of the value of bootstrapping. Prior to Dr. Cornwall’s Entrepreneurial Challenge course, I always assumed that start-ups required massive investments to succeed. Especially in light of the current economic situation, it is refreshing and encouraging to hear success stories about dedicated bootstrappers.
I was also inspired recently by the success story of Debbie Gordon in her business (Snappy Auctions). Gordon bootstrapped by learning to write some of her own legal contracts, designing her own software and, most impressively to me, developing a relationship with the President of eBay that enabled her to have an influence on the guidelines and regulations for her own store!
These are great stories that serve as both inspiration and guidelines for aspiring entrepreneurs.
Robert S. Johnson, MAcc student, Belmont University
Really enjoyed this post. As I’ve become more familiar with the concept of “bootstrapping”, it appears that small business entrepreneurs should utilize these techniques as much as feasibly possible – even if they do have the ability to obtain large amounts of outside funding. The reality is the business model requires continuous development throughout the initial stages. At the earliest stages, forecasting the need of external resources may be unrealistic. At the end of the day, the goal is just to get started, right?
This concept brought an idea to mind within regards to staffing. In the current market, new ventures can take advantage of a plethora of individuals needing work. There are many individuals, specifically those fresh out of school, who simply need experience and are willing to do just about anything to obtain skills and network (and receive very little or no pay in return). Even if the employment is short lived, both the entrepreneur and employee can benefit greatly.
Matt Loftis, Belmont University – MACC
Reading the posting and our discussions in class triggered memories in my mind and I would like to share my friend’s story.
In 1989, when Bulgaria started the transition to Democracy, it was impossible to get outside funding. A friend of mine wanted to start a venture. The resources that he could use were limited. He started his company cheaply- with some savings, his wife’s salaries, and borrowing some money from a relative. There was a necessity for bootstrapping. Although, he didn’t get any outside funding, using his creativity he created a very successful retail store. He cut costs of rent (initially he rented a small building and later on reconstructed it), of furniture (he made them by himself), and of labor (he involved his family members into business). His company was very successful and it grew quickly. Soon after, he owned several stores.
I truly believe that an entrepreneur can launch a business without outside sourcing.
I think that it is very important for entrepreneurs to understand that funding should not be a barrier to start a new venture.
Another way entrepreneurs can succeed without outside funding is to enter promotional contests. There’s a brand makeover contest going on right now at Oddpodz (link in my name), where one business is going to get $10,000 worth of branding services for free.
If you keep your eyes out for opportunities like this, you can accomplish a lot without a lot of cash.
The success stories mentioned in this post/comments are very motivating. Bootstrapping techniques give an owner a form of satisfaction that the limited amount of resources or cash that they used as their initial investment has now transformed into unbelievable profits and created life long value for their company.