So you’ve decided to start a business but you don’t have much money and you don’t know where to get money. If you’re young and have no credit history, getting a small business loan from a bank will be nearly impossible. So what are your options?
You can ask friends and family to invest in you, but that’s risky. Before you do that, ask yourself these questions: What if the business doesn’t work out? How do you value a business that doesn’t exist yet to determine how much of the company they are each buying for their investment? What will you do if the business gets up and running but you don’t have sufficient profit to pay royalties? What if they need the money back for an emergency?
For most young entrepreneurs, they quickly determine that taking investments from friends and family is a bad idea. But there are ways to start the business you’re dreaming of without a lot of startup capital.
What About Venture Capital?
For most young entrepreneurs, myself included, venture capital funding is out of reach. To successfully get venture capital funding, you need to have a mature business idea that doesn’t already exist in the marketplace. You need definable and provable skills, such as software engineering, web design, and social marketing. Often, you need assets already like a prototype of your idea, the web domain you hope to use, an existing user base and even a team working with you before a venture capitalist will consider taking a risk on you.
That’s not to say it’s impossible. It’s not impossible. For a select few, venture capital is available and makes sense. You’ve got to fight for it. You have to stay up all night at hackathons, pitch on stage at events like Techcrunch Disrupt Europe, and post your idea publicly to sites like Hacker News (the message boards for Y Combinator, the most successful startup incubator in the U.S.). Once you get it, you’ll have to sell a part of your company to get the money. That means less ownership for you, the founder. And, to top it off, you’ll have to listen to your investors’ concerns, gripes, comments, ideas, etc, even if they clash with your own vision for the business.
But There’s Another Way: This is Bootstrapping
If you want to start your company now and venture funding is either unavailable to your or unattractive, then your only option is to bootstrap your business. But what is bootstrapping?
Bootstrapping is when you start your business without outside help or capital and use revenues to fund development. Let’s just say you want to start an internet company that helps people find dog walkers. To bootstrap your new company you might use a little bit of your savings to buy the domain name and host your new website. You might then teach yourself to build websites so that you can put together version one quickly and cheaply. That’s Bootstrapping Tip #1: teach yourself as much as possible because hiring other people to do work for you is expensive and often less effective than if you do it yourself.
After you launch version one, you’ll walk around your neighborhood posting stickers or handing out cards to people with dogs, trying to get your first users. As soon as your company starts making money, you have to save it. That’s Bootstrapping Tip #2: save as much of your revenue as you can so that you can reinvest it into the business. Which goes hand-in-hand with Tip #3: be a maniac about controlling costs and keeping track of everything you are spending.
So now your little website to help people find dog walkers wants to grow and evolve. You want to add a new feature, one that allows people who want to walk dogs create profiles and find jobs walking dogs in their neighborhoods. Hopefully by now you’ve followed Tip #1 and Tip #2 and you have improved your skills at building websites and have saved any revenue you’ve made other than your costs of doing business. Now you’re ready for Tip #4: constantly be improving and reinvesting revenues into your business to achieve new growth. Improving and reinvesting can come in the way of new features, new marketing, new product lines, improved user experience, a design update, to name a few ways.
With a little bit of luck and lot of hard work, you’ll reach the first big challenge of bootstrapping your business: you will grow too big to do all the work yourself! It’s a good problem to have, but the need to hire comes with it’s own challenges.
Challenges of Bootstrapping
One of the toughest parts of bootstrapping your new business will come when you’ve grown too big to handle doing all the work yourself. You’ll have to hire someone to help you get all the work done. Hiring people comes with lots of clear and hidden costs, all of which eat into your profit (and ability to follow Tip #2). So what should you do?
First, see if you can hire someone part-time to start. Try to pay for hired labor in the smallest amount possible. If you can hire a contractor to do the job, start with that. Hiring full-time employees comes with all kinds of cost burdens from insurance, to the capital costs like rent, computer, software that they will use to do their job. You guessed it, that’s Tip #5: pay for hired labor in the smallest amount possible and do not hire full-time employees unless absolutely necessary.
Employees, contractors, part-time workers, whatever shape they take represent the biggest challenge of bootstrapping because they divide your attention between your work, the overall business and now their work, needs and costs. When your business is very small and just beginning to hire it’s first employee or employees, take the time to create a well-defined culture that will influence them to work the way you want them to even if you aren’t managing them closely. Create a set of easy rules that everyone must follow. That brings us to Tip #6: Don’t be lenient when an employee doesn’t follow your rules, just let them go.
The biggest mistake a boostrapped company can make is to waste time and money. An employee that won’t follow the rules, doesn’t mesh with your company culture, or just overall has a bad attitude is a both a waste of your time and money.
If you succeed in hiring the right people for your business, save absolutely every bit of revenue you can, teach yourself as much as possible so you don’t have to rely on others and constantly push forward trying to evolve your business, then there is a good chance you’ll reach a breakthrough.
A breakthrough is simply when the business grows to such a size that you no longer struggle to make payroll, pay rent and handle other expenses while starting to see a profit every month. If demand for your business outpaces supply, or if you adapt your business rapidly to meet market demands and trends you could find yourself in this position. And who are you? You could be anyone. Anyone can bootstrap a company.
The only disadvantage to bootstrapping your business is it can limit your ability to grow very quickly. But, the best part of bootstrapping is that if you bootstrap your business to some success and then plateau but want to keep growing, you’ve done yourself two favors:
1) If you seek venture capital investment with a more mature business that already has a proven revenue stream and growth potential it will increase the chances investors take a risk on you and;
2) If you decide to take venture capital investment your business will be worth more so they’ll have to give you more money for less equity.
Venture funding can help you rapidly grow through acquisitions, sales teams, high-priced executives with growth experience, a work force and infrastructure. But, you don’t have to start out as a venture funded startup.
So, to recap, there are 6 important tips to remember if you decide to bootstrap your business:
Tip 1: Teach yourself as much as possible because hiring other people to do work for you. It is expensive and often less effective than if you do it yourself.
Tip 2: Save as much of your revenue as you can so that you can reinvest it into the business.
Tip 3: Be a maniac about controlling costs and keeping track of everything you are spending.
Tip 4: Constantly be improving and reinvesting revenues into your business to achieve new growth.
Tip 5: Pay for hired labor in the smallest amount possible and do not hire full-time employees unless absolutely necessary.
Tip 6: Don’t be lenient when an employee doesn’t follow your rules, just let them go.