So, you want to make it on your own. No venture capital. No investors. No cold-hearted corporate CEO. Just you, your idea, personal savings and, maybe, an intimate little team of people you can trust.
Well, then you should definitely get to know a bootstrap theory. The one that may suit your intentions. Because if you’re going to build a startup on your own, you must be prepared for the difficulties and limitations that will arise over the course.
What is bootstrapping?
Bootstrapping is about starting and running your business through your own means, without the help of outside investors.
It’s not about running a business with no money, there’s always a need for some money, but there are ways to reduce big time the money you need to start your business. Not by not spending where you should be spending, but rather by using proven techniques to evaluate what you actually need to spend your money on.
What does bootstrapping means?
Bootstrapping means learning new ways of working to make sure your money is well spent. Being cost conscious is only a part of the solution, there are business development techniques that can have a real positive influence on the finances of your business. They will have you doing what you originally planned but in different ways, and at the same time cut significantly the investments you need.
Bootstrapping is not only about avoiding spending money, it's also about taking actions that cancel the need for some spending.
There are many kinds of bootstrappers, from the hardcore one to the one that will use bootstrapping techniques to optimize his business, and run his company more efficiently. You’ll have to define by yourself what kind of bootstrapper you want to be. Since a bootstrapper does not plan on using money from outside investors, it will largely depend on the money you have, versus the money your agency needs.
The Five Sides of Bootstrapping
There are five things that an entrepreneur should focus on when bootstrapping a business. We’ll call them five principles of bootstrapping:
- Spendings management.
- Customers acquisition and retention.
- Business management.
- Competencies acquisition.
- Work and life balance.
Four of those key principals are focused on reducing, as much as possible, the financial burden of starting a firm and operating it during its infancy. The last one is about the impact that bootstrapping can have on the life of an entrepreneur, but more importantly, on how to manage it.
First of all, you should look at the most significant costs of starting your business and think how to keep them under control. It’s about how you influence the negative side of your financial equation, the money going out. There are several proven approaches that can help:
- Lean development – You can pick this model for development if you have a long-term, evolving project that receive constant feedback from users.
- Joint utilization of resources – Any kind of co-working, incubator will do the trick.
- Part-time working – You may consider keeping your day job for a little while before standing on track. Just ask yourself: do you need to dedicate 100% of your time? What are the concrete things you’ll be doing?
- Leasing – Lease equipment rather than buying it. This way you can delay payments and get more capital flow.
Customers acquisition and retention
The second principle is about customer acquisition and customer retention, which is ultimately about making money, generating revenue and influencing the positive side of the equation. There are three core values that will help you determine whether you’re on track:
- Customer Acquisition Cost – it is a compound cost of all marketing and advertising activities divided on the number of clients attracted to your product/service. To stay profitable CAC should be lower than LTV.
- LTV – customer lifetime value, is a prediction of the net profit from the entire future relationship with a customer. Just calculate how many transactions an average client makes, and what is their compound value.
- Churn Rate – also called attrition rate, is the number of clients that leave you services over a specific period. Meaning if you outflow is bigger than inflow, then you have a problem. Make sure that churn rate stay no more than 5% of your client base.
The third principle is about business management and what mechanism you have in place to determine if you are on the right track or not, and if not, what needs to be done to get back on track.
- Build working capital management that minimizes accounts receivable.
- Establishing growth strategies for the firm, including survival strategies.
- Shorten the length of business processes or distribute the load between several operational units.
A big part of starting a company is about having the right competencies available. Since competencies means people, it usually also means big money to hire people, money that many startups don’t have. So you should look into ways that enable you to acquire the competencies you need through different forms of compensation models which ultimately can reduce significantly, if not completely, the bill.
- Find a part-time players.
- Propose shares for key players.
- Hire contractors instead of full-time workers.
- Outsource as much as you can without harming your core value proposition.
In the early life of a company and more so of a bootstrap company, the line separating work and personal life will be blurred, at best. Because you’ll be working a lot, sometimes from home, you might not be able anymore to make that difference, and that could weigh on your venture.
- Set time limits, especially for night time.
- Set business connection and personal relationships apart.
- Make clear division between work and personal space, especially if you’ve decided to work from home.
Being a bootstrapper is not about doing it on your own with no outside help to prove the world something, it’s about using techniques that make possible a venture that would not have been possible otherwise.
By the way, most bootstrappers use those techniques to start their company and get to the size they need to attract investors, so the two are not incompatible, it’s just different phases of the development of a company, and using bootstrapping techniques during the entire life of the company is a good business practice anyway.