“I love Bootstrapped businesses! I like it when founders are scrappy and get things done with almost no money!”, heard by start-up leaders from many an angel investor.
A large number of investors, and some founders, are huge fans of bootstrapping companies in the early days. It forces the founders to remain capital-efficient, they say. It helps avoid unnecessary extravagances, they say. It minimizes the amount of capital at-risk while the founding team is proving-out the core business idea; the initial product offerings and whether the market actually wants to buy and/or use your solution. All true. I’ve been involved in well-funded start-ups and sometimes unnecessary spending does occur, or the pain from bad product decisions is cushioned by having a healthy bank account.
My most recent entrepreneurial endeavour is a start-up company in the legal cannabis market. I’ve also described it as an F&B start-up (food and beverage), and a CPG start-up (consumer packaged goods). It’s fair to characterize it as all of those. It was launched with lots of ambition, energy, passion, and business and entrepreneurial experience. It was also launched with very little funding...it was bootstrapped.
Bootstrapping a start-up business usually means the founders are constantly looking for funding as they have limited cash runway. Making payroll, paying rent, and paying suppliers is always a stress point for founders as not being able to pay any of these will often grind your business to a halt. Every moment spent meeting with, calling or emailing potential investors is time not spent acquiring customers, developing and enhancing products or telling the company story to users and clients for your products.
Start-up media, blog posts and articles in any industry are full of stories where the founders never took-in any outside money, or where the company was profitable from day one. All likely true, and for each such success story there are probably tens of companies that didn’t survive. Of course the overall success rate for start-ups is about 10-15% so funding strategy is only one of several factors determining the outcome of a new business venture. And, there are many, many stories of start-ups burning through tens of millions of dollars of investor money, with nothing to show for it at the end of day.
The funding strategy, bootstrapping or securing significant financing at the beginning of the journey, that will lead to a viable self-sustaining business and a solid return on investment really depends on what the business idea is.
Building a brand requires significant and repeated time and effort to successfully connect, convey and convince users/clients of the brand story. It needs to be explained over and over again why this product will help you with something and that you can trust the product and brand to help you again and again. My recent start-up is brand play and bootstrapping it was not the correct financing strategy. Of course, there will be many examples of brands that were bootstrapped at launch and generated product sales. There are always exceptions. But a successful brand is one that gains recognition with the general public, and that takes time and investment. Despite this, new brands are launched all the time. Why? Because the most valuable companies in the world are brands. Apple, Toyota, GM, Sony, Nike, Samsung, Starbucks. It’s hard to build a brand and it requires significant funding and time, but it represents the biggest opportunity.
Other products such as mobile apps and software platforms can be built and launched with very little upfront capital, by the right team. With a strong product person, a good set of developers and a solid business/customer person, and the right growth strategy, a company can successfully get started by bootstrapping. A brand play needs a solid team and the right strategy as well, but it needs more capital upfront.
A brand idea needs constant validation and reinforcement to confirm its success. With other business ideas, particularly technology-related businesses, incremental market validation early in the journey is very valuable. It validates initial product and market capture strategies; it provides confidence to would-be potential investors and makes it easier to raise seed funding and larger Series A and Series B financing. It helps with recruiting members to team during the start-phase and later at the scale-up phase.
The type of product offering will also influence the amount and nature of initial funding required. A cloud-based application or platform has almost zero cost of goods sold. And, if it’s designed well so that users/clients can self install, setup and support themselves then there is not much of a customer support or operations team required.
Offering a physical product that needs to be manufactured requires funding for inventory of raw materials, paying for access to a production facility, and paying for production itself (labour and overhead). The business needs working capital. These costs will need to be paid upfront. Your clients may pay you in 30 to 45 days, or perhaps sooner by credit card but then it will take time for funds to arrive in your bank account from the credit card processing company. Working capital gives the cash flow float you need to get your products into the marketplace. Bootstrapping in this type of opportunity is even more challenging.
When thinking through your ideas for an exciting new product or solution, make sure to spend time modelling the cash needs for a successful business for the first three years. You don’t need to have three years’ worth of cash runway locked-up before you get started, but you do need to have an initial understanding of how much money you’ll need and when. Yes, things will change and the funding needs and timing will change, but going through this exercise validates whether or not your idea can be bootstrapped.
Thank you for investing time in reading this post. Questions and comments are always welcome.
Shail Paliwal
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