Bootstrapping Basics Entrepreneurs Need to Know
Over the last five years approximately 600,000 entrepreneurs pitched first tier venture
capital firms in North America and about 15,000 received funding. Your chances of getting
funded are 2.5 percent. This is a fact. Many of those that were funded became quite wealthy
and many more failed. Venture capital firms are looking for home runs not base hits.
To begin, let's say you're having difficulties raising capital for one of a multitude
of reasons. You lack an experienced management team with a track record of prior success, your
product is still in development, the service you've created hasn't been market tested and you
still haven't refined the sales process. Or, your company may simply not be a "VC deal" or
a "home run", that is, something that will go public or be acquired for a bazillion dollars.
Finally, your organization may be a non-profit with a cause like the environment or autism.
Does this mean you should give up? Not at all.
I could build a case that too much money is worse than too little for most organizations,
not that I wouldn't want to buy a NBA franchise one day to emulate Mark Cuban. Until that day
comes, the key to success is bootstrapping. Bootstrapping refers to a group of metaphors that
share a common meaning, a self-sustaining process that proceeds without external help.
The term is often attributed to Rudolf Erich Raspe's story The Surprising Adventures of
Baron Munchausen, where the main character pulls himself out of a swamp, though it's disputed
whether it was done by his hair or by his bootstraps. Regardless bootstrapping sounds a lot
more businesslike and appealing than hairstrapping. What follows is some practical advice for
bootstrapping a start-up or small business.
First, focus on cash flow, not profitability. Generating revenue and profits is the key
to survival. If you could pay the bills with theories, this would be fine. The reality is that
you pay bills with cash, so focus on cash flow. If you know you are going to bootstrap, you
should start a business with a small up-front capital requirement, short sales cycles, short
payment terms, and recurring revenue. Service oriented businesses or new products in hot market
segments come to mind immediately.
Next, forecast from the bottom-up. Most entrepreneurs do a top-down forecast: "There
are 150 million cars in America. It sure seems reasonable that we can get a mere 1 percent of car
owners to install our satellite radio systems. That's 1.5 million systems in the first year."
The bottom-up forecast goes like this: "We can open up ten installation facilities in the first
year. On an average day, they can install ten systems. So our first year sales will be 10 facilities
x 10 systems x 240 days = 24,000 satellite radio systems. 24,000 is a long way from the conservative
1.5 million systems in the top-down approach. Guess which number is more likely to happen. This
is one of the most common mistakes I see entrepreneurs make. Stop dreaming and let's get real.
Hire an affordable mentor or small business coach to offer guidance based upon relevant
experience. Most likely they've bootstrapped their own businesses in the past. They can provide
you with valuable objective advice steering you around potential pitfalls and hopefully save
you money, along with time, by keeping you from making the same mistakes as they did in the
past. They also aren't going to want equity in your business just by having their name attached
to it or request a seat on your board of directors.
Most start-up small business entrepreneurs don't have a "proven team" and you can't create
experience out of thin air. Proven teams are often over-rated anyways. Especially when most
people define proven teams as people who worked for a multibillion dollar company for the past
ten years. These folks are accustomed to a certain lifestyle, and it's not the bootstrapping lifestyle.
Hire young, cheap, and hungry people. Employees with passion and desire along with
low overheads are going to be much more likely to stick beside you during the inevitable ups
and downs your business will face. Once you achieve significant cash flow, you can hire adult
supervision. Until then, hire what you can afford and make them into great employees.