The decision of whether or not to raise external funding may be one of the first strategic choices an entrepreneur has to make.
While raising venture capital or taking out a business loan can provide a significant capital injection to help fuel growth, there are also many successful startups that have built their businesses entirely through bootstrapping – growing the company using only the revenue they generate and their own personal funding. In this blog, we’ll explore some of the key strategies and principles of successful bootstrapping, as well as when you might consider seeking outside investment.
Bootstrapping may not be the right path for every entrepreneur, but for those with the right mindset and strategy, it may be an effective way to build a sustainable business. Victor Kewgyir stated, “What sets bootstrapping apart from other forms of business funding is that it relies heavily on entrepreneurs’ frugal thinking, creativity, thriftiness, planning and cost-cutting efficiency skills.”[1]
Focusing on Revenue
Prioritizing revenue-drivers in the early-stages of a bootstrapped startup can help the business achieve self-sustainability. By reinvesting revenue into business operations, a startup may be able to survive on revenue alone without the need for external funding. Of course this can be a delicate balance of being able to cover business expenses and salaries while aiming to generate a profit, but it is a possible path for bootstrapping.
Dario Markovic stressed the importance of cash flow and profitability when he stated in an Entrepreneur article, “For bootstrapped startups, cash flow is king. Regular revenue inflow ensures you can cover your operating costs and invest in the business. Build a solid business model that generates steady cash flow.”[2]
Minimizing Expenses in Bootstrapping
In the early stages, bootstrapped startups often prioritize frugal decision-making to keep costs down. Founders may be vigilant about managing expenses, leveraging free or low-cost tools and resources, and negotiating favorable deals with suppliers. This financial discipline may allow startups to preserve their limited capital and extend their runway, providing more time to achieve sustainable growth.
Personal investment, such as utilizing personal savings or earnings from other jobs, can also serve to fund the startup without incurring external debts or equity obligations.
Utilizing Automation in Bootstrapping
Automation can be fundamental to the operational efficiency of bootstrapped startups. By employing automation tools and technologies, entrepreneurs may be able to streamline repetitive tasks, optimize processes, and enhance productivity. This strategic approach may free up valuable time and resources, allowing founders to focus on core business functions, innovation, and customer engagement.
Automation can also facilitate scalability, enabling startups to handle increased workloads without a proportional increase in manual effort. As the business grows, the initial investment in automation can lead to long-term cost savings, as streamlined processes and reduced human intervention result in greater operational efficiency and resource utilization[3].
Leverage Your Network and Partnerships
Another powerful bootstrapping strategy is to leverage your personal and professional network to help drive growth. This can take many forms, from bartering services with other entrepreneurs to tapping into referral networks to find new customers.
Acquiring customers can be unique when bootstrapping since a startup may be aiming to minimize customer acquisition cost. Tapping into your personal network, forging strategic partnerships, and developing referral programs can be an effective route to find champions for your startup.
While the bootstrapping approach can be highly effective, it’s not the right path for every entrepreneur. There may come a point where you need to raise external funding in order to take your business to the next level. But how do you know when that time has arrived?
There may be a few key indicators that can highlight the need for external funding. First, if it is difficult to generate revenue or secure customers, it may be time to seek funding. If the startup is constantly running out of cash and it is becoming difficult to pay bills or salaries? It may be time to seek external funding. But it is important to remember that needing to raise external funding is not an indicator of failure, external funding may help a startup grow faster and bigger than it would through bootstrapping.
Venture capitalist Jason Calacanis has a well-known quote, “Raise a little of angel funding, prove that there’s product market, and then go out and get second market funding.”[4] This quote focuses on the importance of starting small and scaling, but also that external funding can help your startup reach the next level, once it has obtained product-market fit.
But when that time comes for external funding, it is important to evaluate the different sources available to startups to choose which method may work best.
If you do decide that it’s time to raise external funding, there are a number of different options available to bootstrapped startups. MicroVentures has written multiple blogs on this topic you may want to visit to learn more about funding sources for startups:
Venture Capital
Venture capitalists typically provide large, equity-based investments in exchange for an ownership stake in your company. This funding is typically used to fuel rapid growth, expand into new markets, or accelerate product development.
Angel Investors
Angel investors are typically high-net-worth individuals who invest their own money in early-stage startups, often in exchange for equity or convertible debt. Angel funding can be a good option for entrepreneurs who have existing relationships with angel investors.
Small Business Loans
Traditional small business loans from banks, credit unions, or online lenders can provide the capital you need to grow your business, without giving up any equity. These loans are typically best suited for startups with a clear path to profitability.
Revenue-Based Financing
Revenue-based financing providers offer funding in exchange for a percentage of your future revenue, rather than equity. This can be an attractive option for bootstrapped startups that are already generating consistent revenue.
Equity Crowdfunding
Equity crowdfunding can allow you to raise funding directly from your customers and supporters, often in exchange for pre-orders or rewards. This can be a great way to validate your idea and generate early-stage funding.
Ultimately, the right funding option for your bootstrapped startup will depend on your specific goals, financial situation, and growth stage. By understanding the full range of possibilities, you can make the best decision for your business.
MicroVentures may be able to help you determine if your startup is ready to raise funding, how much money should you raise, which funding source is best for your business, and host your investment opportunity on our platform!
Apply today to raise capital with MicroVentures!
[1] https://www.goodreads.com/quotes/10405104-what-sets-bootstrapping-apart-from-other-forms-of-business-funding
[2] https://www.entrepreneur.com/growing-a-business/10-tips-for-bootstrapping-your-startup/452564
[3] https://www.mckinsey.com/~/media/McKinsey/Industries/Healthcare%20Systems%20and%20Services/Our%20Insights/Automation%20at%20scale%20The%20benefits%20for%20payers/Automation-at-scale-The-benefits-for-payers.pdf
[4] https://productpeople.tv/episodes/ep33-jason-calacanis-of-inside-com-talks-about-bootstrapping-vs-funding
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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
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