There are many different ways to getting the financials you need to create a startup but some options are more complicated than others. Many well known startups and small businesses have got their company off the ground by initially bootstrapping.
Some founders stay in their full time jobs while getting their business off the ground and while this is essentially the more risk-free option it can also be a quick way to burn out. Other founders build up their businesses on a very tight income that is mainly made up of personal savings and loans from friends and family. While bootstrapping is common, can it hinder a business?
In this week’s Let’s Talk, experts discuss if bootstrapping can hurt a business.
Emma Barr, Founder, iLEADS: Starting a business and getting things off the ground is never easy and always comes with expenses that potentially weren’t planned for. Since I started iLEADS we have always tried to keep our overheads to a minimum, however, I have always been very aware that my time can often be worth more than money and it would cost me a lot less to outsource certain services to a professional.
We speak with Real Estate Agents day in and day out who have done courses in Facebook, spent thousands on DIY lead generation and Facebook Marketing with hardly anything to show for it. Really knowing what sectors of your business you could outsource to save yourself money in the longterm will be the biggest benefit to your business.
Sabri Suby, Founder and Head Of Growth, King Kong: Done properly, and with the right attitude, bootstrapping will never harm a business. It teaches you to be resourceful and to respect every dollar coming in so you are then able to get more value out of that dollar.
However, bootstrapping means not having cash on hand, which can force startups to move slower. It may also mean you miss opportunities that require an immediate investment.
In the long run, though, successful businesses grow and perform well because of excellence, conviction and drive. Bootstrapping forces you to build your business on these qualities rather than rely on wads of easy cash.
I started my digital marketing business King Kong in 2014 in my bedroom, completely bootstrapped, and it’s now Australia’s fastest growing digital marketing agency. If I could go back and change my experience of bootstrapping, I wouldn’t.
Alex Alexandrou, General Manager, Reckon: Not too surprisingly [bootstrapping can harm your business] – “ when you run out of cash to effectively service or expand your business. This does not however necessarily mean you are broke. So perhaps you haven’t technically run out of cash to keep your business afloat and you could say that your bootstrap model has been effective, but you could most certainly be treading water as your competitors fly by you on their way to the top. This is where bootstrapping becomes a more tenuous affair, when you are functional but not meeting your potential whilst the competition eclipses you. Another way it can hurt you is in your credibility and networks when it comes to going to market. With well connected angel investors and venture capitalists you gain not only market credibility and exposure but also benefit from the often golden connections and networks the investors bring to the table. This can be so invaluable to penetrating a market and making gains in growth that a bootstrapping model would be a heavy wheel clamp on your business and its potential.
Reuven Barukh, CEO, Live capital & Live group: It’s unusual for new businesses to be profitable from day one – which creates enormous pressure to find the money to grow. If the business owner is continually dipping into their own funds, they can quickly face cash flow challenges. And when their pool of funds is small, it can lead to poorer outcomes all round. As they say, you get what you pay for.
For SMEs not going down the outside investor route or struggling to get a bank loan, financing the business sustainably through unsecured finance can be a great option. Accessing the funds to invest in staff or equipment, manage cash flow or fund other important business costs can help grow the business without requiring a long or complex application process. At the same time, business owners can maintain strategic control, avoid outsider influence and access the funds immediately without needing to dip into their own funds.
Wes Sonnenreich, Co CEO, Intersective: We bootstrapped Intersective through to Series A. In hindsight, we’re glad we did it, with some caveats. When we started, we had a company and revenue before we had employees. As founders we had other full-time jobs; we worked on the business in our spare time. We hired once we have enough revenue to pay for the resources. We developed a cash flow mindset that has served us very well through tough times. We’ve never had to layoff or cut staff due to lack of cash, and we haven’t missed payroll. We were able to get debt financing (through Jobs for NSW) at a much earlier stage because of our strong balance sheet. Finally, we were able to choose to raise capital. We had the time to find the right investor. We also could afford to wait until we really felt we could achieve growth with the additional funds. We believe this helped us get the terms and valuation we wanted.
However, bootstrapping also meant that our rate of growth was slower. We had to make a lot of compromises because we spent as much time servicing our revenue as investing in our future. We developed a culture and work ethic of “pacing for the marathon, not the sprint”. That is good – we don’t burn out our team, but it also could leave us exposed to an aggressive, well-funded competitor. Luckily, in our sector funding isn’t everything and earning the trust of educators – our customers – takes a while. Bootstrapping has helped us buy that time that without burning through equity.
James Coyle, Chief Customer Officer, SuperEd: Bootstrapping can be harmful to a business when a startup founder refuses to seek external help or support. For many entrepreneurs on this journey, having access to networks of influence and external capital can be a really important way to realise your personal ambitions for the business. While bootstrapping is more appealing to some startup founders, it doesn’t always lead to better end outcomes. Our driving ambition at SuperEd is to break the mould and be recognised as a leading digital advice provider in Australia. Traditionally, a lot of digital advice was limited in its scope due to its focus on just helping people with their investment strategy. Having worked closely with a variety of super funds, what we are seeing more of is the importance of education and engagement, getting everyday Australians to think more broadly about their own financial well-being and starting to see advice as an ongoing journey, instead of simply a transaction. Ultimately, by bootstrapping startup founders could be missing out on vital opportunities to scale and grow the business through similarly aligned partners that can help you better reach your audience.
Terry Gold, Adelaide Managing Director, Techstars: Some businesses can’t be bootstrapped unless the entrepreneur is already wealthy, but many can be at least when it comes to the technology – especially now that startup costs are lower than ever. Bootstrapping means developing sources of revenue before the initial capital runs out, so that outside investment is not required. It often comes at the cost of focus and time. Taking on consulting work or doing bespoke projects just for the revenue means that the real work of the company, such as a new product, gets put aside or at least is starved for resources. Bootstrapping can take so much time that someone else with a similar idea and more capital can get ahead to the point where you can’t compete. On the other hand, waiting until you raise capital may mean you never start or that you don’t get good feedback from the market and end up building the wrong product.