In the last post, I offered a brief survey of the traditional funding sources for early startups. As in our textbook, I like to separate non-equity from equity funding sources, as the latter tend to be more applicable to later-stage ventures. By focusing on these early, non-equity funding sources. In a sense, every dollar counts towards your survival. This thinking established a fiscally responsible mindset that will attract outside funders if and when needed. Bootstrapping is a primary way to hone in this all-important mindset.
Bootstrapping is a common funding technique for early startups. In effect, you effectively leverage both internal and external assets in the service of your venture. The bootstrapper funds the startup without using outside funds. By leveraging the many bootstrap sources available, entrepreneurs create space to develop their business model strategy and begin developing early versions of their product. The more time you spend engaging early customers with product iterations, the closer you get to validating your capacity to solve customers’ problems and meet their needs. The stronger the customer engagement with your product, the stronger your case becomes for future external fundraising. Bootstrapping is an integral part of your toolkit at this early stage of development. That said, bootstrapping does not work for all ventures and business models. For example, capital-intensive ventures need significant funds to build the initial product and associated operational infrastructure. While comparing numerous types of funding, a founder should weigh the pros and cons of bootstrapping to understand if a self-financed path is right for your goals.
Advantages of Bootstrapping
There are four primary advantages of bootstrapping. The first advantage is that it forces entrepreneurs to think creatively about their business model. My earlier studies on innovation have observed many examples of when limited resources lead to innovative solutions. For instance, during my innovation research at Stevens Institute of Technology, we conducted comparative studies of the best science and engineering practices across the globe. One consistent finding was that technology professionals rise to the occasion with innovative solutions when there are limited resources, whether it be funds or equipment.
The second advantage of bootstrapping is what you learn by deeply analyzing your business model and operations to save and improve efficiencies. If there is one thing we know about scaling a business, you must first create a repeatable customer transaction. Therefore, all business model elements must work together consistently and repeatedly to produce a scalable venture. Looking at each model component to determine the most efficient and cost-effective way to move forward will have a lasting influence on your future growth. Additionally, by becoming more efficient and cost-conscious, the entrepreneur will be in a stronger position to qualify for additional financing.
The third advantage is that the practice of bootstrapping leads to an immediate reduction of costs from startup activities. While there are untold advantages to looking for cost efficiencies across your business model, the direct impact is quantifiable. Looking at each core activity and resource you need to create a repeatable business model, you will discover many opportunities to reduce or eliminate costs.
A fourth and commonly noted advantage is the retention of control of your venture. Once you open your venture to outside investors, you, in effect, share the management decisions with others. You now need to make concessions and ask permission more than when you were self-financing. This condition works for some and not for others.
A multitude of bootstrapping techniques is available, and it is not possible to catalog all of them. Indeed, an entrepreneur can be just as innovative in developing her methods as the original business opportunity. However, the following discussion describes some bootstrapping techniques that may suit your and your company’s needs.
No or Low Rent. Today, most entrepreneurs can start their early ventures without spending funds for office space. In many cases, you can use your residence as a starting workspace. Paying extra rent to a landlord takes away cash that can go directly into the company. Furthermore, the archetypical garage startup is not a myth. Many well-known companies started in a founder’s garage or kitchen.
When it comes time to move out and have a separate location for the business, avoid signing long-term leases in expensive areas. Start by considering some form of co-working space. Often startup incubator space is available, which may be subsidized by a local government economic development grant for early phase ventures. Co-working spaces, in general, have many advantages at this point of your venture development. For example, many workspaces have shared services, such as copiers, conference rooms, and full-time office support staff. One of the essential advantages is interacting with kindred founders, all going through the same experience. There is a good deal to learn from your peers, and working alone can be isolating.
When you determine that there is a need for a dedicated workspace, think about your requirements carefully. What are the space requirements needed to support your business model? During one of my earlier entrepreneurial ventures, my co-founder and I decided we needed a professional-looking space for client visits. Our clients were large technology corporations, and we felt we needed to project a “corporate” image. We signed a lease for enough square footage for several consultant offices, staff space, and a conference room. We furnished it, and it looked how we envisioned it for our clients’ visits. However, we quickly learned that our clients were not interested in visiting our offices. 99% of the time, they expected us to come to them. Now, we were spending funds on more space than needed with plenty of unexpected travel expenses to boot! We could have avoided this situation if we had found a more temporary space while we gauged our clients’ business practices. There is a decent end to this story. We were able to re-negotiate our lease terms with the landlord, reducing our square footage. As it turned out, we only needed a small space for team meetings and staff. All consultants worked from home, coming together in our meeting space as needed. Lesson learned!
Even if your business model requires that you project a particular image, you should find ways to test what is most important to your customer. Start with a short-term kiosk or popup if you plan to open a retail restaurant or store. I have worked with many startups that have used these temporary locations to engage directly with their customers while finding out what they expect regarding product experience. One founder had an idea to open a high-end after-school program with a specific vision for the learning spaces for both children and parents. I suggested that the entrepreneur starts by finding an existing location aligned with her vision and run some test learning events and activities. Renting space in Soho House worked perfectly for her MVP.
Bartering for Goods and Services. Bartering has come a long way since pre-historic times. Today, this exchange transaction for goods and services is typical across businesses of all sizes and types. These transactions are beneficial for early-stage ventures. It allows founders to access needed products and services without spending precious cash. For example, if your startup is offering services, such as digital marketing, you might be able to trade these services for needed software development from a peer founder. You receive some needed technical help in exchange for providing some marketing support to a peer startup. Product development and marketing are the two most common exchanges in the startup environment.
Startup founders typically set up these cashless exchanges directly. I see these discussions take place quite frequently among my MBA students. Access to bartering is an essential element of your entrepreneurial ecosystem. When a founder is exploring his local resources, I suggest looking for potential direct barter partners. Are there local peer founders that may offer needed products or services in exchange for what you bring to the table? As you network, keep your eye out for potential bartering opportunities. Remember, you want to do the same due diligence as any business relationship.
There is planning involved in these exchanges. You should start by considering what you have to offer. What potential assets do you have to exchange for services? These assets include your products, services, time, and physical space. Once you identify these potential exchange assets, estimate the value. What are these exchange items worth? How much is your time worth if you are providing some exchange services? It is essential to consider these things carefully, as there is almost always an opportunity cost. What are the tradeoffs for spending time or allowing usage of specific venture resources? Additionally, remember that value of various exchange items can be subjective. Founders must prepare to negotiate to find a balanced offer so both sides win.
Finally, decide what product or services you need and would have to pay cash if there is no exchange opportunity. Take a look at your business model and list key activities and resources. What needs do you have to advance your venture and pick one or two exchange items that provide the most value? It is worth conducting these due diligence steps to ensure that the value exchanged is balanced and that you are not taking away from your venture needs.
So far, I have focused on direct exchanges with people in your network and local ecosystem. This type of exchange is called direct bartering. However, founders have another option. Formal barter services facilitate contracts between exchange members for a fee. These formal exchanges exist both online and offline. Local business communities typically run the offline version. Online exchanges act like two-sided marketplaces that allow members to search for specific exchange products and services. A couple of trade associations, the International Reciprocal Trade Association and the National Association of Trade Exchanges, can help you find an exchange that might fit your needs. These associations ask members to adhere to ethics and behavioral codes to search for a member with some confidence. Of course, as with any business arrangement, you will still want to do your due diligence.
I have had many students barter products and services directly within their networks. I have not experienced anyone who has used these formal barter exchanges. In researching my local area, I discovered an exchange that offered various business services, from marketing to legal, that might interest a startup founder. There is no fee to become a member, but the bartering organization charges a small transaction fee for each exchange. These exchanges promote the fact that they help you grow your business by increasing networking opportunities, reducing advertising costs, and optimizing any excess inventory or services. T
Here is how a formal exchange typically works. You become a member. The exchange markets your services across their membership network. If a business member purchases your product or service, they pay you in “barter dollars .”You can apply this barter currency to services that you need. This exchange style is more robust than one-to-one trades, allowing you to select the services you need regardless of whether you are trading directly with that specific business. For example, you are a digital marketing firm with excess hours you want to fill. You can offer your services to the network. If another business is interested in your offering, they pay your rates in barter dollars. If you charge $100 per hour, the company will pay you at this rate. For every hour you provide services, you earn $100 in barter dollars that you can apply toward a needed service, such as accounting or legal services. The benefit is that you receive the total value of your products or services and can exchange this value for services you need without spending actual cash. In other words, a barter dollar equals a US dollar. One caveat is that some of these barter exchange customers may have potentially become cash customers if discovered outside the exchange. While you can not directly convert an exchange member to a cash-paying customer, you can solicit referrals from them to new “outside the network” customers.
If a founder is interested in trying an exchange network, research the current membership to ensure that you need both services and potential customers for your services. In addition, you need to ensure that a balance works well for your venture now and in future growth. Under certain circumstances and depending on your business needs, this can be a legitimate funding approach for an early startup or established small business.
Finally, one last note on bartering. Barter transactions are taxable by US law. The IRS taxes barter transactions in dollars even though there is no exchange of no cash. The IRS measures bartered exchanges by using the market price of the goods or services someone receives. In a swap, both parties must list the market value of what they received as taxable income. As with the exchange I explored, these commercial and corporate bartering exchanges require filing a tax form — a 1099-B. Some exchanges provide detailed lists of your transactions for filing your taxes. You should keep detailed documentation of all trades. As always, founders should consult an accountant or tax advisor.
Advertising and Publicity. As I make it clear to all aspiring founders, marketing is one of the important cost centers. You never have enough funds to support all your marketing and promotional opportunities. Additionally, it takes funds and a long-term strategy to establish a brand in the marketplace. The majority of the promotional channels entrepreneurs consider cost money. Driving your revenues via free social media strategies is a non-started with rare exceptions. That said, there are some things that a startup can do to generate customer awareness and successful lead generation. As with any of these approaches, there is no one size fits all, so consider your business model and strategy as you decide on a course of action.
As a starting point, it helps to think of your early promotional efforts as educational. You are educating your customer on how you can solve their problem, why the offering differs from existing solutions, and that you are the right person or team to help them. The first thing to consider is what are some ways that founders can get in front of customers to answer these three questions. You can take advantage of many educational opportunities with no cash outlay. For example, suppose you are providing a service that builds on specific domain knowledge. In that case, you can use your expertise to educate your customer. recently, I met an entrepreneur that consults on blockchain and crypto technology applications. He frequently gives talks hosted by local chambers of commerce. He reaches his target business customers through the promotional channels of local business organizations. This approach can have a more extensive reach as many local business events attract media attention, thus providing earned media value. An entrepreneur can get real value if an article refers to the talk and the exhibited expertise. In addition, it allows you to share the article through your channels, a secondary benefit.
There are many opportunities for you to share your expertise through in-person and virtual talks. Many entrepreneurs host “free” webinars on topics of interest to their customers. By offering webinars, you not only expand your reach, but it is a great way to test your marketing channels. You can promote these sessions organically or with small paid channel tests. Measuring which media channels drive the most participants to the webinar gives you insight into their effectiveness. Of course, if any of the participants convert to paying customers, all the better.
Startups can apply a similar approach if you sell or promote a product in its early stages. I have watched many founders set up kiosks in grocery stores for taste testing or popup stores to show new fashion items. These opportunities allow you to engage your customer and give them an experience with your offering. Sometimes, these quick product demonstrations can scale for minimal costs. I have had many founders, either through brand ambassadors or paid interns, expand these demonstrations to multiple locations over some time. With some training, you can have these brand representatives engaging customers, creating awareness and qualified interest.
You can expand this approach even further through the use of channel partnerships. When confronted with the “partnerships” element of the business model canvas, many entrepreneurs fail to identify strategic partnerships that may expand their customer base. When I teach the BMC, I always highlight it as one of the core partnerships to consider. Are there specific organizations that a startup can work with with the sole purpose of expanding its reach? Maybe the answer is not always obvious, but it is well worth exploring.
I have experienced many stellar examples of channel partnerships, whose purpose is to support both parties’ market and branding strategies. This arrangement can be a win-win. The established organization benefits by partnering with a domain expert or innovative solution provider in the service of their customer. The startup expands its customer reach and aligns itself with an established brand, offering increased credibility. For example, I have been working on a series of new programs focusing on the professional development of entrepreneurs and innovators. One of the programs trains innovators to better manage the plethora of information that must be captured and organized during the venture realization process. While considering channel partners, Evernote, a knowledge management company, became an obvious choice. They have the expertise and tools to support knowledge management and have a large user base for their well-recognized note-taking application. By partnering with them, my venture achieves several benefits, including additional credibility around the domain area and increased marketing reach through their extensive social media campaigns. Hopefully, they will gain a domain expert who is an ambassador for their solutions.
Finally, entrepreneurs should always take advantage of any content they create as part of their product development or marketing efforts. Your content is an asset that you should capitalize on in many situations. Your content is one of the best ways to reach and engage your customer. For sure, content marketing is hard work and time-consuming. However, if you meet customer needs with the information, you strengthen your relationship with them. Besides creating your content, you can also look for willing content creators that are looking to get their writing recognized. They are also bootstrapping to increase awareness about their skills and services. Guest bloggers can generate additional content on the startups’ site, reducing the onus on the founder.
Pre-Selling. One way to look at bootstrapping phase is to dedicate your time to pre-selling. Before you build any product, see if anyone will buy your product or service before it is ready. This approach works well with a service-driven business. If you can make it happen in an acceptable timeframe, you will have a sale without spending any development money. The critical point is that this only works if you can produce the product or offer the service within a reasonable period. And you need to manage your customer expectations about timing. You will find that early customers are often flexible about timing, but you need to communicate the product status transparently. Of course, this is not scalable, but that is not the goal. Instead, you validate the customer’s willingness to pay for your service. Either way, you are already engaging potential customers and learning more about their needs.
Expanding Your Team. An advantage of bootstrapping is that you can take the time to develop the right team for your evolving venture. Most of the time, outside funders pressure founders to find co-founders and other core team members quickly. Investors often see ventures with co-founders and core team members as more stable and scalable. Bootstrapping allows you to take your time, expand your network, test out relationships, and find a team that has the capability of bringing you to the next stage of development.
An entrepreneur taking the bootstrapping route takes time to build their team. However, there are many ways to add capacity to your venture without jumping into various employment relationships. Options include working with mentors, relationships with universities and local government resources, and outsourcing.
Establishing relationships with mentors and advisors is vital for all startups, regardless of your planned or future funding strategy. I advise founders to identify and solicit potential mentors at the start of the venture realization process. Your advising needs will change and evolve, but even at the earliest stage, having at least one person familiar with your industry, product category, and venture creation are mission critical. As part of a pre-screening process, I ask founders to evaluate the depth of their domain knowledge and market access. A mentor with the proper knowledge and access to the market can fill any deficit in these two areas.
Founders should scan their local ecosystem to find potential mentors. A good starting place is a local university. Many universities host startup training and incubator programs. Look for faculty that teach in the domain area relevant to your business. If the faculty member does not have the time, they may be able to connect you with other experts in the area.
Another place to search for mentors and advisors is local government-supported organizations. For example, the US Small Business Administration (SBA) is the largest free startup and small business advising provider. For example, the Small Business Administration hosts regional small business development centers (SBDCs) in every US state. These centers offer free business advice to any business owner that works in that state. In addition, many SBDCs are located at universities, thus making them perfect entry points for learning more about local resources.
Another SBA-run organization, SCORE, provides mentoring services. SCORE offers free resources and expertise to existing and emerging small businesses. SCORE mentors provide advice at no cost (financing, human resources, business planning) via email, telephone, and video. SCORE mentors are experts in entrepreneurship and small business operations. Founders can easily search for mentors in their local area on the SCORE website. Additionally, SCORE provides various services, including training, webinars, online workshops, on-demand courses, and a library of online resources. SBA offers unique programs for women, minorities, and veteran-owned businesses.
Another way to expand your “team” is through outsourcing. A new, growing company will need several professional services that are not required full-time and may make sense to outsource entirely. Today, several marketplaces can help you find almost any assistance you need. These marketplaces offer an array of services with multiple service providers. The cost to hire a service provider is transparent and typically reasonable. Services range from website design to accounting services. In addition, these marketplaces commonly provide additional support, such as customer reviews and testimonials, to help you find the right service provider.
Finally, there are times when you might want or need to hire a team member. I am an advocate for hiring people for a trial period. This method can work for potential co-founders and core team members. If you have limited funds, you can always hire the party of interest to help you with a specific project task. For example, have the person code a part of your product software or design a particular marketing campaign. Be transparent about having limited resources, but it benefits all parties to see how everyone works together. My bias is to pay something during the trial period, even if it is below the person’s market worth. If they are passionate about what you are doing, they will participate. Many founders offer equity as part of this arrangement. If the first test goes well, you can start having these types of discussions. Even then, don’t offer equity so quickly. Make sure that there are clear expectations and objectives associated with equity. Build a vesting schedule with these objectives hard-wired into an agreement. And yes, use a lawyer for these agreements.
When hiring an individual or service, one thing to consider is to prioritizing arrangements to keep the expenses as variable costs. There are always opportunities to connect a cost to a revenue-producing event financially. The sales function is a typical example. For a startup, structuring financial arrangements to pay salespeople per sale unit and not with a fixed salary is an excellent way to tie costs directly to sales. Another operational activity that you can structure as a variable expense is manufacturing. Founders should explore hiring contract manufacturers willing to produce small batches and store your product until the sale is made. Then, if they are open to being paid on a sales basis, you have successfully converted this expense to a variable cost.
In the end, you should look at each cost area and think about ways to structure it as a variable expense. Converting potential fixed costs to a variable is essential to reduce your need for cash. In addition, it can make a difference in whether you succeed or fail as an early venture.
Other Bootstrapping Techniques. The above is a short list of the many bootstrapping techniques entrepreneurs use to get through their early stages, either to defer the search for equity funding or to retain control of the company. You can check out other techniques in the textbook.
Things to Consider
Be Budget Conscious. If you plan to take the bootstrapping path, you must consider cash your most precious and limited resource. You should create a detailed budget accounting for each projected expense as a starting point. Along with the projected amount of each expense item, detail its reasons. Ask yourself whether this item is critical to business success. Will my venture fail without this item? Can this expense be deferred to a later date? If essential, can I find a no or low-cost option? Can I find a similar thing used or deeply discounted? Is there a way to barter this item for a self-provided service? Can I convert this expense as a variable cost? Finally, if essential, can I extend the payment over time?
Many founders believe they can save on specific items by doing it themselves, the DIY approach. This approach has become more ubiquitous with ever-growing technologies, especially in automation and workflow management. As a result, the number of no-code and low-code options for entrepreneurs is game-changing.
Be Customer Focused. One of the advantages of bootstrapping is the need to build close relationships with your customer. Engaging with customers early on can provide a range of benefits, even financial, by prepaying on a future delivery or paying for product development work to meet their specific needs. Also, a purchase order from a large company in good standing, even if it is contingent on the delivery of a product or service to a defined specification, may help secure a working capital loan.
Be Network Driven. Building relationships is an essential part of bootstrapping. From acquiring talent from current advisors to future co-founders, you should always search for people with the necessary knowledge and skills to execute your business strategy. Networking activities should occur throughout the relevant ecosystem, from local universities to chambers of commerce. Look to your current and future supply chain as well. Establishing a close and honest relationship with suppliers will help. Suppliers may be willing to help in many ways with the hope that, in the future, a new company will become a significant customer. Help may include:
- Access to experts.
- Supplies of test materials.
- Introduction to their supplier and customer networks.
- Technical support.
- Sharing of market data and reports.
- Perhaps even an option to license some of their proprietary know-how.
They may also be willing to help with funding inventory until you have been able to receive payment from your customers.
In upcoming posts, I will address other early startup non-equity funding sources, including family & friends and crowdfunding. In the meantime, feel free to check out chapters in the textbook on “Launching and Financing Your Venture” and “Equity Financing for High Growth.”
For more on this subject and other entrepreneurship topics, get a copy of Patterns of Entrepreneurship Management, 6th Edition.
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