“Pulling oneself up by one’s bootstraps” refers to 19th century high-top boots that were pulled on by tugging at the ankle strap. It generally means doing something on your own, without any outside help. In the present day context, bootstrapping is a commonly used term used to describe startups that rather than seeking help from external investors, an entrepreneur fund the development of their company through their own money or internal cash flow.
At a time when funding has become more a norm in the startup world than a necessity, it is common to see startups go investor-hunting even when the ‘brilliant idea’ is still at a concept stage. They have nothing to substantiate their claims before investors – no product, no customer, no traction. For some this is a new job category.
It is startups like these that need to understand that funding is not the only way forward. Bootstrapping, can be a very powerful alternative to create a more impactful company. Sometimes, a hybrid model might be more effective, where the entrepreneur could bootstrap for an initial period of time and only take external funds when the business is ready to scale. We wonder then, why most entrepreneurs these days fear to tread this path and settle for the seemingly easy route of seeking angel investors and VCs!
Someone has very rightly said, “Raising capital is not equal to success, not raising is not equal to failure.” One should understand that funding does NOT guarantee success. Also, it is important to realize that when growth occurs faster than the business model that supports it, the result is an increased likelihood of ending up in that disappointing majority.
There are many successful bootstrapped companies across the globe, including India. According to iSPIRT – the Indian ‘Think Tank’ that is actively helping and promoting Indian product companies to make India a product nation, 73% of the Indian software product companies are bootstrapped. It recently came out with an interesting Index – India Software Products Industry Index – B2B (iSPIxB2B) to highlight some surprising facts about the Indian B2B software product companies. According to the data collected, the enterprise value of the top 30 companies dealing in the B2B software product space is $6.2 bn (₹37,500 crores) and about 37% of these companies are bootstrapped.
As a matter of fact, even VCs prefer to back bootstrapped companies to those with early angel investment. They would much rather invest in a startup where the entrepreneur’s own money is at stake as well, since it shows the amount of confidence he/she has in the product or idea. There’s no denying that while it is easy to play with someone else’s money, no one wants to play with their own money unless they truly believe that they can make it work.
Bootstrapping forces entrepreneurs to constantly think about cash flow, which in turn forces them to become customer focused and create value. It forces entrepreneurs to become effectual, where the entrepreneurs navigate their journey to co-create the future that does not exist today.
Fundraising is a time-taking process and especially for early stage startups it can be a dangerous thing to dedicate so much time on meeting investors or preparing pitches, so much so, that you lose focus on your product and your customers. If you are self- funded in the initial days, you won’t have to make rapid decisions that you repent later. You can always raise funds in the future, once the foundation of the business is stable and you are ready to scale up.
Sometimes, growing slow is better. Specifically when there is a lot that is unknown; but once you find a direction, it will become easier to run faster; and then the need for external funds becomes more appropriate.
Once you have something more concrete to show to the investors after you have developed the product; tested it; and generated substantial traction – chances of getting valued will certainly be more. Moreover, you will be in a better position to bargain and negotiate the deal on your terms.
The decision to go down the road of bootstrapping and create a self-funding business has been known to provide rewards that can be both immediate and lasting. Many of the successful companies that we see today – Dell Computers, Facebook, Apple and eBay to name a few, had humble beginnings as bootstrapped enterprises. It clearly reiterates that funding is not a norm for success and as far as you can go solo, you should. Remember – customer money is the cheapest money that you get.
There is no right or wrong way; the fact remains you need funds to run a business and as an entrepreneur, the funding orientation is a choice that you will have to make. One should understand that every business is unique and demands different resources to build and operate it. Do a quick assessment for your reasons in seeking funding from an investor – big or small, angel or first/ second round of funding. You need to look at many other factors such as the industry type/ business you are into, the kind of working capital required, competition, opportunities of scaling up etc. Carefully analyze the pros and cons and then choose the path that is suitable for your business.
Remember not to be lured by the halo attached to the big funding news that is generating headlines in all the pinkies. You can go solo, yet achieve the same ‘stardom’ while retaining full control of your dream venture. However, simply put – ask for funding when you are ready to scale big time.
To me, entrepreneurship is a dynamic manifestation of creating connected values with compassion; so focus on creating connected values regardless of your funding orientation.