What’s your preferred strategy for starting up and funding a new business?
There are a few different schools of thought. What works for you will depend upon your own goals and level of comfort with the financing methodology.
Some startups take the VC route, especially when they have goals of rapid growth and being acquired within a few years. Bootstrapping – where you self-fund the business, is also popular although it can come with some extra financial constraints.
Our own founder, Brian Casel has self-funded his businesses, and our clients represent a mixture of bootstrapping or external financing. One of those, Daniel Zacarias, founder of Underway discussed his thoughts on bootstrapping with us on a recent podcast.
Here we’re breaking some of those ideas down – to bootstrap, or not?
Making the decision to bootstrap
Bootstrapping tends to be the most popular way to fund a startup. In a sense, it’s the lowest barrier to entry because you get to test out an idea with little or no external risk. You don’t have to ask anyone else for financing and you can play by the rules you set for yourself.
For many founders, bootstrapping is about agility and the ability to “fail fast” and pivot. When you test out your idea, you put your own capital at risk, but you can also make a quick decision to switch to something else.
We asked Daniel Zacarias about his own decision to bootstrap. What prompted his choice?
“It lets me pursue smaller opportunities and potentially create an independent business that doesn’t need to “take over the world” to be viable,” he says. “Don’t get me wrong – I have nothing against VC at all. I just believe that it shouldn’t be the default option for a lot of businesses. There are plenty of smaller opportunities that may be attainable through a self-funded path.”
In those early stages, being self-funded can give you the option to test things out as you see fit. On the other hand, if you have investors, you will answer to them first and take into consideration their ideas and thoughts.
What about cons to bootstrapping?
Of course, there are also a few cons to bootstrapping. To some founders, these will be enough to have them avoiding this financing method altogether.
For one thing, bootstrapping is generally linked to slower growth. Why? Funding tends to fuel growth and if you’re bootstrapping, you’ve probably got less funding resources than a startup that has investors.
Along those lines, you tend to have to be exceptionally careful with how you spend every penny. When it comes to activities that help to promote or grow your business, a funded startup might have the capital to go all-in, whereas a bootstrapped startup usually has to make a judgment about what might work the best.
For some founders, this can mean extra stress. Every financial decision may feel like “make or break,” especially if you’re living off savings, or little to no income. Many bootstrapping founders find they have to keep working at a salary or wage job, or in consulting or freelancing, just to make sure they have some income being generated.
This can also mean that you need to get results much faster than a startup that has VC funding. You have limited funds, which means you have a shorter timeline (or runway) before they run out. A startup with funding often has the luxury of more time on market research and more time iterating its product or service.
For Daniel, one of the challenges of bootstrapping is that he has to work a paid job at the same time as working on his startup:
“It’s hard not being able to give more attention to the product, as I can’t go full-time on it,” he says.
Prioritizing what to invest in
So if you do take the bootstrapping route, you have to be very careful about how you set your priorities and what you will invest in with the capital you do have. We wondered how Daniel went about prioritizing what to invest in:
“For Underway, I had positive feedback from early customers on the product itself, but I knew I needed to drive more traffic to the site, so that led me to outsource content,” he says. “This lets me focus on customer support and adding improvements to the product, which is something I wanted to stay involved with.”
This is a variation of a theme we’ve talked about before: founders should develop a great understanding of what they’re good at and what they should hand off to someone who is better at it. So if you’re bootstrapping and bringing in more organic traffic is a priority, you might choose to invest in expert help to get it.
Of course, another area to prioritize is the development of your product or service itself. Without a valuable product, there’s no sense in driving traffic! It’s not that you can (or should) accommodate every feature request, but you have to look at it through the lens of the customer experience. What is the primary problem you are setting out to solve? Anything that directly serves that primary purpose may be a priority. Fortunately for Daniel, he is able to do much of the work on features.
Daniel sees this strict focus on prioritizing positively, too. If you learn to work constructively within the bounds of bootstrapping, you develop a good understanding of what works and what doesn’t. This can work in your favor if you choose to seek investment later on. “When you do bring on investors, you can be clearer about what the money will be used for,” he says.
Working positively with constraints
By definition, if you choose to bootstrap you will be constrained by the resources you have available. You don’t have the luxury of falling back on more funding if a feature or marketing method doesn’t work, you have to be very focused on what feedback and research suggests will work in the first place.
For some founders, this would be utterly exhausting, so how does Daniel work positively with these constraints?
“There are a couple of things that work for me,” he says. “The most obvious is to look at it as a force to drive focus. I have to be very mindful of where I can invest my time and funds. But also, it’s important to be OK with any potential outcome.”
“It might be that a lack of energy, attention or funding at the right time ultimately kills Underway, and I’m OK with it. I’ll try something else if that happens. The advantage of this path is that there’s relatively small risk involved, so it’s easier to set our own definition of success (and failure). If we’re clear on those, then it shouldn’t be a source of frustration.”
Bootstrapping is a great way to found a startup – in fact, it’s how most small businesses get their start. However, it’s not for everyone and it’s not the only way to go.
If you’re looking at launching a new business, it’s important to assess what your goals are and to weigh up the pros and cons of bootstrapping versus other funding methods. As Daniel mentioned, you’ve got to be comfortable with the knowledge that it might not work and have your own definition of success in mind.
You’ll learn to work with constraints, but that doesn’t have to be a negative. To quote Daniel: “I love constraints. Constraints force you to really think about your choices.”