Anyone who has ever launched a business using limited resources knows it’s an endeavor fraught with challenges.
You have an idea, but it’s going to take money to make it a reality. So, do you seek investors and risk losing autonomy, or do you go it alone and bootstrap your way up?
Both options present benefits and risks, so there are a number of questions you need to address before determining which is right for you:
- Can you achieve profitability quickly? This is the single biggest issue that you have to face. If you can’t run a profitable business before you run out of initial cash, then you have to shut down or raise more money. It’s imperative to understand what your startup costs will be in relation to the time it will take to achieve a profit.
- Is your business labor- or capital-intensive? Product businesses (e.g., enterprise software) often require a great deal of initial capital expenditure and hires before making a single sale.
- What is your customers’ time frame for payment? At what pace can you expect payments to come in? Enterprise software companies receive annual payments year after year and expect long-term profits. Therefore, acquiring customers will result in a short-term negative cash flow, as sales and marketing costs are paid up front.
On the other hand, service businesses (e.g., consulting) usually receive one-time, up-front payments, which provide immediate cash flow to cover short-term expenses.
A Few Points to Keep in Mind
Once you’ve answered these questions, your next step will be to raise money or start bootstrapping. Regardless of which you choose, there are several considerations that are often neglected.
First of all, having investors is more than just getting a cash infusion; you also get valuable advice and access to relationships that wouldn’t happen through bootstrapping. A great venture capitalist will bring an array of connections, advisors, institutional support, and credibility that provide value far beyond the cash he brings to the table. For example, John Doerr and Michael Moritz were instrumental in bringing in Eric Schmidt as CEO of Google, and his expertise proved vital for scaling up the business.
If you elect to bootstrap, however, you face the challenge that comes with not having many external voices in the conversation.
Finally, you have to consider whether you’re in a winner-takes-all market. Ask yourself if there’s a massive gap between first and second place. Take LinkedIn and YouTube, for example. Both companies have network effects that make them exponentially more valuable with each incremental user. In this situation, the company that hits critical mass first will crush the competition, so having the largest war chest is a substantial advantage.
On the other hand, if network effects are less important for your business — as is the case in a traditional restaurant or a consulting firm — then you don’t need a huge bankroll to capture a large share of the market. In my company’s space, network effects aren’t particularly valuable, meaning we fill a niche need for our customers. This allows us to thrive without fearing that competitors will kill us once they reach critical mass.
Moving Forward With Bootstrapping
If you decide that bootstrapping is right for you, utilize these three strategies to avoid making critical mistakes:
1. Assess what makes your business valuable. Is it your critical mass of users or your specific content and tools? Once you answer that question, gauge whether network effects or something else drive your value. If the answer is network effects, you have to start out with a lot of money. Essentially, network effects businesses are “go big or go home,” so make sure you understand what you’re getting into if you choose a business like this.
2. Think tactically about what you’ll need. If you’re not going to raise money, you need to identify the holes in your operation — whether that means marketing, product, or operations. How can you recruit the right advisors or employees to fill these holes without the support of an institutional investor?
3. Be conservative. Everything will take longer and cost more than you expect, so be conservative when building forecasts. Budget for 12 months, even if you think something will only take six months. You don’t want to risk running out of money a few months before closing a critical sale.
Whether you choose to bootstrap or seek out VC funding, having enough money in the bank to make your business function is your top priority as CEO. If you can’t do this — even if you do everything else right — it will all be for nothing.