The Art of Bootstrapping: 5 Elements your Business Needs to Have
Despite all the current rage of startup funding, unicorns and billion dollars valuations, most successful businesses are actually bootstrapped.
With the term bootstrapping we mean the process of using one’s own finances, grit and sweat equity to start, establish and grow a new company.
In a market where inertia rules, it is actually quite difficult and remarkable to be able to launch a new product or service, gain customers and mold a profitable business model.
In recent years, a number of spectacular companies have been bootstrapped to high levels of success, especially in the online and tech domains.
Companies like Atlassian and Mailchimp are amazing stories that show the path of what is feasible.
Having said that, it is not always possible to leverage bootstrapping. It heavily depends on your business type and the model you wish to implement.
One of the best analyses that I have ever read on the subjects was provided by business evangelist Guy Kawasaki.
In his book, “The Art of the Start”, Kawasaki discusses bootstrappable business models.
A model like this has specific characteristics that allow the business to first survive, then grow and eventually thrive.
Let’s elaborate on these.
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1) Low up-front capital requirements
Since you are not raising external funding (e.g. taking VC capital or issuing a bank loan), the initial capital needed to start your business should be really minimal.
This means that the upfront capital expenditures should be low, and that fixed costs should usually be low too.
For example, a company that would require heavy infrastructure or machinery to be in place in order to operate is not a good candidate.
This is one of the many reasons that online businesses are so suitable for a bootstrappable model. You can usually start with a low capital allocation.
Additionally, since money is scarce at the early stages, you should focus on being scrappy and frugal, and run the business in a lean way.
2) Short (under a month) sales cycle
With the term sales cycle, we refer to the course of time between the initial contact being make with a customer, the identification of services or goods to be procured, the finalization of the corresponding purchase, and the actual transaction that completes the sale.
Typically, business that sell directly to consumers tend to have shorter sales cycles, while businesses that sell to other businesses tend to have longer sales cycles.
Additionally, the larger the amount of the actual sale, the longer the sales cycle usually is. If you wish to sell a $100M aircraft, more people and due diligence will need to take place in comparison to selling a $1 apple.
Sales cycles are very important because they directly affect cashflow. Remember, you need to have cash coming in as soon as possible, otherwise your business faces the risk of running out of cash and dying.
If, for example, you are trying to sell to Enterprises (long sales cycles), you will need a huge cash buffer.
3) Short (under a month) payment terms
This is related to the topic of sales cycle but focuses more on the actual payment process. Again, depending on the type of business transaction, there will be different payment terms.
In consumer-facing business, transactions are usually instantaneous and money exchanges hands on the spot. This is amazing for your business’s cashflow.
On the other hand, a whole new world exists in B2B (Business-To-Business) transactions. There it is a matter of agreement between the companies, and whichever has the more leverage usually sets the terms.
There are agreements where the business is obligated to pay with a month (NET-30), two months (NET-60), three months (NET-90) or even more!
Again, you should aim to minimize the amount of time your customers pay you, while prolonging the amount of time it takes for you to pay your vendors.
4) Recurring Revenue
Recurring revenue has been called the “Holy Grail” of business. This is where you have customers that pay for your product or service again and again, in a pre-arranged time frame.
Having a customer paying you in a predictable and repeatable manner is incredibly powerful. Not only it increases the Lifetime Value (LTV) of your customer, it also enables you to better plan your company’s growth.
This is why SaaS (Software as a Services) businesses have exploded the past years. They have this repeatability attribute embedded in their business model.
If you have a business model where customers buy repeatedly from you, you can not only bootstrap more easily, but also scale the business much faster.
5) Word-of-mouth advertising
Finally, another characteristic that is going to make your life easier is selling a product or service that makes for “word-of-mouth” advertising.
In order to achieve this, you need your product to have some kind of inherent virality (think Snapchat) and of course to have such a good product that people have to tell their friends.
If you want to take this to an even higher level, then you are looking for models where having a user inviting his peers means that the experience is better for both users. This is where “network effects” kick in and can create very powerful businesses.
One of the most prominent examples is LinkedIn, the business networking website. If you are a user of the service, then by inviting your friends and peers, you make the whole experience more enjoyable and the service even more valuable for you.
Successfully bootstrapping a business is an amazing feat and should be celebrated. This approach should be your first option when looking to start a new venture.
In order to do so, though, your business model needs to have some specific characteristics.
These involve low initial capital requirements, short sales cycle and payment terms, a recurring revenue and “word-of-mouth” advertising.
Not all of them need to be in place, but the more of them exist, the easier it will be for your business to survive the difficult early phase.
Now, go out, and bootstrap your own business like a boss!