Wiktionary defines bootstrapping the following way:
Bootstrapping: to pull oneself up by one's bootstraps
- (idiomatic) To begin an enterprise or recover from a setback without any outside help; to succeed only on one's own effort or abilities.
We can't get a loan, so we'll just have to pull ourselves up by our bootstraps.
Much has been written about the art of bootstrapping a young enterprise and a simple search on Google will give you plenty to read on the subject. What I thought would be topical would be to look at it specifically from the perspective of those contemplating starting a business, as many who read this may already be engaged in running their business this way and already be in a bootstrapping mode. For more on this subject and how to tell when to take outside money once this is working and your enterprise is further along, I thought that this article in VentureBeat by Javier Rojas did a really good job of setting the stage.
Why is this topical? We’ve heard and read a great deal in terms of the difficulty in engaging VCs in today’s economic climate, as they try and hold on to their own cash for existing portfolio companies and thus have fewer dollars (and time) to do new deals. But before we even think about this stage, I want to go to an even earlier stage of business formation – at the very, very beginning.
Let’s say that you’re working for someone (not yourself just yet) and that you’ve made the decision – at least mentally – that you’re ready to take the plunge and become an entrepreneur. So then the question becomes – what next? Some answers are obvious – write a business plan; get some of your personal “stakeholders” on board with your vision (could be a friend, a significant other, a relative, etc.). In my own instance, I was so convinced that I had a good idea that I became almost entirely focused on the funding aspects so that I could actually leave my job and get started. Since I was pretty confident that I would NOT be a good candidate for VC funding (no prior track record, first time entrepreneur, no working prototype, etc.), I needed a plan that got us started and allowed us to get underway, for at least 6-9 months, without outside funding. I did not consider asking friends and family for money, for a whole variety of reasons, which I won’t get into here.
Here’s how I prepared to get started (the total elapsed time from idea to starting was approximately 5 months):
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Cleared all credit card debt. This was imperative as I knew I needed to travel extensively to sell my product (the first photo editor for the PC – but that’s for another post).
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Set up a line of credit, using the equity in my house. My wife and I were in decent shape as far as our value versus what we owed on our home, so this provided a source of funds for living expenses, since I was not drawing a salary. I wanted to submit the loan application prior to leaving my job so it would have a greater chance of being approved. It eventually was.
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“Hunkered down” on all unnecessary expenses and redid my household budget. No vacations. Going out to eat a whole lot less. No new car. In short, cut down on all unnecessary, discretionary expenses. You get the picture. As part of this, we prepared our extended family for what was coming and what to expect from us (like at holiday times).
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Did as much as I could to get friends to help me in writing the plan. We did research, wrote drafts, began exploring technical aspects – in short, anything that could be done directly or with friends at night or during the weekend before I left my job and my income.
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Once we started the business, we spent very little that wasn’t absolutely necessary, beyond product development. For example, I worked out of my house until it became unmanageable and we found that we simply had to spend $350 a month on office rent to continue.
Aside from these five ideas on getting started, one last thing I would recommend in today’s environment: if your product is web-based and you are not a programmer but the one with the idea – get a friend who has the skills to help. If you don’t have such a kind-hearted friend, start networking and find someone and “sell” them on your idea. Do this with the thinking that they would be part of the “founding team,” with more equity if they can devote time during the nights and weekends prior to starting.
By doing these things, and more, we were able to secure customers within 90 days, since our product was so far along (remember, we did the work prior to leaving our jobs), and this led to a product we shipped within 6 months after starting. This yielded real customers, real revenues and profit within the first year. Now, these were modest revenues and none of the founders took a salary, which set the profit threshold lower but gave us huge bragging rights with investors. We prepared ourselves to live without salaries and thus it wasn’t as stressful as you would imagine. Just after the first year, we had offers to buy our business as well as an offer from an Angel investor to provide a $200,000 equity investment. Good choices from humble beginnings. We chose the investor over the buyer and decided to continue on, with our exit happening a year later, through a sale to a public company.
If you’re thinking of starting a business, I encourage you to chase your dream – but do it with the idea of funding yourself at least for the first year in business – by bootstrapping!
John Dearborn is the Chief Development Officer of JumpStart and brings experience as an entrepreneur, founder and CEO at companies across the US and Europe over the last 25 years to the pursuit of economic transformation in Northeast Ohio.