Facing the bootstrapping dilemma? Here’s what you should know
In the last decade, the banking system has shaped up in a way that makes obtaining loans for business purposes an easy affair. Seeking external funding isn't a bad thing but an entrepreneur must establish his business fundamentals before seeking external capital. The biggest companies in the world like Apple and Nike have raised money, but they have done so after bootstrapping their way into figuring out and building a viable business in action. Nothing kills a startup's buzz faster than the idea of bootstrapping. However, the concept of bootstrapping is not for the faint of heart, and it has never been more relevant than it is today.
Image : shutterstock
Bootstrapping bolsters business and product modernisation
Today, most funded startups are focused on spending money instead of making money. Bill Gates of Microsoft and Phil Knight of Nike were great money managers when they started off. They founded their respective business with a bootstrapped idea and pushed to stretch every dollar they had. They chose the harder path of stronger organic growth. For example, Knight relied on bootstrapping from the very beginning when he started his business by borrowing 50 dollars from his father. For years he funded his imports through bank guaranties. Nike, which was earlier known as Blue Ribbon Sports, was close to running out of funds multiple times. However, it was these testing times that pushed Knight to innovate from the low-margin business of importing shoes to producing superior sports shoes that the world today knows as Nike.
Focus on creating a business and not just a top-line
Every entrepreneur builds his business with a vision to make it outgrow him. Most venture capital investors, however, invest in a business with the intent of exiting it in five-to-seven years. Not many entrepreneurs are aware that raising capital from the very beginning can change the focus of their entrepreneurial journey. This is because VC investors want to see aggressive growth and entrepreneurs have to consult them for every small business decision they make. Instead, when an entrepreneur is smart enough to keep his eyes on the business and not fulfilling investor's demands, he can grow at his own pace.
The cost of equity is the greatest cost
One of the most important decisions in an entrepreneur's life cycle is diluting control and equity. Several entrepreneurs make the blunder of diluting too early just because the money is there. This inevitably leaves them with lesser equity and lesser control for future fundraising needs. Bootstrapping ensures that the course your company takes is solely in your hands. Also, because your company's growth is fully organic, it isn't very affected by external disruptors. According to Tom Werner, Founder of Github, “Bootstrapping is a way to do something about the problems you have without letting someone else give you the permission to do them.”
It is advisable to bootstrap for as long as you can so that when you have a clear vision of profits, you are in a great position to leverage what VCs can offer you.