If You Don’t Have Financing, Bootstrapping is the Solution and the Matrix’s Red Pill is your Best Medicine.

16 September, 2013 — Leave a comment

Dr_Martens,_black,_old

It is said that a startup has two options: raising funding or bootstrapping. Bootstrapping is in reference to the famous saying “pull yourself up by your bootstraps”. Bootstrapping in business means starting a business with the very little capital that entrepreneurs have, managing their companies with a lot of creativity instead of money.

Nowadays, it is a pity that bootstrapping is not a choice for many entrepreneurs, but the only option they have, due to the difficulty to raise money.

Comparing bootstrapping with raising investor funding, that has the advantage that the entrepreneur has total control of his company without any interference from investors. On the other hand, the startup grows more slowly than those that receive investment, due to lack of resources.

Some additional advantages I’ve extracted, summarized and agree with from an interesting post by Javier Megías (in spanish):

  • Learning: if you’re forced to get your product to market quickly to bill the customer, you’d better learn what the client wants and he doesn’t.
  • Austerity: shortage of funds force us to be more efficient in the use of our resources and it help us to avoid wasting when we get funding.
  • Focus: If you have many resources, you will be tempted to do many things at once and the dispersion is fatal in a startup, it requires focus.
  • Validation: the obligation to bill customers implies that you will know soon if your big idea is something that the customer is willing to pay for or not, which is a key factor to validate your business model.

My own opinion:

When we launch a startup, it should have enough financing to enable the company to reach its break-even (income level that covers all expenses). If entrepreneurs do not have large resources they may try to raise financing: 3F ‘s, business angels, venture capital, crowdfunding , etc. But when the startup is born and it has no finished products, it is very difficult to get funding. In this case, there is no alternative to bootstrapping. But I recommend that the startup try to raise financing when it achieves its first customers. Then it will have the necessary credibility to attract capital, which allows the startup to grow quickly.

Some ideas about how to bootstrap a startup successfully, without dying of starvation (I mean this financially speaking):

Choose a kind of business that allows you to start with only a little money. In general it will be easier to bootstrapp if we get into an industry that requires little investment. For instance, it may be easier to bootstrap a startup providing some services through the internet than to bootstrap a biotech startup.

Offer services that you can collect from the very beginning. If the entrepreneur is specialized in a technological based sector, such as biotechnology, microelectronics, etc., instead of starting with the development of a product, he should start providing services to clients. These advanced services will enable the startup to bill and collect soon and to save some money to start with product development.

Find clients as soon as possible and make sure that these clients pay in advance. This may seem crazy, but it’s not at all. Many entrepreneurs are just asking potential clients to fund the launch of their products through a crowdfunding platform . The most famous case is a young man who wanted to build some innovative watches, which he called Pebble. Pebble connects with smartphones using Bluetooth. The young man raised on Kickstarter crowdfunding platform more than $10 million from customers through pre-orders, then manufactures the watched and finally sold over 85,000 watches. Trying to raise financing through crowdfunding has other implications and additional difficulties, but without using crowdfunding entrepreneurs can also visit potential clients and mention the possibility of pre-payment. If their product or service is truly innovative and it fills a need that is important for customers, there may be some of them willing to take some risk and to pay in advance.

Hire workers who are able to work for a low salary, in exchange for some shares of the startup. This is especially important if we need to sign someone to a key position in the company. Also someone who is willing to work in this way will put a lot more passion than any other professionals that we hire. This type of workers with some entrepreneurial profile work very well in a startup . By contrast many excellent professionals who are used to working in large companies with a lot of resources, often have difficulty adjusting to the flexibility required in a startup.

Focus on cash flow, not so much in profits. The important thing is that you don’t run out of money soon and your startup get positive cash flows. I spoke about this at the “Metaphor of the tub” and other related posts.

Carsten Schertzer bath money Original - recortada

Metaphor of the tub

Take the red pill. I read this recommendation in the book The Art of the Start by the great Guy Kawasaki a few years ago. He referred to Neo, the star of The Matrix. He had to choose between taking the red pill, that shows the reality of life in all its hardship, or the blue pill, that shows a perfect and idyllic life. Kawasaki said bootstrappers can not afford to take the blue pill. They should swallow the red pill everyday to see the depth of the rabbit hole they have in front of them. According to Kawasaki the depth of the rabbit hole of a bootstrapper is a calculation: the amount of money you have, divided by the cash you spend monthly, because it indicates how long you can survive.

Matrix Pills

To finish I leave a nice one minute video explaining what is bootstrapping:

If you can not watch the video on your smartphone, here is the link to Youtube .

If you want to learn more, here are some interesting articles on the topic:

  • The Art of Bootstrapping. The great article in English by Guy Kawasaki in addition to the above recommendation of “Taking the Red Pill ” adds other very interesting. Highly recommended!
  • Self-Finance or Raise Money? A Quandary for Start-Ups. A interesting article that compares the evolution of two companies born at a time and in the same industry , one that is financed with their own resources , bootstrapping , while the other raises venture capital.
  • Bootstrapping o cómo emprender con nuestros propios recursos (Bootstrapping or how to start with our own resources) It is a good article in spanish by Esteban Romero -Frías, professor and researcher in business administration , with more recommendations and referrals .
  • Bootstrapping: 5 Técnicas probadas (Bootstrapping: 5 Proven Techniques). A very interesting article in spanish by Matías Hernández , entrepreneurial and Blue Noise Nobody Labs , which collects his own and other entrepreneurs experiences on this subject.

And if you are convinced that bootstrapping is not for you and you want to know other financial possibilities, you can check my other posts on startup financing:

Do you think there is any other way to bootstrap your startup? If so, you can add it in the comments.

If you liked this article or do you think it can be useful to your contacts thank you to share it on your social networks. Thanks!

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