Capital gains from bootstrapping4 min read . Updated: 30 Oct 2011, 09:44 PM IST
Capital gains from bootstrapping
Capital gains from bootstrapping
Have you been sitting on a business idea, delaying acting on it because you don’t have enough money? In their new book, School for Startups, Jim Beach, Chris Hanks and David Beasley give practical advice on how to start right away.
Covering a wide range of topics, such as finding a great idea, marketing a product or service, hiring, risk management, buying, franchising and the right time to quit one’s day job and jump into the deep end of entrepreneurship, School for Startups: The Breakthrough Course for Guaranteeing Small Business Success in 90 Days or Less is a guidebook for those looking to build small businesses.
Bootstrapping—a metaphor for improving one’s position by one’s own efforts—in business too means finding success without external help or capital. In a chapter, “Bootstrapping versus Raising Capital", the authors explain why it’s better to start with internal cash flow. So, instead of waiting until you have enough investment, start now. Edited excerpts:
Rules of bootstrapping
Bootstrapping is better for the business. It makes you focus on profits and cash flow, and it frees you to spend time on selling instead of raising outside capital, and on solving problems that are truly keeping the company from making a profit, such as low sales volume and excess inventory. Having cash can hide a multitude of mistakes and the long-term problems of the business.
Bootstrapping is better for the owner. It lets you maintain equity and control, learn more, and have an easier time selling the company in the end.
Bootstrapping is better for the employees. They work at a firm where there is a clear and absolute line of authority, and they are taught a surefire way to sell a product. Also, more shares are available for them in employee stock option plans.
Overall, bootstrapping forces you to be more realistic, to not waste time, and to be better prepared for the long run. Hopefully, we have established that bootstrapping is far superior to raising capital. If you’re willing to borrow an idea from someone else, as 93% of successful entrepreneurs do, and if you remove the thought that you must have capital before you start, there are no legitimate reasons preventing you from being a business owner now.
•Get operational quickly
One of the best things you can do to reduce risk is to begin selling immediately. Hopefully you’ll generate revenue right from the very beginning.
•Look for quick sales
If you can find a product that will sell immediately to large numbers of customers, you can actually use those sales to finance your startup, using the sales (known in the business world as receivables) as collateral for a loan.
•Offer high value products
We do not like to compete on price, simply because the only way to be more competitive is to be cheaper or lower your profit margins. Imagine being in a price war with Walmart, in which case, eventually your profit margins will be close to 1%. To bootstrap, you must compete on high performance and after-sales service so that your perceived value, and hence your return on investment, is higher. Always position your company as the best.
• Forget the crack team of recruits
Entrepreneurs must realize that in the beginning of their company’s life cycle, they must be the chief salesperson, chief marketing officer, chief financial officer and the person in charge of cleaning the toilet every day. To bootstrap successfully, entrepreneurs must sacrifice their own vanity and do all of the jobs that previously had been done by a large support team.
David Stahl and his software company take this to the extreme. Their company, Infinovate, hires employees only when there is already a signed contract for their services. By constantly remaining understaffed, he is able to keep costs down and bootstrap successfully.
•Keep growth in check
It may seem counterintuitive, but slow, steady growth is preferable to fast, explosive growth. The second outcome usually requires a tremendous influx of capital. Growing organically is maybe not as sexy, but it’s more likely to produce a company with no debt that is able to weather recessions and crises.
• Focus on cash, not profit
While we would never recommend selling a product or performing a service below cost, we certainly believe that profit is not always the most important aspect of your business. At the beginning, when you are just hoping to stay afloat, your worry should not be profit margin, but cash flow.
•Start in your house or garage
The idea of starting a business in your home or garage is truly a cliché at this point. We have all heard how Michael Dell started his company in a dorm room and how Apple Computer was started in a garage. Even though this kind of startup method is a cliché, it is great advice. Office space is a luxury you cannot afford.
• Argue every price
Prices are meant to be negotiated. Tell the people you are buying goods and services from that you are broke and a new company and in need of a special “new-company discount".
• Harness word-of-mouth advertising
Advertising can be a major expense for your new company, but you can cut those costs to near zero through blogging and social network sites such as Twitter and by building e-mail lists.
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