We're going to talk about bootstrapping, where that term comes from and how you can start
a company without ever raising venture capital or angel investment.
In the press you often hear about startups raising millions of dollars in financing and
raising millions of dollars can give you a lot of leverage, it can give you a lot of
advantage but as Mark Cuban says, Raising Venture Capital isn't an accomplishment, it's
an obligation to your investors and there is a different way to start a business.
The term bootstrapping comes from the expression to lift yourself up from your bootstraps.
Obviously you can't do that but the idea is that you bootstrap, you start yourself off
from nothing.
I first heard the term bootstrapping in computer science, and it's really a chicken and egg
problem.
How do you write a programming language and a compiler for that programming language and
for that computer if you don't have one?
And the idea is that you really write a compiler that compiles itself.
I won't go too deep into computer science but the idea is you're using yourself to start
yourself, to start that cycle.
And the same is really true about the business of bootstrapping.
The idea that you can start your business by bootstrapping, by starting yourself.
There are five core ways to bootstrap a business.
And the first is by keeping your operating costs really low.
Craig the founder of Craigslist was able to start Craigslist, his company really started
off as a mailing list.
By keeping it simple Craig didn't need to raise additional financing, he was able to
grow the business for the first number of years of the business and able to scale that
business because his operating costs were so low.
The second and third way of bootstrapping a company is with either owner financing or
owner debt.
And that's the idea that you put some of your own cash into the business.
Sarah Blackley, the founder of Spanx was able to start her business by investing $5000 of
her savings into the business to get that business operating and starting.
Lots of other founders will use credit cards and other debt instruments to finance their
company as well.
That allows them to get that initial startup capital to get started but they don't a lot
of capital they're able to sell through the business and sell products, sell services
to continue to operate that business and grow it year over year.
The fourth way to bootstrap a business is sweat equity.
And this is the idea that you really just work hard.
You're putting in a lot of effort and rather than hiring a lot of people to operate and
work in your business, you're doing most of the work yourself.
By doing two, or three, or four jobs, working nights and weekends, by putting in the work
yourself, you don't need that external financing, you don't need those external hires, you're
able to grow the business through your own blood sweat and tears.
Now doing all the work yourself isn't sustainable in the long-term, but in the early days of
a company when you're really just getting off the ground it can be a good way to start
that business and make some initial progress.
And the fifth way to bootstrap a business is through revenue based financing.
If you're able to generate early revenue, if you're able to generate early cash through
sales of products or the sales of services, you can use that cash flow to continually
fund the growth of your business.
There are even some companies that will offer debt instruments or offer to loan you money
based on the revenue you're able to bring into your business.
So by being able to sell products, you're able to more quickly generate that bootstrapped
mechanic where that revenue is generating money for your business and allowing you to
grow and iterate over time.
So what are some of the pros and cons of bootstrapping?
I actually bootstrapped my own business and when I was getting started it allowed me a
lot of flexibility, obviously when you're bootstrapping you get to decide all the things
about your business but at the same time you don't really have a safety net from an investor
perspective.
If something goes wrong in the business, it's really up to you as a bootstrapped founder
to figure out exactly what you're going to do.
You don't really have a lot of latitude to pivot the business or change how you operate.
You really need to make sure you're generating revenue, really from day one to continually
iterate and grow your business.
When I first started my father actually told me a story.
He said, you can either have a business that's fast burn or slow burn.
And I really didn't know what that meant.
But he said, look.
If you raise capital if you use venture capital.
You have a fast burn business.
And venture capital businesses, want you to grow very quickly, and they want you to have
a successful exit.
If you have a slow burn business, if you bootstrap your business you're really in control of
the velocity of your company growth, you decide how fast or how slow you want to grow your
business and there is no push, no external.
event , there's no external investors pushing you to make a decision.
So there's no right or wrong in terms of fast burn or slow burn.
You're just deciding what you want from your business.
External investors can give you latitude, can give you input, can give you advice, but
they can also exercise control in-terms of what they want from your business.
So just think about what you want and weather those investors are things that will accelerate
your growth your business, your trajectory and your vision or in some cases they may
be a distraction in terms of where you want to go.
Either way, bootstrapping is a great way to start your business even if you decide to
raise venture capital in the future.
I'm Greg Raiz.
I talk about entrepreneurship, technology and design.
I hope I'll catch you on the next one.