In my experience as an advisor to aspiring entrepreneurs, I often encounter the myth that an initial startup requires investors. The reality is that over 80 percent of new businesses will never attract venture capital or angel funding, according to experts, and there are many good reasons for skipping that painful and distracting process. Outside funding is not a startup entitlement.
The media tends to highlight experienced entrepreneurs who succeed with early new venture funding, like Uber’s Garrett Camp, but fail to point out the more common bootstrapping successes. Notable examples include Bill Gates, Michael Dell and Richard Branson, who took no early outside money, and waited for confirmed initial success to go public or scale the business.
Here are some key advantages I see in starting a new business through bootstrapping, without outside investors:
- The business is all yours, and you are really the boss. Many aspiring entrepreneurs jump ship from corporate environments, complaining that they want to be their own boss, only to find that investors are more demanding bosses than the ones they left. You do not have to fight for your equity, and no one can slow you down in decision making.
2. A limited budget makes for a better business plan. Entrepreneurs who do not have someone else’s cash for outsourcing come up with the more innovative and creative approaches to get things done. Flaws in a business plan are often masked by money, but ultimately will kill any startup. You need to see them quickly, and pivot as required.
3. Startups need to stay nimble and adapt to change. After you have honed and given your investor pitch a hundred times, your mind and your investors are hard to change. Every startup I know has pivoted at least once, so learning from your mistakes should be a positive experience, rather than a painful error that will cost you credibility.
4. Keep your focus on customers rather than investors. Even the best investors will dramatically increase your workload, with daily communication, agreement expectations and business overhead. They normally expect a C-corporation versus a far-simpler Limited Liability Corporation, office space and staffing efforts to fill key roles quickly.
5. Do not quit your day job until the revenue is flowing. Investors expect nothing less than a full-time commitment, even in the early stages when the business model has not yet been proven. Investor money burns quickly, and can leave your family with no startup and no means of support. For aspiring entrepreneurs, a fallback plan is always good.
6. Keep later critical financing needs viable. Every round of investing makes the next more expensive and less likely. The most critical need for financing will come as you scale initial success, when you need money to cover new inventory, delayed receivables and location expansion. Do not let early funding increase risk and dilute your potential.
7. Spread your equity internally to build the team. Bootstrapping does not mean that you do not share equity. You can use it best to entice outstanding team members and partners, building a level of commitment you do not get with salaries alone. You can also use it acquire or merge with other companies for exponential growth.
8. Keep your exit strategy options open as you learn. Investors want their money back, with sizable gains and no hassle, in 3-to-5 years. Thus, they will insist on a sale or public offering at every opportunity, which will likely force you out. Your dream of changing the world may take longer, or be the legacy you want to stay with.
These days, it is possible to bootstrap almost any type of business, if you are willing to think creatively about deferred paybacks to developers, advances on royalties, equipment financing and bartering of services. It is also possible to extend your own investment capabilities with lines of credit, receivables factoring, and simply moving slower through organic growth.
Smart entrepreneurs understand that changing the world is not a mad dash to the finish line, but a long journey, with many twists and turns along the way. You will be more likely to get to your destination if you set out, your way, to enjoy the journey as well as the destination.
Image credit: CC by OpenCU
