6.1: Bootstrapping
What is it?
Bootstrapping is funding a new business with a minimum of outside investment. Ideally, everyone would like to start their new venture with a solid and reliable supply of money, preferably obtained by winning the lottery or inheriting a vast sum from a previously unknown relative. The reality is that many people (if not the majority of people) start their businesses with nothing. No savings, no big gifts from relatives, and no lucky breaks. This is bootstrapping.
By definition, bootstrapping involves running your start-up as cheaply and efficiently as possible, constantly finding ways to minimize your expenditures and squeezing the most out of what you have. Bootstrapping is hard work, but it’s good for your business. It teaches you valuable lessons about how to run the business on a shoestring budget, preparing you to make good financial decisions in the future.
Bootstrapping tips that work
University of Maryland business professor Andrew J. Sherman offers ten proven tips for bootstrapping a business:
- Wear multiple hats in managing your business to save personnel costs.
- Buy or lease used furniture and equipment, and don’t overpay for unnecessary service warranties.
- Share office space with (or sublease from) a large company that will offer you access to conference rooms, office equipment, reception, or administrative services.
- Apply for several credit cards at once, and use the available portions as your operating line of credit.
- Hire student interns willing to forego a salary in exchange for work experience. Better yet, hire a retired executive or family member who may be willing to help out just to stay busy or serve as a mentor. A wonderful resource for this is the Small Business Administration’s SCORE (Service Core of Retired Executives) program.
- Work hard to maintain excellent customer relationships to encourage or require early payment.
- Commit only to short-term leases and other obligations to maintain maximum flexibility and cost controls.
- Ask major clients to purchase the key equipment that you’ll need to service their account and then lease it back from them.
- Offer shares in your company to vendors, landlords and key employees in lieu of cash, subject to federal and state securities law and acceptable dilution ratios. (Sam Walton used this tactic when starting Wal-Mart, and his former secretaries and office workers are now multi-millionaires!)
- Join a commercial barter exchange and use it to acquire key products and services. In some cities, even alternative currencies have emerged as a type of barter exchange and bootstrapping technique. These local currencies have stimulated economic development in small towns and rural areas that haven’t yet been affected by the regional gluts of venture capital or where commercial lending dollars aren’t flowing freely.
Stay focused
Bootstrapping isn’t easy. It requires discipline, diligence, and hard work. It’s unreasonable to expect everything to fall effortlessly into place. Be prepared for bumps in the road. No matter how tough things get, stay focused on the mission at hand: successfully starting your business.
Find a mentor
Experience counts. As Sherman points out in tip number six, having a good, experienced mentor can be a boon to you and your venture. Entrepreneurship expert Jerry Mitchell says, “So much depends on the industry and your contacts in it. I believe very strongly in mentors. Mentors can advise you on the nontraditional methods in order to be successful within your targeted industry.”
That’s just what happened to Luke Pinkerton and his Advanced E-Team, Polytorx. Pinkerton was looking to commercialize his product—a twisted fiber that, when mixed with concrete, creates extraordinarily strong, shock-resistant blocks—and attended an event hosted by a local non-profit organization supporting entrepreneurship. There he met veteran businessman Bill Orabone, who would not only become his angel investor and primary source of funding, but also an invaluable mentor. “Bill has been absolutely instrumental in showing me how to run a business,” says Pinkerton. He cites Orabone’s guidance in creating a focused business plan, ordering machinery for a low-cost manufacturing line, and securing raw materials for a sound supply strategy as essential to Polytorx’ success.
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Bootstrap origins
For this and other interesting boostrapping content, visit Guy Kawasaki's blog, How to Change the World at http://blog.guykawasaki.com/ .
Incremental growth
"Imagine trying to get a whiffle ball out of a tree. You cannot reach it, so you toss another ball up there to knock it down. But now, the second ball is trapped up there also. You look around for something to stand on, and see a picnic table and benches. You bring one of the benches over. But it's not high enough. So you bring over the table. It's not high enough, either. Then you stack the bench on top of the table, and, voila, you can reach the balls. That's bootstrapping in a nutshell." From "Thinking Like an Entrepreneur," by Peter Hupalo, 1999, http://www.thinkinglike.com
It's good for you
From "New Venture Creation," 2004, by Timmons and Spinelli, page 348.
Bootstrapping resources
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