Andrew Youderian • March 26, 2014 These days, it’s very fashionable to have a business “funded” by an investor or venture capital firm. While this kind of funding is most prevalent in the tech sector, it’s still tempting for ambitious new store owners to bring on investors or get a business loan to “accelerate” their progress.
But that’s almost always a bad idea. Here’s why bootstrapping your business is usually the better alternative.
What Is Bootstrapping?
There are a lot of different definitions floating around, but here’s one I created that I like best:
“Bootstrapping is starting and growing a business using your existing resources.”
Notice what bootstrapping doesn’t mean. It doesn’t mean you’re excluded from investing any of your own cash. It also doesn’t mean that you must remain a one-person company for eternity, or that you have to settle for meager revenues and profits.
It simply means growing your business using your existing resources instead of going out and raising a bunch of money from other people. It means growing organically.
Why Bootstrap?
If your #1 goal is to build something enormous and world-changing as quickly as possible, bootstrapping may not be a good choice. But if your primary goal is to build a profitable business that you will ultimately control, bootstrapping is almost always your best option. Here’s why:
Cash Alone Rarely Solves Problems
Cash is pretty nice to have around, and there are many situations in which a fat bank account can come in handy.
But in just as many cases, business owners tend to see cash as a solution to their problems. Instead of thinking through business growth issues and dealing with them, they’ll simply throw a lot of cash at the problem (by hiring contractors, consultants, etc.) and expect the underlying issues to be taken care of.
This rarely works and is a mistake I’ve made myself. Instead, most successful companies grow due to the direct, in-the-trenches sweat equity of a highly invested personal founder who is personally grappling with problems. Paying to outsource the early work involved with getting a business off the ground is almost always a bad idea.
Forces You to Prioritize
When we have a lot of something, we tend to be much less discriminating about how we use it. When you’re sitting on a big pile of money, it’s pretty easy to spend needlessly on things like logos, flashy web design and nonessential “feel good” business items.
Working with limited resources (both times and money) forces you to ruthlessly prioritize on the bare essentials to move your company forward. More often than not, you’ll eliminate 90% of the waste and fluff that wasn’t that important anyway.
Allows You to Maintain Control
Money always comes with strings attached. At a minimum, you’ll be bringing on a third party who will be scrutinizing and trying to influence your decisions. At worst, you’ll be giving up control of the company you’re pouring your heart and soul into.
That doesn’t sound like much fun. Isn’t calling the shots one of the reasons you started your own business in the first place?
Makes You Focus on Profitability
With $100,000 in the bank (especially if it’s someone else’s $100K), it’s easy to mask the reality of an unprofitable venture for far too long and avoid making difficult (but necessary) decisions. That’s much less likely to happen if you’re running a lean operation and/or the money in the bank was solely generated from your own blood and sweat.
Keeps You Out of Debt
Skip out on that big bank loan. Few successful companies have been started with a founder saying, “We just secured our $100,000 line of credit! Let’s start ordering things.”
And potentially even more dangerous is the prospect of borrowing money from family. As Dave Ramsey says, Thanksgiving dinner always tastes different when you owe somebody at the table money.
The 5-Step Bootstrapping Process
Once you’re onboard with the bootstrapping concept, here’s a five-step process you can follow to give you the best chance of success:
Step 1: Prove Your Concept
With limited funds, it’s more crucial than ever to prove your business concept before investing your valuable resources. If you’re reselling an existing product, this step is a bit easier given the existing demand. But make sure you’re very clear on how you’ll be adding value — and don’t say via low pricing! Will you be offering a unique branded experience or adding informational value?
If you’re creating a new product, make sure you’re able to validate that people want — and are willing to pay for — your product before you invest heavily in mass manufacturing. Get your prototypes in front of as many people as possible, take pre-orders or even launch a Kickstarter campaign. Nothing is worse than manufacturing 5,000 new items that nobody wants.
Step 2: Do/Learn as Much as Possible
Wait a minute … How am I going to build a real business if I’m doing everything? And are you really suggesting I do everything? As in, learn to code and even do my own accounting out of the gates?
In short, yes! I recommend doing as much as possible in the early days of your venture, especially if you don’t understand the underlying concepts. This often requires performing a task or learning a skill that you weren’t anticipating.
You’ll save money doing things yourself, of course. But more importantly, you’ll gain a deep understanding of your business that will be incredibly valuable as you grow.
It’s nearly impossible to manage people and/or outsource tasks if you don’t fundamentally understand them. In fact, it’s often a precursor to disaster. You won’t be able to do this for every aspect of your business, but the more areas you can understand well in-house, the better off you’ll be in the long run.
So teach yourself the basics of CSS and HTML and then go and outsource your layout and design work. Get a good grasp of the fundamentals of finance and get a few months of bookkeeping experience under your belt and then hire a bookkeeper to manage the books on a monthly basis.
I’m not advocating being a one-man or one-woman shop forever; that’s no way to build a business. Currently, I have either in-house team members or contractors manage most aspects of my business, from accounting to customer service. But I’ve done my own accounting and I understand how the books work. I’ve answered countless emails and phone calls. That inside knowledge of my business is crucial to helping it grow and scale, as we’ll talk about next.
Step 3: Systemize Your Roles and Processes
Once you have a firm grasp on most aspects of your business, it’s time to start handing off tasks to others. Delegating responsibilities is one of the most crucial steps for successful growth. It’s also one of the areas most fraught with frustration and friction if you’re not intentional about how you do it.
The Wrong Way to Scale: Hire someone, give them a few general areas of responsibility and hope they do a good job
The Right Way to Scale: Document your critical business processes and hire people to execute (and improve) those processes
This concept of systemization and documentation is involved and far beyond the scope of this post! So instead of doing a poor job of writing a brief primer here, let me point you to a few great resources on the topic:
The books Work the System by Sam Carpenter and The E-Myth Revisited by Michael Gerber are go-to resources for how to best create a process-driven company that controls chaos, enables delegation and allows you to scale. I’d also recommend this great podcast episode by the guys over at the Tropical MBA on building processes into your business.
At eCommerceFuel and Right Channel Radios (my eCommerce business), we have dozens — if not hundreds — of documents outlining the best processes for most tasks in our business. Everything from editing an order to bringing on a new forum member has a document outlining how it should be done. We manage everything using Google Docs and Asana.
We’re definitely not perfect, and there are certainly some shortcomings in our documentation. But without it, our business would be absolute chaos.
Step 4: Start Plugging In Key Team Members
Once you have systems and documentation in place, it’s much easier to start plugging team members into roles that are clearly defined and documented.
But growing a team with a bootstrapped company is a bit challenging. Unlike bigger companies, you probably can’t afford to have someone dedicated to HR and someone else focused solely on graphic design. Instead, you’ll likely have to pick a key team member or two who will be required to wear a lot of hats.
Personally, I’ve found the most important thing to have early on is a trustworthy, reliable person who can act as the operating core of your business. Someone who really understands your customers and the different aspects of your business, and can serve as the go-to person for general operations.
It’s not too difficult to outsource graphic design or programming tasks. But it’s extremely difficult if you don’t have a person with a good high-level understanding of your business to manage customer service tasks, supplier issues, etc. Having someone in this operations and customer service role is often the best first hire you can make.
For more thoughts on hiring, check out the recent conversation I had with Bill D’Alessandro here on the podcast.
Step 5: Decide How Big You Want Your Business to Be
At this stage, you likely have a six-figure business that’s well-documented, highly automated and hopefully growing. Congratulations! Now it’s time to do some soul searching. This step isn’t technically necessary for “bootstrapping” a business, but I think it’s an important enough step in the process to discuss.
How big of a business do you want? Stated differently, what’s most important to you?
If the ultimate goal of owning your own business is to provide a full-time income and flexibility/time to do what you want, that’s easily accomplishable with a six-figure business, a small team and minimal stress. But if you’ve got your eyes set on something bigger — a multi-million dollar business, for example — you’ll need to take a different approach.
In the book No Man’s Land: Where Growing Companies Fail, Doug Tatum discusses how most founder-led companies stall out at the high six- and low seven-figure mark. He argues that growing a company past that revenue point, an area he calls “No Man’s Land,” requires a different strategy than what was originally used to scale the company.
Instead of using a small team to leverage the skills of the founder, getting to that next stage requires building out a full-fledged team of area specialists to legitimate scale. It requires taking a hard look at your business model to see if it’s viable when paying market rates for staff and leadership. And it usually requires a few years of significant investment (and often financial stress) to grow the team ahead of the normal business curve to support that growth.
It’s a great problem to have, but one you’ll need to think seriously through.
Follow-Up Resources
A few additional resources on bootstrapping:
Rob Walling: Rob is a software entrepreneur, but he’s a bootstrapping/self-funded evangelist, and many of his lessons are just as applicable to eCommerce and other online entrepreneurs. I’d especially recommend his book Start Small, Stay Small and his podcast Startups for the Rest of Us.
The Bootstrapper’s Bible: Written by marketing guru Seth Godin, this 100+ page PDF guide is a great resource for bootstrappers, and it’s free.
I’d love to hear what you think. Are you a VC or funded startup founder whom I’ve deeply insulted? Have some additional thoughts or resources to add? Let me know in the comments below.
Post by Andrew Youderian
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