Written by Daanish Khan
Are you trying to find out how to finance your startup, even without the help of a business angel or a venture capitalist? The solution is simple: use bootstrapping for startups.
You have probably heard of it, especially if you are collecting information on how to open a new company and you need to validate an innovative business idea.
The term bootstrapping derives from the English bootstrap and is also used in the IT field: it generally indicates a self-starting process, which does not originate from external inputs or stimuli.
Consequently, bootstrapping of a startup means a technique for self-financing your business and making it grow, in a context in which the contribution of risk capital or external investments are zero.
The source of money is limited, because it is one’s savings and revenues, which are used to allow the startup to operate and expand on the market. Obviously this is not an easy road to follow, yet if it is successful it gives the startupper incomparable gratifications and satisfactions.
boostrapping for startups
At this point you may be wondering why anyone would choose to bootstrapping a startup, as it involves some degree of difficulty. The answer in this case may seem paradoxical: it is one of the simplest ways to start a business.
This statement might seem contrary to what was previously said, but in reality it is not if you consider the context in which an entrepreneur looking for investments moves: it is not easy to obtain them if the business is just born, if the team has not behind a decade of experience in the sector, if the technology used is under development or has yet to be developed, or if the market in which it operates is constantly evolving.
There can be various reasons why it is difficult to find someone who brings risk capital to a startup, without forgetting that investors such as business angels or venture capitalists may think that your business is not so attractive, because they simply do not foresee an extraordinarily profitable exit.
In such an initial situation, it is easier to launch a startup with your savings and then bootstrapping than asking someone to invest in a poke, without even having a prototype of the product or service you want to sell. This explains why self-financing of a startup is a difficult path to take at an economic level, but it is also the easiest and most pragmatic choice if you want to get started.
1 – Choose a serious and reliable co-founder
If you are starting your startup and you need to choose a co-founder, make sure that his skills are complementary to yours, so that you can divide the work and manage different aspects of the company, in a complete and functional way. This will make it easier to bootstrapping.
For example, you could manage the commercial side, marketing and sales, while your business partner could take care of administrative activities, product development or team building: in any way you share the tasks, remember that by delegating some aspects to a reliable and serious partner you will be able to carry out your tasks faster and better.
It is not uncommon that friends or people in whom you have a lot of trust are often chosen as the cofounder of a startup, just to be sure that the other is really committed body and soul to achieving the set goals.
2 – Try to have a pragmatic approach: do not immediately pursue perfection and study feedback
There is a psychological aspect that should not be overlooked when it comes to bootstrapping a startup: before producing a first prototype of a product or service, someone may be obsessed with achieving perfection, precisely because with their own money and limited funds the risk margin is small and nobody wants to make a mistake.
This is a wrong mentality for two reasons:
involves a much higher level of pressure and stress at work;
slows down the development of the company.
If reason number one has psychological implications that are easily understood, it is reason number two that is more interesting to investigate.
Someone will ask “How does perfection slow down the company? Shouldn’t that be an advantage? ”. Unfortunately, most of the time this is not the case: first of all because perfection does not exist, but you can get very close by studying the feedback of consumers and early adopters, also starting to sell early is one of the ways to evaluate the market response.
If you start with the idea that the prototype is already the final, perfect and finished service, it will take a lot of time to create something that stands up, without the certainty that it really works. And what if the final result doesn’t go well? Precious resources will have been wasted and it is not certain that we can make up for lost time.
Much better to have a pragmatic approach, aiming at the creation of a basic version of the product and service, such as an MVP, to be improved and completed over time, little by little, thanks to the advice and suggestions of those who have started to use them: in this way it is much easier to be able to create a quality and successful product, reducing the risk of wasting resources and money and therefore optimizing the boostrapping process.
3 – Focus on cash flow and not profits
If you want to start a startup with bootstrapping you will need to focus on cash flow. It might seem strange to you, because the theory says that profits are the key to surviving, but it is also true that it is the cash flow that allows you to pay the bills in the early days.
Since with bootstrapping you will only have your savings available, you will certainly have a very limited starting capital, so it would be useful to think of a business model tailored to your needs, for this reason it would be better to set a sales cycle and terms for the shorter payment, to get recurring income.
Do not aim to close a big contract or a big sale in 12 months, because you need liquidity to be able to move forward in the daily management of the startup, so start with small steps before you can say that you have learned to walk: you will see that you will arrive a lot farther than those who immediately try to make the big leap.
To predict cash flows in the short and long term, it may be useful to define a Financial Plan. By doing this you will have under control the objectives to be achieved and the resources necessary to do so.
4 – Optimize Personnel Management Costs… And Others Too!
self-financing for startups
Personnel management costs represent an important expense for any startup: optimizing them means having more money to invest in development, and therefore a greater chance of hitting the objectives set in the shortest possible time.
With this in mind, the first step could be to outsource payroll management, relying on outsourced payroll services, which allow you to save a lot on administration costs and therefore rationalize your bootstrapping capital.
Hiring someone to take care of wages, for example, involves a series of expenses with a significant weight for a newly born startup: cost to hire a specialized figure, social security contributions, taxes, any overtime, etc.
If you want to optimize personnel management costs, in general, the outsourcing of services is a good choice, which can also be taken into consideration in other cases to reduce costs: you can also outsource IT services, for logistics, for legal advice, for marketing and communication, etc.
Also remember that you can also save in another way: you can personally take care of all those activities you know well and are able to do, without having to pay a consultant.
What if there was something you still don’t know how to do or in which you are not particularly experienced? You decide if you can invest your time in training to perform a task better and not outsource it, or if instead it is appropriate to focus more on the tasks you already have to do every day. You need to understand how and where to best invest your savings to make bootstrapping as effective as possible.
5 – Take full advantage of Brand Positioning
If you want to start a startup through the bootstrapping method, therefore having limited funds, you will certainly want to achieve results as soon as possible, and this is also possible thanks to the brand positioning, i.e. the position that your brand occupies in the mind of consumers, based on comparison with your competitors.
Once you have established the market segments or have created buyer personas to turn to, this is the time to determine where to position your startup, aiming to differentiate it from the others that could compete with it.
Why is this process critical? Because a good brand positioning allows you both to acquire new customers and to retain those who have already chosen your products or services, creating a special bond with them and also a dialogue, which will be very useful to quickly develop your offer thanks to the study of feedback. After all, by bootstrapping your funds are limited and you need to quickly find a way to generate income.
With brand positioning, you could start entering a very specific market segment more easily, consolidate your presence there and then expand and target other groups, thanks to a much clearer planning and marketing idea.
6 – Get the Most With A Bottom-Up Approach
When it comes to managing a startup there are generally two types of approaches: top-down and bottom-up. In the first case, the choices come directly from the company’s top management (top), while in the second case, more weight is given to ideas and ideas that come from the bottom (bottom), or from customers and employees.
Each of the two solutions has strengths and weaknesses, but the bottom-up approach can be more effective because it is data driven, therefore it is based on measurable data, and consequently allows for more sustainable development and significantly reduces the risk of making wrong decisions. two very important aspects when limited resources are available, as in the case of bootstrapping a startup.
The information and data are also collected through consumer feedback, analyzing their opinions and suggestions, which make it easier to improve the product or service offered. On the other hand, who better than a customer can indicate the changes and innovations necessary to be competitive on the market?
To take advantage of the advantages of a bottom-up approach, however, a fundamental characteristic is necessary, that is to create a startup that is customer centric, centered on the customer, which must always be listened to carefully: it is he who provides the data to be used as a guide for management optimal company.
Finally, we must not forget the contribution of employees: anyone can have useful ideas to improve an aspect of the company, even in a decisive way at times, so it is good to listen to everyone’s opinion and try to create a constructive dialogue, to filter the best ideas and try to implement them, especially if they come from those who are in close contact with customers and listen to them every day.
In summary, bootstrapping means being pragmatic, knowing how to save where you can and listening to the feedback from customers and the team. You are now ready to start your startup!