How can you fund your new business venture? Are investors and lenders the only way to raise money for your business? Or is there another way? What about selling to your customers and funding your startup with “revenue”?
In this blog post, I want to talk about another method of raising money for your startup, called bootstrapping. But before we can get to that, let’s understand a very important/ fundamental aspect necessary for bootstrapping your business.
Imagine your friend Deepak loves cricket.
Deepak tells you that he’s started taking cricket lessons and his coach thinks he has the potential to be a professional player one day.
He decides to enter some competitions to really test out his mettle.
Knowing that Deepak is still a beginner, what kind of competitions would you suggest he enter?
- An international level competition where the best players from all across the world compete?
- A national tournament where advanced players compete?
- A local tournament where beginner players compete?
It’s always a good idea to start small, test the waters, gain experience and build skills before going into the big leagues.
This will help Deepak as he practices to become the next national cricket team captain.
If you have a new business idea, you may dream of it becoming hugely funded and successful as soon as it launches, but that is like winning an international level tournament on your first try!
But just like Deepak’s cricket career, you will probably need time to learn and build your product and skills before launching it to the world.
Launching small and developing your idea a little at a time is infact, a very smart strategy.
Starting small will give you the time to learn new skills to mould your business/ product or service into the best version that it can be without risking a lot of money or capital.
However, you might be wondering, “But, I still need money to hire a team or rent a location to build my product or app” and this is where bootstrapping comes in.
What is Bootstrapping?
Bootstrapping in business means starting a business without external help (investors) or capital. Such startups fund the development of their company through the earliest instances of revenue (in other words..sales) (not outside investment).
The term ‘boostrapping’ originates from the phrase “pulling oneself up by one’s bootstraps,” and professionals who engage in bootstrapping are known as bootstrappers.
In bootstrapping you focus on making sales early in your business so that you can use the money to startup.
Sales and marketing are the most important factors in any business’ revenue and focusing on it early in the process means that you are setting your business up for success.
I have seen so many entrepreneurs pump so much money into their product’s development and ignored their sales pitch and finally ended up bankrupt and out of business.
Don’t make this mistake.
Selling the solution to the right audience can not only bring your the funding required but also help you validate if a market for your business really exists.
Advantages of Bootstrapping
Bootstrapping helps you avoid early stage investors, who will often ask to own your business.
It will also help you avoid lenders, who you will need to pay whether or not your business succeeds.
Bootstrapping helps you avoid early stage debt, which in my opinion is important because your business idea is still untested.
Bootstrapping also allows you to build up a good track record of sales and a client base which will help you pitch your product as profitable and viable when you’re talking to potential investors and lenders in the future.
You need a MVP – Minimum Viable Product
In order to start small and bootstrap your way, you will need to come up with your minimum viable product (MVP).
A minimum viable product (MVP) is a product with just enough features to satisfy early customers, and to provide feedback for future product development.
Gathering insights from an MVP is often less expensive than developing a product with more features, which increases costs and risk if the product fails, for example, due to incorrect assumptions. The term was coined and defined by Frank Robinson about 2001 and popularized by Steve Blank and Eric Ries.
It’s okay that it’s not the complete version of the product that you had in mind. You can improve it the next version or even update it’s design or purpose completely as you start receiving feedback from your customers.
How to define MVP
Here is a example to get you started!
Let’s say that you want to open a restaurant! Opening a full fledged restaurant is expensive and risky. So you ought to start with you minimum viable offering. Here your MVP could be a food truck or a catering service. Both of them cost much less than opening a restaurant and lets you learn about food costs, portion sizes, vendors, customer expectations, food waste etc.
Step 1: Write down the big vision for your business
Include things like the problem that your business will solve, it’s key offerings and how it differentiates itself from other businesses.
Step 2: Create a financial plan
Create a detailed financial plan which will show the detailed costs involved to launch your business in its most ideal form. Include costs like rent, equipments required, employee salaries, marketing and advertising costs, inventory and materials, insurance, licenses etc.
Step 3: Keep only the key differentiators
Now think about how you can keep the key offering, differentiators and value of your business while cutting out costlier parts of it. Ask yourself, what can I remove so that I can deliver a minimum viable product?
For example an app developer might consider releasing a simple web application version of a financial management tool first, instead of launching a mobile app right away.
When to start selling?
Do you have to wait until your minimum viable product is created before you can start selling to your customers? Absolutely not!
Sometimes you may need funds to even create a minimum viable product (MVP). In this case it may be a good idea to do pre sales.
Presales involves selling the idea of your minimum viable product to see if you can get pre-orders.
One of the more popular ways of pre-sales today is crowdfunding.
Crowdfunding can also help you raise awareness for your new business market it and get feedback from the public.
So that was the post. Do you have something to add? Let me know in the comments section.