What is Bootstrapping and when do you do it?
Bootstrapping is the process of starting a business from the ground up without relying on outside funding. It’s a method of funding small enterprises that involves the owner purchasing and employing resources initially at their own expense and later operating on company profits, rather than pooling equity or borrowing large quantities of money from banks.
The most important things to remember when bootstrapping a business are to have a business idea (product/service) that solves someone’s need, reinvest net profit to scale the firm, and to find a mentor or someone who is successful in that industry and can provide useful advice.
During the early years of your company’s existence, venture capitalists (VCs) could be uninterested in your business. This might be due to the fact that you are in a niche where you are unlikely to receive much attention. This is the time when you should consider bootstrapping your business.
Another scenario when you can bootstrap your business is when you want to stay in control of your business for the long run. The need to bring in external funding reduces significantly if you want to scale your business patiently or in stealth mode.
Advantages Of Bootstrapping Your Business:
FREEDOM / INDEPENDENCE
You do not need to listen to investors or develop products according to their tastes. The founder has creative freedom to work on the product right from designing it to selling the product.
As no money has been borrowed, you are not answerable to anyone about the money invested in your business.
You can keep working on your business and not worry about finding new investors or from where the next funding would come in. You are self sufficient which helps you in focusing more on the business rather than the financial aspect.
Due to a lack of initial financing, entrepreneurs are forced to come up with novel solutions to issues, develop new market offerings, and demonstrate innovative thinking.
Can Bootstrapped Businesses Scale?
To understand this, we first need to understand the difference between scaling and growth. Growth is a phase in an organization when the operation costs are growing in proportion to the growth in sales. This does not change your net profitability. But in scaling your business, you are trying to grow your sales while keeping the operational costs the same or at least have them grow less than sales grow. This helps you in improving your bottom line by increasing the profitability.
To begin with, a bootstrapped firm necessitates an in-depth examination of your own – as well as your team’s – strengths and limitations. It’s crucial to know what you can and can’t do when it comes to running a business. While scaling a bootstrapped business, it is necessary to keep the costs to a minimum. You should not spend exorbitant amounts on things such as a huge office space in an upmarket location or buying the latest hardware available. Co-working spaces provide the best alternative which allows you to have your own personal space, but at the same time make new connections and probably find potential customers.
Bootstrapping and scaling are typically on opposite ends of the spectrum. It is the people who bootstrap their business, the ones not taking capital, but reinvesting their own money in the business. It might seem that it is not possible to scale your business without external investments, but that is not the case.
Bootstrapping your business makes you develop lean ideas right from the beginning. It allows you to use resources judiciously, which is an important trait if you want to scale your business with limited resources. It imposes a discipline on spending, where you know that excessive spending or unnecessary investments would burn out cash.
It is also possible for you to focus on your product / service rather than thinking about what your investors would think about the outcome of their investment. Overall, bootstrapping gives you a lot of freedom to expand and scale your business in a systematic manner.
Read more on how to scale your business here.
How to scale your bootstrapped business?
Now that we have realized that it is possible to scale up a bootstrapped business, let us look at the stages you need to work on while developing your business plan for scaling.
WORK ON YOUR COMPETITIVE EDGE
Understanding the competitive advantage of your business is crucial to your success. You must have a thorough understanding of the market as well as your competitors to be able to dominate your niche. You should also be aware of your company’s key capabilities so that you can invest in focused growth.
It is important that you get work done in your business, but at the same time, it is also necessary that you work on developing your business by focusing on the small details which set you apart from the competition. Identifying, developing, and effectively marketing one’s skills is crucial for scaling businesses.
MAKE A PLAN
Have an internal assessment of your business to see if it’s ready for expansion. You won’t know what to do differently unless you first assess your current situation. Plan out what you’ll need to do to boost sales, as they are the most significant drivers for scaling up. Sales play an important role to help you scale up as it is the point of communication between you and the customer who wants the product. If there are no customers available who are interested in that product, it would be difficult for you to scale your business.
Assume that your business has doubled or tripled in size overnight. Do you have the personnel and procedures in place to handle those increased orders without failing or earning a bad reputation? As your company grows, you may face rising costs, customer service concerns, and miscommunication among employees. In other words, if you try to scale a bad process, it will only get worse.
This is the point where you prepare a strategic business plan. You must be able to create a big-picture strategy that shows where you want your company to go, how much money you want to make, and what market share you desire. This could include the customers you want to target, the markets in which you want to grow, how would you define and standardize your internal processes, etc.
PRIORITIZE YOUR SCALING PROCESS
Once you have made your business plan, the next step is to prioritize its implementation according to the level of impact it will have on your business. You will obviously prefer improving your business in such a way which would give you quick gains with minimum effort.
When it comes to executing a scaling strategy, you’ll need to draw on the talents and knowledge of others. Examine your company’s talent pool – do you need a high-level financial person or a marketing team leader to help you drum up business? Hire only the person who you think would add value to the position as well as the business. To build a team, be prepared to hire or outsource important duties and tasks.
Do not fall into the trap of hiring people at a fast rate. This could lead to an increase in payroll and put a strain on your finances. You do not want an increased wage bill but no projects to work on.
Learn more on how to create a hiring roadmap based on your business strategy here.
CASH FLOW PLANNING
The most important thing which needs to be kept in mind while scaling up a bootstrapped business is the availability of cash with the company. You should never burn out all the cash you have in scaling your business. You should align your cash flow in such a way that it gives you freedom to invest in your business, but at the same time has got you covered for the next 3 months or more depending on the nature of your business or your industry.
In a bootstrapped business, it is really important to make use of all the cash judiciously. You do not have an investor who would re-invest in your business if you fail with your first business plan. While scaling your business, it is possible that you might go low on cash or you might have to skip your own salary for a month or two. But it is a part of the scaling process and you would definitely see the results of your investments in the time to come.
While almost all businesses have the potential to scale, some are better positioned to do so than others. Professional services firms, for example, will always struggle to scale their businesses because each new client requires new employees to do the same, repetitive work for different clients. In such businesses, you cannot find repeatable tasks which can be automated. Thus, you can achieve growth, but not scale exponentially.
Having a competitive edge and working on setting up your business plan are the most important steps while scaling your business. You need to differentiate from your competition and have a proper sales plan to reach your customers. As you do not have external funding, you need to make conscious decisions while investing in your business.
Although it may seem difficult to scale your business without investing heavily, it is still possible to do it with concentrated and focused efforts towards improving an individual process or a part of your business and then replicating these efforts for the other segments in your organization.
The most important thing to look at for you, as the business owner, are milestones which you have set along the way. If you are able to clear those milestones during your journey, you are on the right track to scale your business.
Let us know how your experience has been while scaling your bootstrapped business in the comments below.