You’ve got a great idea for a startup — the next step is to figure out how to fund it.
While some entrepreneurs assume that raising cash through VC funding is the only way to go, many founders get their start by “bootstrapping,” or building their company from the ground up using their own savings, with little or no outside funds.
A survey conducted by OnePoll in conjunction with the company Lendio of 2,000 small and micro business owners found that in 2018, by far the most popular method of small business financing wasn’t through angel investors, venture capital, online lenders, family donations, or bank loans but through personal funds.
It’s no small feat, though, to bootstrap your startup. Entrepreneurs taking this route not only need to worry about doing everything involved with getting their business off the ground, but they also must sweat whether or not they have enough money in the bank to keep going from month to month.
“Tremendous sacrifice is required if you want to bootstrap,” John Holloway, cofounder of NoExam.com, a digital life insurance brokerage that was launched in 2013 with the intention of never taking investor capital, told Business Insider. “It forces you to be extremely scrappy. No money is wasted. No time is wasted. When you bootstrap, you get the purest, distilled path forward.”
Some entrepreneurs, like Rob Sheppard, avoid using investor funds on principle. “From the beginning I was pretty certain I didn’t want to take investor money,” said Sheppard, who founded the online English school, Ginseng English, in 2016. “I actually had an offer from a colleague and turned it down, though you can bet I thought about it! I just don’t like the idea of having to report to anyone other than myself for a passion project like this. It would totally change the nature of the thing.”
To get some answers on doing it right, Business Insider informally surveyed a wide range of successful startup self-funders for their advice on how other founders can make the path of financial independence work. Below are some of the best strategies shared with us to help aspiring entrepreneurs bootstrap a startup.
Sheppard points to doing double duty with outside work while launching his own venture as key to making bootstrapping realistic for him. “I started my business while working for my previous employer full time for nearly a year, before diving into my startup full time,” said Sheppard. “This allowed me to have the company registered, a website generating traffic, and some content up online before I started dipping into any savings.”
Research supports Sheppard’s strategy. A study co-authored by Jie (Jasmine) Feng, an assistant professor at the Rutgers School of Management and Labor Relations, found that entrepreneurs who kept their salaried jobs while launching their companies were 33% less likely to fail than those who went all-in on their venture right away. By using this tactic that Feng terms “hybrid entrepreneurship,” founders are able to maintain a pipeline of personal funds, which they can use to help get their new business off the ground.
“Don’t quit your day job, at least not right away,” Feng told Business Insider. “It not only gives you more time to polish your ideas, products, and plan, but also means that attracting investors is not do-or-die because you have the safety net of a full-time job to pay the bills. This means you can actually enjoy entrepreneurship instead of constantly worrying.” Feng added that a side benefit of this approach is that you can continue accumulating knowledge and connections at your full-time job that may be useful to your startup.
Nicholas Vandenberghe, CEO and cofounder of the tech firm Chili Piper, initially bootstrapped his startup past $2 million in annual recurring revenue. Vandenberghe attributes his company’s success in bootstrapping to what he calls the “bull’s eye strategy” of honing in on the most influential clients first to generate a flow of inbound interest.
“In every industry, there are some core influencers,” said Vandenberghe. “Communication spreads in concentric circles, from these core influencer companies towards the least connected actors at the periphery. By targeting these core influencers in the ‘bullʼs eye,’ a company can spread its message at [a] much lower cost.”
Using this strategy, Vandenberghe proceeded to close the first million in revenue himself, mostly through in-person networking. “I attended every industry meetup and conference in person,” he said. “It’s an unusual approach these days when there are so many tools to mass email unsuspecting prospects, but it was much more targeted and successful.”
When you’re bootstrapping, waste is the enemy. There’s no room for inessential spending and expenses. James McGrath, cofounder of the New York-based real estate brokerage Yoreevo, has found plenty of room to cut corners over the last two and a half years of bootstrapping. While the startup has kept a close eye on costs since launching, they find additional expenses to trim by combing through their credit card statement every few months.
“As one example, we were paying $120 per month for a phone app that allowed us to use numbers with NYC area codes,” said McGrath. “We realized that was unnecessary and cut that expense to a simpler phone service that saves us $500 per year. By paying attention and making sure all of your expenses are justified, bootstrapping will be more of an option.”
Another way to cut costs is to save on the front end. James Hixson, CEO of a custom furniture manufacturing company in Denver called Black Hound Design Company, emphasized that his number-one piece of actionable advice for anyone planning to bootstrap is to scour sites like Craigslist and Facebook Marketplace — as well as consignment stores — to locate and buy discounted tools, equipment, office furnishings, and supplies.
“We’ve been in business for six years now and definitely had to bootstrap to fuel our growth,” said Hixson. “Nearly all of our tools and furnishings are used, which made the cost a fraction of the new price. This simple strategy saved us thousands and thousands of dollars, which is vitally important to a new business.”
Bootstrapping means not being beholden to the terms of investors, but it doesn’t mean that you can’t apply for grant funds.
Lindsey Handley and her cofounder bootstrapped their business, ThoughtSTEM, LLC, which today serves around 10,000 students each year through their online education technologies and 2,000 students each year in San Diego. When they launched the startup in 2012, the cofounders were graduate students at UC San Diego, and began with only five students enrolled.
Handley admits that starting small made it tempting at various points to consider taking funding from venture capitalists — but they have remained steadfast in turning down VC in favor of the autonomy and freedom that comes with bootstrapping. Instead, they applied for grant funding through the National Science Foundation’s SBIR (Small Business Innovation Research) program — and to date have received over $1 million in grants.
“This program gives small businesses large grants without taking any ownership in the business,” explained Handley.
After working for nearly five years at Google, most recently as a manager of the Global Ops engineering team for Google Cloud, Scott Fortmann-Roe left the tech giant last year to become CEO of his own bootstrapped company, Text Blaze. Fortmann-Roe advises other potential bootstrappers to be relentlessly focused on delivering immediate value to their users, noting that while venture-funded companies have the luxury of avoiding the intense pressure to do that, this luxury can also be a curse.
“VC-funded companies can grow by sinking money into advertising, other marketing, or sales teams working the phone,” said Fortmann-Roe. “In many cases these companies are simply burning cash in these channels. Bootstrapped companies put their users, not investors, first. We solve our customers’ real-life problems.”
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