When you’re just beginning to build your startup, funding options are limited. Traditional banks won’t talk to you. VCs want to see traction; and angels want to see a great MVP. Debt financing isn't an option yet, because you don’t have revenue. And on the off chance that you can pique the interest of investors at this early stage, you’ll give up a large chunk of equity—sometimes 30 to 40 percent—for their money.
So what are your options? The best thing you can do is bootstrap it for as long as you can, whether that's all the way to an exit or to raising your Series A.
Bootstrapping Fundamentals
Though it can be scary to rely on the revenue you generate to keep your business growing in its early stages, there are some key advantages to bootstrapping. When you bootstrap your way to success, you not only preserve valuable equity and maintain full control of your business, you also become skilled at growing efficiently—putting every dollar to work where it's most needed.
If you're determined to bootstrap your way to success, follow these 5 core bootstrapping principles.
1. Pick your co-founders wisely
When you’re starting a business, the most important thing is to pick the right co-founding team. If you have somebody who you think might do, wait until you find somebody who you know is a great fit. You need people who share a similar vision and interest with you, but have complementary skill sets.
Equally important, you need to find people with the same level of commitment. Startup life is full of ups and downs, and eighty-hour weeks without compensation isn’t for most people. Statistically, the majority of startups give up or die within four months of inception.
If you don’t have a co-founding team that can give you their full attention and commitment, it will make the journey that much harder. Your ideal team should be excited about committing to your idea and financially able to make it through the bootstrapping phase with you.
Of course, you can always go the solopreneur route in the beginning and look for co-founders later.
2. Don’t give up your day job, just yet
Though many entrepreneurs fearlessly dive right in, quitting your day job is risky prior to validating your idea and testing the market is risky. What if the product you envisioned just isn’t possible? What if the market isn’t interested—or if someone else has beaten you there? Plenty of founders ease their way into entrepreneurship working on their “projects” during evenings and weekends.
Even if your project shows potential to become a viable and profitable business, do the math and run some scenarios before you give notice at work:
How long you can go without a job?
Can you rely on your savings, a spouse’s income, or money from friends and family?
Do you have an unexpected chunk of money (e.g. a severance package or inheritance) to get you through the pre-revenue phase?
Consider this: the cheapest money you’ll ever get is the money you earn from your day job. You don’t have to spend time chasing investors to get it, you don’t owe interest on it, and you don’t ever have to pay it back.
3. Focus on cash flow
One way to get a bootstrapped business off the ground is to start as a consultant. You'll not only have revenue coming in, you'll also gain invaluable industry experience, begin to understand your future customers' needs, and build a network of potential customers that trusts both you and your expertise. All of that will make it easier for you to productize your service down the road and provide much-needed cash flow.
Lighter Capital has funded many startups that began as consulting services or other service providers, before they pivoted to building a product. Steelbrick (now Salesforce Quote-to-Cash) is a good example.
Once you have revenue coming in, you can reinvest your profits to grow the business. And that brings us to principle 4...
4. Control your cash burn
One of the top reasons bootstrapped startups fail is they run out of runway and use up all their cash. Bootstrappers operate on an extremely tight budget, so prioritizing essential expenses and using limited resources strategically will be critical to your success. The goal is to make the money you have go as far as possible.
You need to maintain control of your cash burn rate and keep an eye on your runway.
For instance, don’t plan on investing in scaling your business until you have a loyal book of customers who can't live without your product. Now is the time to focus on validating your product-market fit. If your product needs an overhaul to appeal to your target market, your most cost-effective solution is to leverage the skills of your existing team, instead of hiring outside developers.
Outsource for skills and competencies you need but don't have. Take advantage of product and service discounts for startups. And hold off on investing more heavily in marketing until you've gained traction in channels that work.
5. Extend your runway at key inflection points
There will be events and opportunities as you grow your startup that you'll want to jump on right away to accelerate your momentum. For example:
You just closed your biggest contract to date and it's time to hire a sales professional who can service the account and fuel your sales pipeline.
You have incredible traction in a marketing channel that's bringing in a deluge of good leads, and you want to invest more into it.
There's a change in the market and your solution can meet an immediate need—you need money for advertising and marketing to capture that demand.
A moderate injection of capital can propel the business forward much faster than you will without it. Non-dilutive debt can be a great solution to extend your runway and seize the moment. If you have an opportunity to grow faster with the help of extra cash, and the payoff outweighs the cost of capital, it’s absolutely worth taking on some debt.
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