In the startup world, it is often assumed that in order to be successful, you need to have outside investment. But is this really the case? Can startups survive without funding?
One company that proves this is possible is MailChimp. The email marketing platform bootstrapped its way to profitability and has remained self-funded ever since.
MailChimp is not alone; there are a number of startups that have been able to grow and thrive without funding.
But before we cast a stone on funding, let us look at what such companies missed by not taking in an investor.
Benefits that come with funding
The first thing that comes to mind is the mentorship and advice an experienced investor can provide. If you are a first-time entrepreneur, having someone to help guide you through the process can be invaluable.
Another potential benefit of taking on investors is the networking and connections they can provide. This could be helpful in terms of getting your foot in the door with certain customers or partners.
c) Funding itself!
Of course, one of the main benefits of taking on investment is the funding itself! This could allow you to hire more staff, open new offices or simply have a cushion to fall back on if things get tough.
Lastly, some entrepreneurs feel that securing investment from well-known VC firms acts as validation for their business idea.
Reasons why some startups choose not to take on investment
There are a number of reasons why some startups choose not to take on investment, even if it is available to them.
a) They want to retain control
One of the main reasons is that they want to retain complete control over their company. This could be important to them for a number of reasons, such as wanting to maintain a certain culture or not wanting outside interference in how they run things.
b) They don’t need the money
Another reason why some startups choose not to go down the funding route is that they simply don’t need the money.
If they are profitable or have another source of income, then there might be no need for them to take on investment and give away equity in their business.
c) The terms aren’t favorable
Investment deals can often come with a lot of strings attached, such as giving up a certain amount of equity or having less say in how the company is run.
If these terms are not favorable to the entrepreneurs, then it might make more sense for them not to take on investment at all.
d) They don’t want to give away equity
Finally, some startups might not want to take on investment because they don’t want to give away any equity in their company.
This could be because they feel that they can grow the business themselves or because they think that it will be valued higher if it is completely self-funded.
This begs the question;
Can Startups Survive Without Funding?
The answer is yes, startups can survive without funding. As we’ve already mentioned, there are a number of companies that have been able to do this and go on to be very successful.
What’s more, there are other ways to raise funds for your startup. That’s where bootstrapping comes in.
What is bootstrapping in a startup?
Bootstrapping is the process of starting a company with little to no outside funding.
This can be done by using your own savings, or by finding ways to generate revenue quickly. Bootstrapping can be a difficult process, but it can also be rewarding.
There are several benefits to bootstrapping a startup.
First, it allows you to maintain control of your company. You don’t have to answer to anyone else and you can make decisions based on what you think is best for your business.
Second, bootstrapping helps you learn how to be frugal and efficient with your resources. You need to be able to make every penny count if you want to succeed with limited funds.
Finally, bootstrapping can create a sense of community among entrepreneurs. When everyone is in the same boat, they are more likely to help each other out and share advice and resources.
Startup Bootstrapping Methods
These methods are aimed at minimizing the amount of external debt and equity financing coming from banks and investors. Here are some of them;
a). Owner Financing
Here, you are using some personal funds to finance the company at the early stages before bringing on external investors later down the line when things are looking up financially.
b). Barter System
The barter system is an old way of trading goods and services without the use of money. It usually involves trading goods or services directly between two people, without the involvement of a third party such as a bank or merchant.
A barter system can be used as a method of bootstrapping, which is when a business uses its own resources to get started. This can be done by exchanging goods and services with other businesses in the community. This can help to build relationships and create opportunities for networking.
For example, if you are a web developer, you can offer to develop other businesses’ websites in exchange for goods/services.
c). Friend and Family Financing
This is common among startups as it is a low-cost way to raise capital. However, before you go this route make sure that your family and friends understand the risks involved as they may not have sufficient investment experience as professional investors do.
Crowdfunding has become a popular way to raise money for a variety of projects, from new businesses to creative endeavors.
But what is crowdfunding, and how can it be used to bootstrap a business?
Crowdfunding is a way of raising money from many people, typically through the internet.
People who are interested in funding a project or venture can donate small amounts of money, usually through a web portal designed specifically for crowdfunding.
In exchange for their donation, donors may receive perks or rewards depending on the campaign.
There are many different types of crowdfunding portals (such as Kickstarter, Indiegogo, and Wefunder), but all share the common goal of connecting people who want to fund something with people who need funding.
And crowdfunding can be used to raise money for just about anything, but it’s particularly popular among entrepreneurs and small businesses who need start-up capital.
e). Sweat Equity
Sweat equity is another one of the methods bootstrappers can use to get their businesses off the ground.
This is when the founder or founders invests time and energy into the business rather than money. This often means working long hours for little or no pay.
While it can be difficult to get started this way, there are a few benefits to using sweat equity as a bootstrapping method.
For one, it is a great way to build credibility and relationships with potential customers and investors. It can also help you learn more about your business and how to run it effectively.
And finally, it can be a great way to save money on start-up costs.
f). Government Grants
There are many government agencies that offer grants to entrepreneurs and small businesses as part of their economic development initiatives.
g). Revenue/Sales Financing
Here, you receive financing based on the revenue or sales generated by your business e.g a percentage of each sale made is given out in cash until the loan amount has been repaid in full plus interest charges.
h). Inventory Minimization
Another common bootstrapping method is inventory minimization, which can help reduce costs and free up cash flow.
Inventory minimization involves reducing the amount of inventory that a company holds at any given time. This can be done by streamlining the production process, ordering only what is needed, and eliminating waste.
It can also involve close collaboration with suppliers to ensure that the correct parts are delivered on time and in the right quantities.
There are a number of benefits to inventory minimization. First, it can help reduce costs by eliminating waste and excess stock. Second, it can free up cash flow that can be used to invest in other areas of the business. Finally, it can help improve customer satisfaction by ensuring that products are available when they are needed.
i). Operating Costs
Another common way to bootstrap a new business is by keeping operating costs low. This can be done by minimizing expenses and being resourceful with how you use your resources.
For example, rather than leasing office space, you might work from home or rent a shared office space.
You can also save money on marketing and advertising by utilizing free online tools and social media platforms.
What’s Needed to Bootstrap a Startup?
To bootstrap a company, an entrepreneur will need to have a clear business plan, focus on profits, and the ability to execute their vision.
They will also need to be able to build a team of passionate individuals who are committed to helping the company succeed.
a). Execute on Big Idea
The first step to bootstrapping a company is having a big idea. This could be something as simple as opening a new restaurant or creating a new product.
The key is to have an entrepreneurial vision that can be executed upon. Once the entrepreneur has their big idea, they need to focus on making it happen. This means putting in the hard work and dedicating themselves to seeing their vision through.
b). Focus on Profits
Another one of the most important aspects of bootstrapping a company is focusing on profits. This means that the entrepreneur needs to be laser-focused on generating revenue and making sure that their expenses are covered.
In order to do this, the entrepreneur will need to have a clear understanding of their business model and how they can make money.
They should also keep a close eye on their burn rate, which is the amount of money they are spending each month relative to their income.
c). Build a Passionate Team
Another key element of bootstrapping a company is building a passionate team. This team should be composed of individuals who share the same vision as the entrepreneur and who are committed to helping the company succeed.
The team should also be able to work together harmoniously in order to achieve common goals.
d). Focus on Execution
The final step to bootstrapping a company is focusing on execution. This means that the entrepreneur needs to have a clear plan for how they are going to execute their vision.
They should also be prepared to put in the hard work necessary to make their dream a reality.
Types Of Companies Suitable For Bootstrapping
There are a few types of companies that are particularly well-suited for bootstrapping:
- Startups with a simple product or service. Bootstrapping allows startups to focus on their core product without having to worry about fundraising or investor demands.
- Companies with a loyal customer base. Bootstrapping can help these businesses generate cash flow and grow organically, without giving up equity or control to outsiders.
- Businesses with low overhead costs. Bootstrapping is ideal for companies that don’t need to invest in expensive office space or inventory.
- Companies with a scalable business model. Bootstrapping can help businesses grow at their own pace, without the pressure of meeting investor milestones.
Disadvantages of Bootstrapping
While bootstrapping may be a viable option for many new businesses, there are also some disadvantages to consider:
a). Cash flow issues
Since bootstrapping generally means that a business is self-funded, it can be difficult to keep up with cash flow issues. This can make it challenging to cover unexpected expenses or take advantage of new opportunities as they arise.
b). Limited resources
Bootstrapped businesses often have limited resources, which can make it difficult to scale or grow the business. This can be a particular issue if the business is successful and needs to expand quickly in order to meet customer demand.
c). Equity issues among multiple founders
If there are multiple founders involved in a bootstrapped business, it can be difficult to fairly distribute equity among them. This is because each founder is likely to have invested different amounts of time and money into the business.
d). Risk of failure can be high
Since bootstrapped businesses are typically self-funded, the risk of failure can be high. This is because there is often no safety net in place if the business does not succeed.
Is Bootstrapping Worth it?
Bootstrapping is only worth it if you are confident in your ability to start and grow your business without outside assistance.
If you need help getting started, or if you don’t have the time or resources to do everything on your own, then bootstrapping may not be the best option for you.