Bootstrapping is Plan A for all young businesses, whether they realize it or not. All startups inevitably use at least one of these 5 bootstrapping strategies, and successful businesses use at least 4:
- Choose a low cash burn business
- Turn personal resources into business resources
- Minimize cash expenses
- Improve cash flow
- Reinvest profits back into the business.
Here’s a quick look at how and when these 5 bootstrapping strategies help young companies launch and grow.
1. Choose A Low Cash Burn Business
Entrepreneurs like to make new things happen. Instinctively many are drawn to a particular business because they can instantly see: “I can do this!”
Consciously or not, the act of choosing a business that doesn’t require a lot of cash to launch or grow is step one for many bootstrapped businesses. The data shows that the vast majority of businesses get started with $10,000 or less. It often doesn’t take a lot of money to start making money!
Of course, plenty of entrepreneurs and wannabe entrepreneurs don’t start here. They come up with big ideas that eventually will require significant cash to become a reality. They aren’t choosing a low cash burn business.
But the next three bootstrapping strategies can dramatically increase the chance that investor cash will someday be available. And the final strategy gets used from the day you turn profitable until the day you’re running a “cash cow.”
2. Turn Personal Resources Into Business Resources
The most common perception of bootstrapping is that it’s all about investing your own cash into your new business. And while virtually all founders put in at least a small amount of cash into their venture, pretty much all young companies also turn founders’ resources *broadly defined* into assets for their business.
Think for a moment about all that you’ve learned so far in life, all the contacts you’ve made, the skills you’ve developed, the things you own, the networks you’re a part of. Many of these can be used to some extent in your young business. And using them means you don’t have to go out and buy them for your company. That’s bootstrapping!
Maybe even more important, a fundamental part of entrepreneurship is developing the instinct to look hard at currently available resources first when you need to solve a business problem. It’s a mental habit you should develop fully.
There are thousands of stories about clever entrepreneurs who figured out how to creatively combine available resources to overcome challenges until customer cash started flowing. Necessity is the mother of invention. And invention can lead to innovation that can foster competitive advantage.
And that’s one of the reasons we say that all entrepreneurs are bootstrappers to some extent. It’s just that the celebrated bootrappers are able to turn those personal resources into all the business resources their company will ever need!
3. Minimize Cash Expenses
How many companies start operating out of their garage, or basement, or dorm room, or spare bedroom? Lots! That’s because office space is an unnecessary cash expense in the very earliest stage of starting a company.
Frugality is a core bootstrapping strategy. Don’t spend precious cash on anything unless you absolutely have to.
This bootstrapping strategy is pretty close to universal for all young companies. It’s a discipline that becomes part of company culture for some firms, even when they are large and successful – like Walmart!
And even companies with substantial funding would do well to remember that resources are not infinite. If you can get in the habit of spending wisely, you will have more runway – more time to make progress before you need to raise more equity funding.
Not to mention that wise spending leads to higher profitability and lower cost of customer acquisition, just to mention two key metrics that investors track closely.
4. Improve Cash Flow
Money flows in two directions for all companies: in from customers, out for expenses.
First time entrepreneurs often don’t understand that the timing of those cash flows is absolutely critical.
You can’t pay a bill today with customer cash coming in next week.
Bootstrapping entrepreneurs do a lot to improve cash flow in both directions. They get customers to pay in advance. They deliver their first product or service faster. They choose vendors based on payment terms more than price. They keep inventory low.
Strategies to improve cash flow remain important forever. In very large companies, optimal cash flow leads to “capital efficiency” which creates high “return on capital employed.” Public company investors like capital efficient businesses. It’s good to start young!
5. Reinvest Profits Back In The Business
All successful businesses eventually start generating profits, according to accounting rules. And they all achieve positive cash flow – more cash is flowing in from customers every month than is flowing out for expenses.
At that point business owners have a choice: do they start giving out dividends or pay themselves a higher owner draw, or do they reinvest that extra cash back in the business?
A company that is 100% bootstrapping – no debt or equity from Other People’s Money – will often choose to reinvest for future growth. In fact, according to a major survey by the Federal Reserve Bank, reinvested operating cash flow is the #1 source of funding for most small businesses.
Even companies that take on investors or loans often reinvest profits to further accelerate growth. Retained earnings, as accountants call it, is the cheapest source of funding.
Use These Bootstrapping Strategies Early and Often
Now that you know bootstrapping strategies can last the life of your business, what are you waiting for? It’s never too early or too late to learn and build habits that will lead to your success!