For many entrepreneurs, the odds of raising venture capital are pretty slim. Bootstrapping is a good way to survive your startup’s early days when capital is low. Here’s how you can do this.
1) Focus on Cash Flow, Not Profitability
In regards to revenue, managing for cash flow means giving up on sales that are profitable but take too long to collect. On the expense side, it means delaying payments for everything you buy (as long as it’s legal and preferably without incurring interest).
Although your company will appear less profitable because of forgone sales, you’ll be building up the actual cash that’s necessary to expand your business.
2) Ship First, Fix Later
One of the trademarks of bootstrapping is to get your product or service to the market right away.
Think like this: Ship, fix, ship, fix, ship, fix, ship . . . rather than fix, fix, fix, then ship.
Although your company image may suffer if there are huge issues with quality, this method will give you immediate cash flow and real-world feedback.
3) Embrace Unproven People
Forget bringing in well-known industry veterans to build a dream team. Instead, bring on inexperienced young people with tons of raw talent and energy.
They may not know everything, but that only empowers them to try anything.
Remember, Bill Gates, Steve Jobs, and Michael Dell didn’t have the standard background to create billion-dollar companies. All were college dropouts.
4) Start as a Service Business
The best reason to start as a service business is because the cash starts flowing immediately.
Suppose you’re building a software company and start creating your product. In the beginning, you provide programming services.
While consulting, you develop a software tool for your client. Over time, you add more clients and continue improving the tool.
Suddenly, you realize that many potential customers can use your tool.
Now you use the fees from your programming services to finish development of the tool, and start selling it independent of your consulting services.
Sales soar, and now you can stop consulting and leverage your time better.
5) Sell Direct
Some startups want to sell their product through a reseller, consultant, or distributor. They think they can benefit from a sales force, brand awareness, and existing customer relationships.
However, this usually backfires.
Most resellers want to fill demand, NOT create it. They don’t want to help to establish a market – they’d rather tap into a proven one.
Three Additional Reasons for NOT Using a Reseller
- A reseller isolates you from your customer. Since your product is new, you need to hear what they like and don’t like as soon as possible, directly from the horse’s mouth.
- Since a reseller takes some of your profit, you’ll need to generate more sales. A large volume of sales is usually difficult for a startup to achieve.
- It takes too long to both set up a distribution system AND get your product through the system and to the customer.
Once you’ve improved your product and established sales, then go ahead and use resellers to expand your efforts.
6) Leverage Against the Leader
Instead of establishing your product from scratch, borrow the existing brand awareness of the competition.
Here are two real-life examples:
- 7-Up – “The Uncola” (borrowing from Coke)
- Avis – “We try harder” (borrowing from Hertz)
To do this, find the best product in your market, and isolate a unique benefit in your own product, such as:
- ease of use
- customer service
By spending millions of dollars and years of effort in establishing its brand, your competition has already done a lot of the work for you – all you need to do is position against it.
7) Stay in Touch with Reality
If you want to be a successful bootstrapper, you need to know where your business stands on several key issues. For instance:
- When will your product or service be ready for the market?
- What are your total, all-inclusive costs of operations?
- When will you run out of money?
- How much of your sales pipeline will actually convert?
- How much of your accounts receivable is collectible?
- What can your competition’s product do that yours can’t?
- Which of your employees are not performing?
- Are you maximizing shareholder value?
- What is your company doing to make meaning and change the world?
- How good are you as the leader?
8) Understaff and Outsource
It’s better to leave some sales on the table because you can’t handle all the business than it is to lay off people because you overestimated revenues.
When you overstaff, not only do you need to go through the difficult task of lowering headcount – you’ll also have to deal with
- excess space locked in a long-term lease
- excess furniture and computers
- fear in the company as people are laid off
- hurt feelings in the lives of the people who are laid off
- hiring different people for the new phase of your business in the midst of letting others go
- trying to convince everyone that your company isn’t going out of business
The short-term solution is to understaff and outsource. You can keep functions such as research and development, marketing, and sales. But payroll can be handled by companies like PayChex and ADP.
Yes, it’ll hurt to leave some sales on the table. But it’s better than laying off your people and running out of money.
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