Introduction to Bootstrapping
No startup can survive without any form of funding. You need money to pay your employees, to pay for hosting or for equipment, and to pay for all that coffee you’re mainlining.
For most startups, funding can come in one of two forms: Fundraising and bootstrapping. Although Singapore is renowned for its fundraising scene throughout Southeast Asia, neither VC nor bootstrapping is a guaranteed path to success. That said, one path can be a better fit depending on your growth plans, and leadership style.
Tossing up which option to go for? This guide introduces you to some factors to consider while deciding whether to pursue external investment or go your own way when building your business in Singapore.
What is Bootstrapping
Bootstrapping refers to when an entrepreneur uses his or her own savings to get their company off the ground, without little to no help from institutional or VC investors. Bootstrapping can be as simple as getting money from your own pocket to loans from your parents.
Bootstrapping is common in the initial phases (eg in the ideation or prototyping phase, or pre-product/market fit) because the operating costs are slim. As you grow, bootstrapping becomes riskier as you’re likely to face more expenditures. This also includes a number of unexpected expenses like having to allot more money for a bigger office or adding more people to the team to meet deadlines.
Before we discuss whether bootstrapping is right for your company, let’s cover the different pros and cons of the practice.
Pros of Bootstrapping
1. You own your startup and direction (at least during the starting phase)
When you bootstrap, you (and your cofounders) are in control of the management and direction of your startup. When you get outside investors, this means also letting in other ideas and interests that may not align with your own growth plans. While they may be “on board” in the beginning, you may encounter differences as you consider market entry, pricing, or other vital elements of your business. During the early phase of the startup, having multiple voices can cloud your direction and may stunt the growth of the company.
2. Helps you focus
Entrepreneur and Y-Combinator founder Paul Graham says, “Raising money is terribly distracting. You’re lucky if your productivity is a third of what it was before. And it can last for months.”
Fundraising can often eat into the time of you as an entrepreneur while you line up meetings, go back and forth, and do due diligence for your potential investors. This is time and energy that isn’t being directly funneled into the business and may create bottlenecks internally.
With no weekly investor catch-up meetings or meet-ups with prospective funding sources, you can focus on your startup. This helps you and your team focus on your company’s core offering.
In addition, the lack of resources – from your advertising budget to your product roadmap – forces you to pay attention to your customers and their needs, and prioritise building a product or service that fixes their pain points.
3. Customers = Survival
When you bootstrap, you are almost always on survival mode. You know that the only way to survive another month is to bring in revenue. Often this results in bootstrapped businesses really taking care of their biggest investors – the customers.
All startups aim to get customers, help them out, and make a profit. But when your survival solely rests upon making sure customers are happy, you’ll go the extra mile to make sure that they do. Bootstrapping is an attitude that can also serve you when it comes to customer loyalty, by doubling down on customer service and ensuring the company has customer-centric campaigns to acquire and retain loyal customers.
4. Helps you innovate
“Necessity is the mother of invention” applies here. Scrappy startups who choose to finance themselves have creative freedom without the (sometimes stifling) accountability to an outsider who is looking to protect their investment. It also means that you can spend your time on ‘little bets’ that can test the assumptions of your market and customers, and then scale the ones that work.
Cons of Bootstrapping
1. Forces you to make money right away
Bootstrapping means draining your savings (and probably loaned money from your family and friends). Because of this, you are forced to make money soon in order to pay off the loans and to get your savings to account back in order.
While it really depends from startup to startup, this often means having to hasten the release of your product or cutting corners in order to become ramen profitable. You may ship a product that isn’t ready and provide a disappointing customer experience, or you may not be able to afford to ‘do things right’ – cutting corners or acquiring technical debt that takes time and money to untangle at a later stage.
2. Can hinder growth
Bootstrapping means that there’s no pool full of cash to use for growth and development. You may put off hiring another person because you can’t afford it. Or worse – you may hire cheap talent and then potentially pay for their mistakes.
This is particularly the case if you have a technology-based product/service – dealing with the aftermath of a poor dev hire can mean paying more to fix their mistakes, slowing the product roadmap and losing ground to competitors.
3. Lack of networks & credibility
Often it’s not what you know, but who you know. When you have outside investors, you gain their connections with the benefit of a ‘warm’ intro (ie implied validation via the investor). VCs and angel investors can put you in the room with the right people, giving you the opportunity to create valuable partnerships, open up markets, and give you an increased profile.
If you bootstrap, you are limited to connecting to the people you already know and a few other people outside that circle. It means a lot more hustling, without the ‘halo effect’ that having an investor buy-in can give you. Bootstrapping may indicate that no one wanted to back you – perhaps due to a lack of business experience.
Factors to consider with bootstrapping
Deciding whether you get accept outside investments or bootstrapping can be confusing. To help you out, here are a few questions you can ask yourself before making the big decision.
- How much do I need? – Create a sound projection of how much you need for the startup and factor in expenditures for growth and development.
- How much control of the company do I want? – Not all startup founders are CEO-type individuals so ask yourself whether you really want to be fully in control of your startup. Understanding the principle of dilution is important before deciding. Are you fine with owning a smaller stake of your company or would you want to minimize dilution? Just don’t forget that the future of the business is at stake and it should be your #1 priority.
- How fast do I expect to grow? – Does your industry only give you a small window of opportunity or is it a safe space for slow, organic growth? The speed at which you expect your startup to grow should give you a good idea of whether you bootstrap or not. Faster means more funding while going slow can rely on profits generated during operations.
Some tips if you choose bootstrapping
Decided to stuff the investors and go your own way (for now)? We leave you with some parting tips:
- Stay disciplined at all times and be valiant with getting feedback from your customers. You don’t have a wide margin of error compared to startups with a cushion from outside investors. One small mistake or unnecessary build can cost you a lot in terms of the runway.
- Take free advice and don’t be shy about it. A lot of startup founders like you out there are giving free advice based on their experience. While it’s not healthy to blindly follow them, find the ones with similar industry, product, or attitude and reflect on how you can learn from their stories.
- Try to develop more skills when you have the time. For example, you can learn basic and intermediate coding to help out with troubleshooting. Taking courses on other disciplines related to business (eg UX or sales and marketing) can also be helpful.
- Stay away from debt - Bootstrapping does not mean maxing your credit cards just to get the business going. Of course, you can use your credit card every now and then to cover small expenses but it should not be your main source of funding. Streamline your expenses and eliminate unnecessary spending when you can.
- Create a budget and stick with it even when money starts coming in. Try to stick with a budget that works and adjust accordingly when the business grows.
