Most young entrepreneurs assume that funds is the most important resource they need to start their ventures. Whilst funding is an important element in the overall scheme of business operation, we sometimes over emphasise its necessity, especially at the beginning of our ventures. The overemphasis made can make an aspiring entrepreneur give up even before he starts what might, otherwise, turn out to be a viable venture. Or, it may make a start-up entrepreneur loose sight of several things he could do to reduce the actual quantum of funds he really requires to stabilise his venture. It also has the possibility of making him loose sight of others things he could do now to make getting funds later a lot easier. I have started a lot of businesses and I can say it. In some cases, I have actually faltered because I had more funds than I needed. I am sure there are several others like me, who are yet to confess to that!
What is bootstrapping? Bootstrapping is the ‘art’ of starting your venture with little, certainly insufficient funding, and stabilising it by your dint of handwork and creativity. The initial survival stage is the most critical in the life of a venture and the young entrepreneur. You must first survive before you could start discussing plans for growth. So how do you start your venture with minimal funding, and without funds from investors and creditors, to pass the survival stage? A word of caution though, some businesses can definitely not be ‘bootstrapped’ through survival and into first stage growth. Nonetheless, all businesses, no matter their size, can always do better, by operating on less resources to yield the same or even better results. It is called efficiency.
The advantages of bootstrapping are numerous. It brings out the best in you as an entrepreneur. If you can survive it, you will go a long way. Other than the creativity it enhances and the resilience it develops in you, it also frees you from creditors and investors at a critical time when you can do well without pressures from them. Furthermore, if you are able to bootstrap your way to growth, you would have increased your equity significantly that if you subsequently decide to get investors, it will be both easier for, and more valuable to you. What you need is the resolve, determination, creativity and focus.The creativity and the resilience you learn early enough will come to your good stead in the future.
How do you bootstrap your venture?
The objectives of any entrepreneur that needs to bootstrap his business to survive and grow should be clear, and as follows:
a) Minimise expenses,
b) Defer any expense or investment that can be deferred without losing the operational capability of the business to deliver,
c) Slow down cash outflow without loosing credibility, and hasten up cash inflow,
d) Maximize profitability without compromising the other three requirements mentioned above.
How does the entrepreneur and his team achieve all of the above?
First principles: For all things important, we must start with a clear intent and understanding of what we want to achieve. It must be clear to you that you are cash tight and must avoid all unnecessary expenditure and also minimise all those that are necessary. Seek to gain maximum value in everything you pay for. You must have a clear focus. If you are already starting with a team of colluagues, you must explain to them what you need to achieve at this initial stage, and ensure you get their understanding, buy-in and support. You can not afford to work with others who will undermine your own frugal efforts. At this stage, over and above most other requirements, you must have colleagues with entrepreneurial minds as well.
Think big but start small: Plan as big as you think your venture can be, but start small. This is time-tested approach that will help you understand the nuances of your business at a stage when errors can be more easily amended and unwanted consequences may not be very dire. Most errors that inexperienced entrepreneurs make arises from attempts to start big or try to grow faster than their available resources can support. This is a recipe for disaster. This an area where a mentor can help and encourage you to apply the brakes. Understand that most of the large corporations you see today did not just spring up overnight. In the few cases where they literally do, they are backed by experienced investors and managers who have handled other businesses almost as big. And most importantly, they either have or can pool the resources they require. You don’t!
You should see starting up small as a strategy, and not a weakness.
Establish what you really need: The next thing you should do is to establish what you operationally and financially need. This is already part of your business plan. Now you go through the details and see if you could reduce and/or defer certain expenses and investments. What happens is that when we are starting a business, sometimes we tend to over blow our requirements. For instance, you may include one computer each for three staff as part of your plan, when in reality you could start by providing just one computer, which each of the three staff could use only when they need to. You may also want to buy new furniture when you could start with used ones for less than a third of the price.
Let me tell you Ross Perot’s story. When he left IBM, he started EDS in 1962 with about $4,000.00, inclusive of $1,000.00 loan from his wife. The money was apparently not sufficient. Mr. Perot and his partners cut out on all the ‘fat’ they could. They still couldn’t afford a door to the rest room in the office, so they just put a curtain instead! Twenty years later in 1984, Ross Perot sold controlling shares of EDS to GM for $2.4billion (yes that is right, 2.4 billion US Dollars). Cut out all the fat.
Do not underestimate any savings to be made: You should not underestimate any savings that can be made by taking other alternative options to a specific expenditure. As the saying goes, if you take care of the pennies, the pounds will take care of themselves. You should also always ask for discounts. It is surprising how most people do not negotiate as often as they could. Even companies selling ‘marked’ items can negotiate and make discounts. Always try it and you will be pleasantly surprised how you will get discounts more often than you expect. The more you do this, the more you will get used to extracting more value on all your expenses and investments, and the more you will really enjoy it.
Understand the real value of your expenses and investments: Startup entrepreneurs frequently make mistakes about the real value of investments and expenses they want to make or incur. Understand that when you start your business, the whole world ( and here I mean all those you have business with) appreciates that you are just starting, and will understand certain compromises you make (not in delivering your product/service but in the methodology of delivering the service). Who really cares, for instance, if you buy fairly used motorbikes for your despatch riders to deliver the pizza as against new ones costing four times as much? What is key is that the motorbikes should be in excellent working condition; the despatch riders should be clean; and they should deliver the pizza hot and on time.
If you get carried away by the ‘impression’ you want to create, you will loose that sympathy and at the same time suffer the tight cash situation you have created for yourself. Be realistic and take your time. You will be able to easily afford the new motorbikes later.
Question all requests for expenditure: You must question each and every request for expenditure. All possible alternative options must be considered for each and every request. Consider alternatives to outright acquisitions such hire purchase and leases. If the cash-flow and profitability benefits add up, go for the leases as against outright purchases.Consider different modes of payment. Can you, for instance, batter?
Enjoy credits: As a bootstrapped entrepreneur, your creativity must know no bounds. Wherever and whenever you can enjoy credit from suppliers and service providers, seize the opportunity. But ensure that you are able to meet the payment terms you agreed with them. Your credibility must be protected at all times. Pay your creditors when you agreed to. You must also minimise the cost of any credit you enjoy. For instance if you are required to pay interest after a certain date, try and avoid making the interest payment by settling the invoice before the term crystallises. No matter what though, earn and keep the trust of your creditors. This is a topic so important that I will discuss it in more detail shortly.
Start with paying customers: Sometimes you can get paid by customers in advance for your goods and services. This is the best option possible and you should explore it. After this class of customers, focus on those that pay you cash (as in against invoice). If possible, avoid customers that need credit extension. If you have to grant credit, ensure you check the capability and character of the beneficiary. Losses arising from bad debts is one easy way a start-up entrepreneur could loose his shirt.
You have to strike a delicate balance between your cash-flow and your profitability. You must be profitable to grow your way out of the situation, and at the same time, your cash-flow must be positive to ensure your survival.
Keep records: Only by keeping proper records will you be able to know how well or poorly you are doing. You must keep out your personal expenses from business accounts. Keeping cash flow projections will also enable you plan and match your inflows with your outflows. Understand that cash is the blood of any business and profits realised will increase the volume and flow of your cash.
At the end of the day, I hope you are able to see bootstrapping as an interesting challenge and a phase in your entrepreneurial life. You should also see it as a training phase that will pass. Even after successfully passing through it though, you must keep the good values you have learnt from it. Recessions and depressions will come, and you will need all the tricks of the trade to survive and even prosper through them.
The next write up will be on focus.
