Why you should bootstrap your start-up
Adam Baker on the benefits of self-funding your start-up, and why there’s never been a better time to bootstrap
Unless you're a developer and can build your first website, or a service provider such as a consultant with virtually no cost of sale, it's likely you will need some capital to start a new business. But not as much as you think.
I started my first company in 1999 with a small amount of redundancy money. In fact, I'll tell you exactly how much I started up with: £9,000. I spent £4,500 on the first version of my website, set aside £2,000 for marketing and £2,500 for working capital (or, more accurately, to cover my bills for the first few months).
I knew I had three months to start generating revenue or I would be looking to enter the rat race again, working for someone else.
In 1999, social media didn't exist. Reaching an audience almost invariably cost money. Google didn't introduce AdWords (take a look at the Startups guide to pay-per-click advertising) until 2000, so reaching a consumer market without spending a lot of money was hugely challenging, while the return on your marketing spend was almost impossible to measure.
I was forced to get out and network. I kept a count of my networking time as I was sure I would look back on it someday and reflect on how time consuming it was. During the first three months of my business, I spent 396 hours networking, of which I kept most to evenings and weekends so my days were free to drive user engagement and revenue.
Two years later, my business employed 19 staff, with revenues of £2m. I was the sole founder and owned almost all of it.
I suppose the picture I'm trying to paint is that it was hard starting a business, and it still is. Seven out of every 10 start-ups fail – not a great statistic to promote entrepreneurship, but a fact nevertheless.
The start-ups that survive and flourish do so because the founders and management teams work tirelessly, with a real purpose and unflinching tenacity, not because they have money.
Bootstrapping your business
I'm only 37 but I didn't get my first mobile until I was 19, or my first PC with dial-up web access until I was 22. “Social media” didn't emerge until around 2006, by which time I was 32. How quickly technology has evolved and fundamentally changed our lives, our social habits and our behaviour.
Today, the socially networked world we live in removes so many barriers to entry for people with business ideas. You don't have to be web-savvy or even have a web business to benefit from the enormous power of the web. It has made starting and bootstrapping a business so much easier.
My latest venture, Blottr, has grown from scratch to 2.5 million users a month, in 15 months. Our latest management accounts show we spent £6,500 on marketing in 2011. All of that was dedicated to Google AdWords. The real investment we have made has gone into people.
If you're thinking of starting a business, or have a new business, ask yourselves these questions:
1. How are you fully utilising social media to build your audience and/or customer base? 2. Do you know precisely what return you're getting across all marketing activity? 3. What more can you do? Do you really need to hire people? After all, you know your business better than anyone. 4. Do you network less than five hours a week? 5. Are you identifying and focusing on the quickest or biggest wins?
I positively encourage founders to bootstrap (self-finance) their business past proof of principle. I would not invest in a company where the founders had not put their own money in and spent months proving the concept. Would you?
Many start-ups fail because they are not focusing on the right areas. Establish a set of goals and define metrics for success against each goal. Then identify where your effort and time is best spent to deliver the quickest wins, not the biggest. The bigger the gain, the longer the cycle. Small, quick wins boost confidence, generate revenue, enable early feedback and help you to reach proof of concept.
If you need money, use your own, or family money, or the bank's. Obviously if you have your own money, it's best to use this as it's uncomplicated and you retain full equity in your business. As I mentioned above, it also shows a deep commitment for future investors too.
If you need to borrow family money, approach it carefully. From talking with people that have taken family money, the best option is to structure it as shares, not a loan. If it's bank lending, the bank will want security, most likely a debenture over your property. Be very sure you know what you're agreeing to before you sign.
It's 2012, the technology era: a time when bootstrapping a business and reaching revenues or a proof of concept doesn't have to be expensive. But it will involve a ridiculous amount of your time and hard work.
But if you're not prepared for that, then you probably won't have read this far.