With startup capital much harder to find this year (2023), more and more entrepreneurs are having to build their businesses without the help of investment. This is not a new concept, as many great companies like Microsoft, took this approach and still became global businesses. If bootstrapping is the path you’re considering, here are the basic principles you should follow.
Starting Capital
What: Even though you won’t be raising investment capital, you will still need some money to get your business started. These initial costs include corporate registration fees, logo design, website setup, etc., and are usually $3k-$10k in the USA.
Solutions:
Personal Savings — If you’re able to save while you’re working your old job, this is a great way to cover your setup costs. This year, many people are using the payout they received from getting laid off to start their new business.
Grants — You’re probably eligible for numerous government or private grants. Be sure to search for new business grants focused on your current location, hometown, educational background, or work history. As long as the grant doesn’t require you to modify your business in any way, it’s essentially free money.
Credit Cards & Loans — I don’t recommend these options, but they are very common and when I was a founder, this is what we did. None of us were lucky enough to have family wealth, so we started our business using credit card debt, and one co-founder borrowed money from a relative’s retirement savings, promising to pay it back.
Ongoing Costs
What: Your startup’s costs and income will not arrive in a predictable or regular manner, so you will likely need to build up a reasonable cash buffer to cover the business during leaner times. Your cash on hand should cover at least one full month of expenses, ideally three months.
Solutions:
Revenue — If you’re bootstrapping, you will have to start charging customers right away. Even if you don’t have a product, you can still ask for upfront payments before launch or charge consulting fees for custom work.
Part-time Work — When revenue won’t cover all the business’s costs, you may need to use part of your time to generate income from another job. Although it’s better if you can focus exclusively on your company, this approach still allows you to make progress.
Credit Line — For those lucky enough to have a strong, existing relationship with a lender or bank, you might be able to secure a credit line to cover the business temporarily. Unfortunately, business credit lines are both hard to find and often quite expensive. Avoid them if you can.
Staying Lean
What: As your business grows, you will generate more cash and begin to have more flexibility on the business’ operations. While these good times feel great, you will need to stay lean and build your cash reserves for the inevitable tougher times to come.
Solutions:
Minimize Hourly Vendors — If you have to use external contractors for product development, compliance or legal work, then ensure you’re agreeing to pricing based on a project’s success, not paying by the hour. This aligns your incentives with the vendor and prevents costs spiraling.
Wait on New Expenses — It’s always tempting to spend on new resources before generating revenue, but you should take the opposite approach. Instead, wait on expense increases until after you have hit a new revenue goal.
Avoid Big Ticket Items — You may want beautiful office space, expensive hardware and company swag with your logo, but none of that is necessary for your business to survive. Focus on customers now and you will have much more access to these corporate luxuries in the future.
Building a startup is hard, bootstrapping makes it even harder, but it’s not impossible. If bootstrapping is your path, sticking to these principles will give you the best chance of success.
Sterling Road invests in idea stage and pre-seed B2B startups based in the US, Canada and UK.
