With a market that seems to overflow with venture capital and hedge fund investors, bootstrapping – starting a business using your own funding – can seem like an outrageous proposition.
Why not take the money, expertise and connections that come with venture capital investments and get off to a roaring start?
Because after that big startup, you find yourself having to report to a group of people more interested in reaping a quick profit than growing your business.
Just ask Natasha and Christopher Ashton, a British couple who arrived in the U.S. in 2003 to attend the University of Pennsylvania’s Wharton School. They could not find a company to provide medical insurance for their beloved cats, so they started one. Their company, PetPlan obtained financing from banking maverick Vernon Hill, and some of his hedge fund cronies. Last year, Hill booted the couple out of the company. Hill and the Ashtons had been at odd over several issues, including providing coverage to older pets.
Bootstrapping, on the other hand, allows entrepreneurs to maintain control of the values and direction of their companies along with the finances.
Some of today’s best-known brands – Spanx, Basecamp and Patagonia – started out with shoe-string budgets and continue to refuse to take capital from outsiders.
What is the secret sauce behind successful bootstrapping?
Here are some ideas for would-be entrepreneurs.
Develop a Budget and Stick to It:
You know how much you are starting out with, whether you are using your savings, taking out a second mortgage or borrowing from friends or family. No matter how tempting it may be to use your credit cards, you will be better off down the road if you stay within your means.
Create a Business Plan:
Although you can go online to create a business plan, volunteer organizations like SCORE, an affiliate of the Small Business Administration, offer mentoring and guidance. Unlike a cookie-cutter business plan you find online, SCORE can help you tailor your plan to your business model.
Keep Your Day Job:
Many entrepreneurs start off in the kitchen and continue to work at their regular jobs while testing and perfecting their products. Sara Blakely, for example, created the original Spanx by cutting off the feet of her pantyhose to feel more comfortable in the Florida heat while she hawked fax machines. She could not anything in the market that met her needs, so she continued to perfect the concept while in the fax business.
Once she was convinced she had a winning product, Blakely invested her lifesavings of $5,000 to develop a prototype, which she tested on friends and family members. Blakely was a one-woman shop, writing her own patent and developing her own marketing plan. Today she owns 100% of one of the most successful companies in the U.S.
Pay off in Equity Rather than Salary:
Offer employees equity in the business rather than market rate salaries. If your employees believe in you and your idea, they will work harder to make all of you successful. Require a reasonable amount of time for them to be vested in the company before the equity kicks in to prevent a revolving door dribbling your shares away. Be prepared to put profits back into the business rather than draw a salary yourself.
Utilize Social Media:
Twelve years ago, Forest Graves was laid off from his job at HP two days before Christmas. Using $600 in savings, Graves and his wife started a coffee roasting business, Jumpin Goat Coffee, in Helen, Georgia. Graves used the equity method mentioned above: he and Debbie enlisted all their family and friends to help with the business. But the key to the company’s success was Graves’ creative use of social media to engage an international audience and create a successful mail order business.
Lease Your Equipment:
If your business requires special equipment to create a product, leasing is a much more economical option. Almost every type of equipment can be leased today, and often there are tax advantages. In addition, whatever equipment you need will likely be obsolete in a year or two, and you can simply swap it out and renegotiate the lease.