Many people dream of having a great idea that attracts funding from investors and rapidly creates or dominates an industry. Reports of such success feed our expectations, but in reality this scenario is rare. Most companies grow step-by-step and evolve into their market, funded by loans, personal risks, and their own cash flow.
The differences between these approaches are two: time, and ownership. Investors enable large scale development, saturation of distribution channels, aggressive marketing penetration, and flexible pricing. Their capital transforms your company into a real player real quick. If used wisely, it can establish your pre-eminence and lock others out of your market. For those benefits, you give up significant ownership early. Seeking capital also forces you to clarify your assumptions and justify your projections. Investors want realistic foundations for your claims of vast returns. For most entrepreneurs, this is an iterative process of presentation of an evolving concept, serial rejection, and adaptation. The ideas that survive this funding filter are more viable and better focused, but they are few in number. Many innovators become discouraged and drop out along the way.
Going It Alone
Bootstrapping is a more nuanced approach to growing your company. You survive not by your dazzling brilliance, but because of your persistence and effective use of limited resources. Getting started is easy. The purchase of business cards and letterhead creates your identity. The filing of a Partnership Agreement or Articles of Incorporation establishes a legal entity for opening a bank account and qualifying for processing credit cards. A simple government form registers your company as an employer. So far, anyone could do it any number of times. The real trick is the cost of sustaining it.
We started our software company with two partners. Both were experienced business professionals and technically qualified to create innovative software. Both contributed cash to cover incidental operating costs and worked their first year without income. We borrowed nothing and owed nothing if the venture should fail. When our first product was ready for market, we split the cost of the first ad in a national magazine. We became the first customer of a start-up ad agency that gave us beneficial rates. Our first ad generated sufficient cash to fund two more ads, and the flame ignited. No outside cash infusion was required throughout the next 26 years of growth.
Funding Expansion
The cash to grow must come from somewhere, either outside or in. Our partners were willing to reinvest all income toward growth. That means mundane things like office space and salaries as well as marketing, promotion, and sales. After five years of steady growth, we wanted to expand both our product line and our market. So we took on another partner who brought the additional technical skills we required and the business experience strategic to our objectives. All the partners took home only a fraction of what they could be earning if employed by an established corporation. But the revenue from early products was used to cover the operating costs of the new products until they were self sustaining.
Hiring the Best
We frequently receive applications from professionals who respect our expertise and see the vast potential of our market. But they come with a high price tag. We have encountered several that would have made major contributions to our team, but we have chosen not to pay high salaries for potential future benefits. The partners themselves brought a cumulative 60 years of prior business experience. We chose to leverage that by hiring potential talent that we could train and guide. We funded their budgets and let them grow into their responsibilities. This has created close knit working relationships, high employee retention, and strong skill sets. One of them eventually became a partner, too.
Leveraging Loans
Banks require assets as collateral for loans. Software companies have no assets that qualify, so loan opportunities are limited. After several years of consistent growth, we challenged ourselves to think on a grander scale. We projected what the next quarter would produce if we continued our normal operations. Then we established a line of credit with a local bank and borrowed the limit, investing all of it in a major incremental marketing campaign. This can boost profits and speed up growth rate, but we have repeatedly found that steady growth is sustainable while attempts to leapfrog are costly.
Distribution Channel is Critical
Most entrepreneurs overly focus on their product. The real point of vulnerability is your relationship to the distribution channel. The right product and the right quality of product is a necessary, but not sufficient component of success. You must also have direct means of delivering promotional materials and product to your prospective audience. It is difficult for a small company to compete, even if they offer a superior product, in an industry dominated by a large company with sufficient investment capital to lock up the distribution channels. If you are bootstrapping, you have limited resources that must be allocated creatively.
The End Game
When you approach an investor for funding, you will be asked for your end of game plan. After you have spent their capital and achieved your projected growth, how does the investor gain the return? Your growing revenue stream is not their end goal, but only a means of attracting buyout options. When you accept their capital, you agree to a scheme for distribution of the going concern to everyone's benefit. But bootstrapping keeps your options open. Your goal may be to sell out and reap early rewards. But you may also choose to ride the growth curve to even greater rewards. Bootstrapping takes longer, but allows you to enjoy the fruits of your labor at the pace you choose.
So where do you go from here?
Bootstrapping, loans, or outside investor money all require you to have a business plan and marketing strategy to improve your chances for success. Our family of products are designed to assist you in the strategy development process and planning phases of your business.
Startups and existing business can both benefit from better planning.