Imagine you have an idea for a new start-up. You’ve done your research and feel confident your concept is original and that the consumer base is untapped. Armed with optimism, you might be tempted to try to jumpstart your venture with investors’ money rather than risk your own funds—which may be limited. However, a far superior option exists: bootstrapping.
Bootstrapping means starting a business without significant external assistance or capital. Having successfully bootstrapped five companies of my own, I can tell you that not only is it one of the most effective and inexpensive ways to build your company; it also allows you to retain more control over your business. For many entrepreneurs, going after venture capital (VC) money is not as attractive as it used to be. Indeed, one of the biggest lessons to learn is that taking investors’ money before building your company’s foundation is a mistake.
Why? Investment money can be tempting, but it can also be a mirage. Investors—be they angels, VCs, banks, hedge funds, institutional investors or any other entity with professional capital to invest—aren’t looking to help out a small business person or budding entrepreneur; they are looking for the Next Big Thing, the next “Unicorn.” You might have what it takes to offer a disruptive technology that makes you rich and famous—but taking on investors to find that out for certain is misguided.
For one thing, potential investors become highly critical and disinterested if your company has not yet sold much of anything to anyone. If you spend your time pitching new business to VCs, understand that it is not the same as trying to sell a product or service; you are trying to raise capital for shares of an idea or concept. The truth about seeking opinions from professional investors is that raising money may actually guarantee failure rather than success.
To see why, note that angel groups and VC firms expect a ratio return on their investment of between 10:1 and 20:1 over several very short years. If you raise half a million dollars, your company better be worth at least $5M in about two years. Your investors expect you to spend money so fast that you’ll need to raise more money in your second round, and even more in your third. If you intend to solicit funding from so-called angels, you better be sure your company is on track to be worth half a billion dollars.
Why do VCs need a 20:1 return? Because out of every 20 companies a VC invests in, with luck one may be successful. The others will either be shut down when they run out of cash or become “zombie” companies—not bad enough to shut down, but not salable. Further, the money-raising process can take six months; your business will be entirely on hold during that time; and if you fail to get funded, you’ve lost that half-year. Conversely, if you are funded, you are now an employee, answering to someone else; if you disagree with their plans, you could be outvoted; and if you mess up, you may be fired.
For reasons like these, it becomes much easier to understand the appeal of bootstrapping as a way of building a business. Your time is better spent in the market, talking to customers, and getting pre-orders or other commitments from them, that could be used to grow the company. If you can solve a pain a potential customer has, try to turn that into a revenue-generating deal. In the end, it’s a better deal for you and your growing company.
Marty Schultz is the author of No Investors? No Problem: A Serial Bootstrapper’s Playbook for Breakthrough Success on a Shoestring Budget (2019). He is the President and Co-Founder of Objective Ed, an organization providing students with disabilities with educational games to achieve the best educational outcomes, and the CEO and Founder of Blindfold Games, now a division of Objective Ed. He has also served as CEO/Founder of McGruff SafeGuard; President/Co-Founder of eSped.com; President/Founder of Omtool; and CEO/Founder of Softbol.
Kizzi Nkwocha is the editor of Business Game Changer Magazine and publisher of The UK Newspaper, Money and Finance Magazine, the net’s fastest growing wealth creation publication. Kizzi Nkwocha is chair of The Ethical Publishers Association and co-chair of The Logistics Association. Kizzi made his mark in the UK as a publicist, journalist and social media pioneer. As a widely respected and successful media consultant he has represented a diverse range of clients including the King of Uganda, and Amnesty International. Nkwocha has also become a well-known personality on both radio and television. He has been the focus of a Channel 4 documentary on publicity and has hosted his own talk show, London Line, on Sky TV. He has also produced and presented both radio and TV shows in Cyprus and Spain.