‘Bootstrapping’ is a term used to describe the fact that the startup is being funded by the founders themselves and no outside investment has been taken. Initially, only the founders believe in a startup’s potential. Thus only they fund the startup. Very rarely do external investors invest in a startup at the initial stage.
External funding in the initial stages generally happens when the founders have high credentials. External investors generally invest only after the problem solution fit has been established. External investors want clarity of the problem, the solution proposed and some idea of the potential to scale before investing.
Thus in the initial period bootstrapping is more of a compulsion than an option. It has both advantages and disadvantages. The advantages are the following:
- Bootstrapping allows founders to experiment on their own terms without any poking from investors.
- Bootstrapping allows founders to retain ownership in the startup. The later founders raise money the better it is in terms of their long-term shareholding.
- Bootstrapping also allows founders to postpone incorporation as a company longer. Investors generally want company incorporation before investing. Generally, that involves cost and paperwork which should be avoided till there is clarity on the problem and proposed solution.
- Bootstrapping also allows the startup to be in stealth mode for longer.
The following are disadvantages of bootstrapping:
- Many potential employees look forward to validation from reputed external investors before joining a startup. Generally, employees from corporates do not want to join a bootstrapped startup.
- Many vendors do not want to work with bootstrapped startups thinking that the startup can close down anytime. They prefer startups that have been funded by reputed investors.
- External funding provides a valuation to the company for pricing its equity. This is helpful for using ESOPs as a recruitment tool.
I personally feel that startups should not raise money till they have clarity on the problem being solved, the solution being created and some idea of the scaling potential. This allows for getting better valuations from investors and also saves entrepreneurs from feeling frustrated due to investor rejections. Frustration due to investor rejections is a big cause of startup closure. Many investors will still reject funding a startup after problem solution fit but at least the probability of funding will be more and also the founders would be more confident in their startup’s potential.
Another question related to bootstrapping is at what time one or more founders should join a startup full time? According to me the founders should join a startup full time when they feel a need to do so and they can afford it.
Generally speaking, founders should start the bootstrapping phase part-time. After some time when they get some clarity on the problem to focus on and a solution to prototype they may explore joining the startup full time.
Before joining full-time founders should explore the following points:
- The founders should start loving the problem and feel that the solution is executable. It is preferable if one or more founders feel at ease in the domain of the problem due to their prior experience.
- The founders should analyze if their involvement is required full time to develop the product.
- If the startup has achieved problem solution fit or is close to achieving it then it can start pitching to investors. Investors generally want the founders to be working full time in the startup and thus at that time the founders should shift full time to the startup.
- The most important decision point should be the availability of money to sustain the start and the families of the founders. Generally, the startup founders should have at least 12 months of money to run the startup since it may take time to create a minimum viable product (MVP) and also raise funding from angel investors. If the startup has money for 24 months it is generally better as product development sometimes takes longer in the case of some products.
Thus only when the founders feel that joining the startup full time is required for starting full-fledged product development and they are sure that this is the right problem to solve and solution to make they should join full time. Also, they should have enough money to sustain the startup full time. If money is an issue the startup founders should continue to work part-time or at least try to do some parallel revenue generation activity (but not very time consuming) till they can raise funding.
Thus we see that bootstrapping is an essential part of a startup’s journey and should be planned properly to avoid the fate of premature closure of the startup.
3 Steps To Startup Success