How to Think Like a Bootstrapper

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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It may be the high-growth, venture-funded companies that get a lot of press, but the fact of the matter is that the vast majority of businesses are started for under $10,000, usually provided by the entrepreneur’s friends and family, credit cards, or their own pocket.

While it’s true that bootstrapped companies have a slightly higher failure rate than better-funded companies, the difference isn’t significant, and there are lots of bootstrapped businesses that succeed, just as there are many well-funded companies that flop. Good management practices are far more important to your success than big piles of cash are. Here are a dozen tips to help you start and grow your business with little or no capital.

How much will it cost to make your first sale?

This is the most important question before you start. Consider everything: product research and development, operational overhead, marketing, cost of goods, etc. If it all adds up to more money than you have, you’re not bootstrapping. Rethink your model – can you really bootstrap, or do you need a bigger stack of working capital?

Cash flow isn’t the most important thing — it’s the only thing.

For the bootstrapper, cash is like oxygen. When it stops for more than just a brief period, you die. Learn everything you can about accelerating cash flow and apply as much as possible to your business. Focus on cash — not on profits, market share, or anything else. Be super-realistic — even pessimistic — when it comes to revenue projections. You have no margin for error on the back end — you have to build it into your estimates on the front end.

Start with partners, not employees.

Payroll is most companies’ biggest expense. Without a big pile of cash, you can’t afford it, period. Find people who are willing to work for equity, or at least deferred salary, when first starting out. Don’t hire any paid employees until profits allow you to pay them. Of course, this means that you have to have all the core competencies for the company covered in your core team. Find people whose strengths cover your weaknesses.

Develop continuous, passive income, even if that’s not your core business.

Your main business may be big-ticket, one-time sales, or project-based services. These are rollercoaster rides that may be wildly successful, but may also frequently bottom out for extended periods. In your business model, be sure to include an offering that creates steady positive cash flow — subscriptions, consumables, automated product sales of information products, etc. It may seem like a distraction at first, but the first time that rollercoaster bottoms out, you’ll be glad you made the investment.

You’re not in the business of lending money.

So don’t. If a customer says they have cash flow issues themselves, that’s what credit cards are for. If payment plans are common in your market, find a financing company to partner with and let them handle it. Get payment — even partial — up front whenever possible. Require a deposit that at least covers your hard cost of the sale. Don’t make excuses — just make it your policy and be clear about it up front.

Use credit for cash, not capital.

It’s perfectly sensible to borrow money to manage short-term gaps in cash flow, such as using vendor credit to delay payment until you can receive payment from your customers, or paying for something that will quickly generate profits that exceed the interest, such as a marketing campaign. What you don’t want to do is borrow money to gamble with. You wouldn’t (or shouldn’t) put a cash advance on your credit card to gamble in Vegas…don’t do the same in your business. You may very well have to personally guarantee those loans, and that’s how entrepreneurs end up in personal bankruptcy, not just closing the business and moving on.

Do without it until you can no longer do without it.

Postpone any and every purchase as long as you possibly can. Share office space, supplies, equipment, etc. The longer you can wait to make the purchase, the more time you have to discover the best deal, or to clarify your needs and find which product or service is best suited to them. Also, particularly with technology purchases, prices tend to go down, not up. This also may mean doing things like having a founder’s spouse keep the books and using free contract templates instead of hiring accountants and lawyers at first. Sure, it has risks, but so does spending available cash on those services rather than on things that will generate revenue.

Don’t try to beat the big boys at their own game.

Large companies have access to capital, massive distribution channels, widespread brand recognition, and established customer relationships. They also have baggage — bureaucracy, formalized risk management, overhead, massive investments in their current business model and brand. Forget about massive retail distribution (for now) — sell direct and/or focus on close relationships with a small number of niche resellers. Take advantage of your ability to be agile, to make decisions quickly and put them into action immediately.

Don’t sell what you can’t deliver.

Manage your growth. Big companies can deal with manufacturing capacity, customer service problems, or even major product issues by throwing cash at the problem. You can’t. While it may not feel like it when you’ve been struggling, there really is such a thing as too much business. Make your current customers your top priority. While potential new customers may be disappointed about not being able to obtain your product or service, they’ll understand. Sure, you may miss out on some potential business, but you won’t risk crashing and burning because of reduced quality control or poor customer service. I recently heard a business owner tale a cautionary tale about his experience of growing too fast. At one point, he called his own customer service line to see just how bad the problem was, and the automated attendant told him his expected hold time was 14 hours!

Don’t gamble what you can’t afford to lose.

Don’t finance your business with a second mortgage on your home unless you’re willing to be homeless. Don’t bet the whole company on one opportunity. No matter how much you believe, no matter how good the opportunity looks, until you have the money in the bank, nothing’s a sure thing. That said, take advantage of the fact that you don’t have nearly as much to lose as big companies do. You won’t destroy billions of dollars of market value with a poor quarterly report. Employees who come to work for a startup know they’re taking a risk, while those working for a large company are usually expecting more stability. You can take chances that they can’t because you really don’t have as much at stake.

Establish relationships to support your growth before you need them.

Sooner or later, you’re going to have an urgent need for resources or expertise outside of your company. It may be your first business tax return, a big order that requires additional resources to deliver, an urgent legal question, etc. Figure out who you want to use and establish a relationship with them in advance, so that they’re ready to go when you call them. If you have to scramble to figure it out when the need or opportunity presents itself, your risk of problems goes up dramatically.

Focus on the customer.

Create raving, passionate fans by consistently exceeding their expectations. It’s far cheaper to keep customers than to acquire new ones. And happy customers are both your cheapest and most effective advertising. Develop your relationships with them above and beyond the sale. Learn about their business and refer people to them. Connect with them on LinkedIn. Check in with them on a regular basis with no sales agenda — just to see how things are going.

Bootstrapping is really more of a business philosophy than it is just about a shortage of capital. Even if you have capital at your disposal, or if you’re well past the startup stage, applying these ideas will help you reduce your risks and achieve smart business growth.