Do you know that a lot of people would be starting businesses today if they knew just how simple it is to start? Unfortunately, a lot of people believe that starting a business is a complex process that costs a lot of money and takes a really long time.
And that couldn’t be more wrong. The bootstrap model certainly proves that starting a business doesn’t have to be complex and certainly doesn’t have to cost a fortune.
This article, therefore, highlights the advantages of adopting this start-up model. We also attempt to breakdown the processes that are involved in starting a Bootstrap.
Bootstrapping is the concept of financing business on a shoestring budget. The budget is mainly financed out of the owner`s personal savings and initial business sales. Therefore it means that the business owner uses little or no outside financing.
The Bootstrap model represents a highly effective and yet affordable method of starting a business.
Full Utilisation of resources
Resources in a Bootstrap must be utilized with efficiency. That means the limited amount of capital must be used prudently so that it takes the business as far as is reasonably possible.
The Lean Startup
The Bootstrap business model is the fundamental basis of the lean start-up model. A lean start-up is a business approach that was introduced by Eric Reis.
The fundamental premise of the lean start-up concept is simplicity. It is based on the idea that launching a new business needs to be a lot easier, quicker, and less costly.
Reis argues that companies should build and launch products fast thus eliminating long development times.
Simplicity and speed to market, therefore, means – (by implication) – that the model eliminates the need for large amounts of funding to start a business.
The critical point to always remember is, you do not need to spend months or even years creating, developing, and building a perfect robust product. You simply need to streamline the idea and make it simple and affordable.
Work with only the basics at the beginning. Then bring the concept/product to market and see how customers react. The great thing about bootstrapping a business is that even if the feedback from customers is negative, it will not be the end of the world.
And more importantly, it will not have cost you a fortune just to find out that the product or service idea will not make any money. It is all about keeping things simple and affordable.
Leo Babauta couldn’t have put it any better when he said;
Simplicity boils down to two steps-Identify the essential, and eliminate the rest.
The bootstrap model thrives on organic growth. Organic growth refers to an increase in the output of the business which is wholly financed by internal profits. Basically, organic growth occurs in situations where a part of business profit is reinvested into the business.
Organic growth gives the business a lot of stability. However, it must be noted that organic growth has its limitations. The big disadvantage of Organic growth is that it can be slow.
Therefore, while organic growth is great for starting a new business and proving the viability of a new business idea/concept - at certain levels of growth, external funding will be required to jumpstart the rate of growth.
One of the key advantages of the bootstrap model is that it is quick to start. The fact that you are self-funding the business means that you decide when you can start the business.
You do not need to spend months moving from one investor`s office to the next pitching your idea for funding. You will be amazed at just how much time people lose while looking for funding.
And the truly sad fact is that the majority of them do not get the funding and therefore the ideas are abandoned.
We have established that the Bootstrap model is started on a shoestring. What that means is that in order to grow, any additional investment into the business would have to come from the business itself.
So, the business has to generate immediate results to create extra funding for the business. This is actually a good thing when you think about it carefully. The next section will clarify what I mean.
To survive with a bootstrap budget, a new business must get creative. Above we mentioned that the need for quick results puts pressure on the owner. Business pressure is the best gift that a business gives entrepreneurs.
The truth is people never know what they are capable of until they are pressured. It is a human instinct to go into survival mode when threatened. And the survival mode can cook up some very interesting ideas.
Therefore the same applies to business situations. A little pressure is great for stimulating innovation and creativity. You will be amazed at some of the ideas that you come up with when cornered.
Competition is another source of business pressure. The business world is highly competitive. A bootstrap business owner has to potentially compete with big, established players with unlimited financial muscle. So the only way to survive is to become innovative.
Remember the biblical story of David vs Goliath? David knew he couldn’t last a minute in a conventional fight with the giant. So he got creative and the rest is history.
In a Bootstrap resources are scarce. Therefore, the business owner has to ensure the limited resources are efficiently utilized. Businesses operating on a shoestring budget are forced to put in place systems to avoid wasting the limited funds.
Their priority structure becomes well defined and thoroughly focused on the needs of the business. An efficient cost management model is, therefore, a fundamental requirement in a Bootstrap.
So a business using this model simply cannot afford to allow operational costs to run uncontrolled.
Intense Focus On Product Quality
Sales are critical for a new business operating on a bootstrap budget. What that means is that sales are directly linked to product quality. For instance, if a business`s product or service is rubbish, customers simply won`t buy it.
And if customers shun the product that means death for the business. So, it naturally becomes critical for owners to adopt a proactive attitude towards product quality.
Also, the need to boost sales forces business owners to focus more on the customer. A customer focussed business has a greater awareness of the needs of their customers. They also tend to be more responsive to customer needs and queries.
Provides An Understanding Of Operational Logistics
How many people that you know that try to sell you a product but prove to lack in-depth knowledge of the product or the business?
A bootstrap model allows a business owner to go thick into the business and all its systems to gain a thorough understanding. In most cases, the owner does everything or the majority of the work.
They source the product, check the quality, manage inventory, do the marketing, process the sale, package the product, decide on delivery method, do the bookkeeping, deal with customer complaints and so forth.
Performing all these roles allows the owner to gain a full understanding of every aspect of the business. Such knowledge inspires confidence when seeking funding for growth. Investors want proof that the person seeking investment knows and understands everything about the business.
Leverage In Funding Negotiations
Starting on a bootstrap budget allows the business to prove and establish a business concept as viable. This is a very important factor when seeking funding for business growth.
It`s all very well to pitch an idea as viable. But does it actually make money in real life? Approaching an investor with a lucrative business idea that has been tried and proven to work gives you more credibility – than trying to prove an idea`s worth on hypothetical assumptions.
Easy Business Control
A bootstrap start-up is easy to control. Business involves controlling and managing various business elements and variables.
And quite often the bigger the business the more complex the process of coordinating, managing and controlling those elements it becomes. Therefore starting on a small scale ensures that the owner is not overwhelmed by complex business structures.
The start-up business structure of bootstrap is thus deliberately is kept small and operationally simple.
The One Page Business Plan
As we have proven thus far, one of the key factors of a Bootstrap is its simplicity. The model makes it easy to understand what the business is about and how it works. Therefore, consistent with simplicity is the one-page business plan.
The concept of the page business plan was developed by Alexander Osterwalder and Eric Reis. They mapped nine fundamental business elements onto a structured business model canvas.
These are the people and organizations that the business will collaborate with to create and deliver the value proposition.
2. Key Activities
These are the activities and processes involved in creating and delivering the business`s value proposition.
3.The Value Proposition
The value proposition directly identifies the value that the business is providing the customers. Value is transferred in the form of bundles, products, and services of the business. At the center of the value proposition element, is a good understanding of customer needs.
This segment of the model defines the kind of business relationships the organization intends to forge with its customers.
The framework will need to have clear objectives and strategies for creating and managing those customer relationships.
The business needs to clearly determine the methods and the costs involved in the customer acquisition and relationship management framework.
This segment is made up of people and organizations for whom the business is creating value. These are the people paying for the business`s products and services.
The Identifies key resources, assets, and infrastructure required to create, deliver, and capture value.
7. The Distribution
The distribution channel framework identifies the channels through which the business makes contact with customers and deliver value.
It also assesses which channels present the best balance between efficient value delivery and cost.
8. Cost Structure
The business`s cost structure looks at the fixed and variable costs that are involved in the process of creating and delivering the value proposition. More importantly, the cost structure looks at how those costs are controlled and managed.
Revenue streams segment defines the business`s revenue streams and how each stream contributes to total business income.
Therefore critical to revenue are decisions about the pricing models the business exploits to capture value.
The business should match its value proposition with pricing. Pricing strategies also include factors such as customer payment methods and preferences.
Practical Fundamentals Of A Bootstrap Model
Now let us look at some key elements that can be applied when adopting a Bootstrap Business Model.
Secondhand vs Brand New
- Do not buy expensive brand new equipment for your startup if good affordable secondhand equipment is available.
Lease/Hire Purchase vs Buying
- You must also make sure you utilize opportunities to lease or hire equipment where they exist.
Ask For Credit/Account where possible
- Don’t pay cash for inventory if you can get it on sale or return, or on credit.
Use Equipment You Already Own
- Don’t buy new business furniture and equipment if you already have it or if you can borrow it from friends and relatives.
Learn New Skills
- Don’t pay for jobs you can do yourself or that you can learn to do.
Create a Priority List For Costs
- Only spend money on things you NEED in order to start your business. Put off any expenditure on things that you don`t need right away to a later date
- Don’t spend money on unnecessary activities. Only pay for items that are fundamental to your business needs.
Research For Affordable Options
- Don’t pay for things you can get for free, such as websites.
The Bootstrap Model Example
In order for us to get a better understanding of how this model works let us consider a hypothetical Startup example.
Suppose you wanted to start a hair & beauty salon business. Let us, for argument`s sake, assume that you have looked at your startup costs and come up with a capital requirement breakdown as follows;
|Renovations & Decorations||1000|
|Advertising and Marketing||800|
|Fuels and transport||250|
As can be argued, at $8810 capital requirement it is still a reasonably modest startup. But let`s imagine that you still don`t have that amount of capital.
Therefore, we can consider applying some fundamentals of the bootstrap model. Let me break down and analyze the cost structure, item by item so that you can see how the model could be applied in a practical sense.
Salon Furniture – $4000
That amount can be reduced by simply buying second-hand equipment. That way, you can significantly reduce your furniture cost.
However let`s say that you still cannot afford to buy the second-hand furniture. So what do you do?
Well, in that case, you could consider leasing or hiring the equipment at say $100/month. Now that’s good, wouldn’t you say? Even better is the fact that you could buy the equipment on a hire-purchase deal.
That way you can own the equipment when you pay up all instalments.
Office Furniture – $500
Now I am sure you have a dining chair somewhere in your house. If you don’t, you could ask your relatives and friends for a dining chair that you can use as an office chair. You could even ask if they have a desk too.
There is no harm in asking. By asking for a desk and chair from friends and relatives you could end up having zero cost for office furniture.
However, if you can`t find these from friends and relatives, you can still buy second-hand office furniture on eBay or your local second-hand shop.
You can also find a refurbished computer and printer on the internet. As you can see, you can reduce your office furniture and equipment costs significantly by simply thinking outside the box.
And with a little creative thinking, you now have a desk, chair, computer, and printer for your business.
Renovations And Decorations – $1000
You can easily do the renovations yourself. There are a lot of DIY videos on YouTube that could teach you how to renovate.
Learning to do it yourself can save a bundle. One advantage of doing it yourself is that you can use your own creative skills and bring your vision to life through shop design.
Of course, this is just a hypothetical illustration. A salon business would probably require a professional to design the shop. Salon business is highly competitive and the elegance in the design and feel of a shop plays a key strategic role in attracting customers.
Website – $600
Six hundred dollars is a ridiculous amount to pay for a website. There are countless websites making tools online these days that cost very little.
It may take a few hours of learning but that also means shaving a large chunk off the start-up bill.
You would remove the cost of the website from the startup bill by creating the website yourself.
Inventory – $700
A hair and beauty salon requires Inventory of products for use in the salon, as well as retailing. However with a bit of thinking and creativity, one may not need to buy the inventory upfront.
With good negotiating skills you could strike a deal with wholesalers and buy on credit. There are a lot of hair and beauty products` wholesalers and distributors who are desperate for customers. They may, therefore, be willing to sell on credit.
Getting the inventory on a sell, or return deal with some wholesalers is another option.
That being said, if after applying the above strategies you still find the amount needed to start still too high, then you could adapt the business concept/idea.
Rather than opening a shop, you could find clients that require hair and beauty services in their homes and start a mobile beauty business instead. And that’s how a bootstrap business model can help you launch a business.
So, as you can see the Bootstrap model is highly effective and it forces entrepreneurs to get creative to make things work.
By adopting creative thinking and applying a number of bootstrapping strategies, a start-up bill can be reduced significantly.
I do understand that this is a very simplistic business example. Yet it is very practical and it encourages creative thinking, which is a fundamental quality of an entrepreneur.
Things To Consider
You possibly are already thinking of ways you can make your business startup affordable. But you have to implement bootstrap fundamentals the right way. Therefore you should consider the following factors carefully.
- If you decide to buy secondhand equipment, you must make sure that it is efficient, reliable, and good equipment. Don’t compromise on the quality of the equipment for the sake of saving money. Doing that is clearly counter-productive and will only hurt your business operations.
- When you lease or hire equipment, you must make sure that you always have enough working capital to service the lease each month. Failure to pay your installments may result in equipment repossessions, causing disruptions to your business. Relying on sales alone to service installments is very dangerous. Think about: what if I fail to generate enough sales?
Never Compromise on quality
- Never compromise on quality if you are doing some of the jobs yourself. Always make sure you do a professional job. After all, it`s your own business. Important to remember is that it`s okay to spend money if it will benefit your business.
- Never buy more inventory on credit than you can sell it. That’s because even if you fail to sell the inventory you still have to pay for it. And also, your credibility and profile as an entrepreneur will depend on how you deal with creditors and all those that you owe.
Note: Not all these points are applicable to all business situations. For some startups none of those points are valid. The point is you must analyze your own business ideas and find ways that are unique, and relevant to your scenarios and apply those.
This is not an exhaustive list. You could find that there are plenty of other ways you could Bootstrap your own start-up. And remember creativity is the cornerstone of business success.
Someone once said that simplicity is good for the soul. And I believe it is. Starting a new business doesn`t have to be complex.
It doesn`t have to cost you an arm and a leg. If you strongly believe that you have a value proposition that is potentially viable, then the bootstrap model can help you. But the most important thing to always remember is to keep things simple and affordable.
That`s been one of my mantras – focus and simplicity. Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it`s worth it in the end because once you get there you can move mountains. (Steve Jobs)