I think we’ve all been sucked into the idea that quick growth fueled by equity investment is the best way to grow a business. I don’t agree. In fact, thinking that way might not be good for your business.
The myth of the Shark tank suggests that if your business is one that would draw interest from a venture capitalist or other equity investor, you have a good business. If it’s not, you don’t. I don’t think that sentiment is anywhere close to the truth.
Granted, the small business that launders my shirts and dry cleans my suits will likely never be interesting to an investor looking to infuse cash, ramp up, and sell. Does that make them a bad business? I don’t think so. Does the fact that my dry cleaner is likely looking at building a sustainable business that can be passed down to heirs or sold at the end of his career to fund retirement make him a bad businessman? I think there are countless families reaping the rewards of their progenitors in the steel business, big oil, banking, and real estate that might argue the value of that approach.
Bootstrapping might be the antithesis of finding an equity investor, but it’s definitely the way many Main Street startups get things off the ground. With that in mind, here are five suggestions to help bootstrap a young startup:
Starting a business might just be the rainy day you’ve been saving for: My grandmother always encouraged me to save for a rainy day. Over the years I’ve dipped into my savings to get a fledgling business or two off the ground. Sitting across the dinner table from your wife suggesting you are going to dip into savings or even the equity you’ve built in your home is seldom an easy conversation, but it’s the way many small business owners get started. What’s more, I don’t know of many investors or lenders willing to stick their necks out to invest in something you won’t?
Make sure you know the difference between what you need and what you want: My Dad was a great example of this. Over the years I worked with him and observed how he ran his small industrial supply business. He was very good at determining those things that he needed to have vs. the things that weren’t really necessary to do business. In the early days, for example, whenever a shipment of something heavy was coming for delivery or for shipment, he made sure to request the trucking company send the trailer with the lift gate. He put off purchasing a forklift for many years this way. And, when he finally did purchase one, it was an old second-hand machine he could purchase out of cash flow. He seldom spent money on anything he didn’t really need.
Focus on creating long-term customer relationships: Most businesses claim they want to build lasting relationships with their customers, but few are very successful at it. Another lesson I learned from my Dad took place when I was 16 or 17 years old working in the warehouse and driving the delivery truck. He used to say, “For many of our customers, you are the person they will see most often.” He expected me to keep the warehouse clean, the delivery truck in tip-top shape, and my personal appearance clean and presentable. He understood that our company brand was a lot more than our logo or our colors. If my delivery truck was unkempt and the boxes I delivered were greasy and dirty, it reflected poorly on our business. Your brand is your values and how you act on those values at every point of contact, the way your delivery driver conducts him or herself, the way your employees answer the phone, the way they interact with customers and prospects on social media—you get the picture. When bootstrapping your business, every dollar it takes to make a new customer needs to be maximized to keep that customer as long as possible.
Keep on top of the bills: I’ve been there. Sometimes you need to rob Peter to pay Paul. Unfortunately, string two or three months of doing that together and you can experience real cashflow problems—as well as potentially damaging your ability to get credit down the road. Keep in mind the second bullet on our list. It will help—but it doesn’t stop there. I hating keeping the books. It was something I had to do, so I put it off (mistake #1), I’d do it at the end of the day when all the other work was done and I was tired (mistake #2), I didn’t hire someone who was better at it than I was (mistake #3). Most entrepreneurs don’t start a business because they love bookkeeping and doing payroll. Fortunately, hiring someone to do it doesn’t mean you have to add another employee; there are services that specialize in small business bookkeeping and are relatively inexpensive to work with. The money you save keeping on top of the bills in many cases might even pay for the service. One company I’m aware of was able to add two or three percent to their bottom line every year by taking the discount terms for paying in 10 days vs. the customary 30.
The right hires make all the difference: Once you start hiring people, the choices you make have the potential to either make or break you. It’s tempting to hire the candidate that presents the best of those that applied. My grandmother also used to say, “Patience is a virtue.” As frustrating as it is to go through a round of interviews and find nobody that you’re really interested in hiring, it’s not uncommon to find yourself back at the well several times before you find the right person for the job. I think this is just as true for entry-level positions as when looking for a more senior person. Hiring the right people is critical, because you often end up paying for a bad employee twice—once when you pay his or her salary and twice when you’re forced to pay for sloppy work and poor customer service.
Bootstrapping is anything but an easy way to start a business, but many very successful companies are started this way. Successfully getting past that first couple of years with a healthy and profitable business (regardless of how small), often makes all the difference when you do go into the bank looking for a loan or find yourself talking to an investor interested in your business.
I know an actuary who spends his days buying insurance companies. He says, “I never buy a company looking for a purchase event. I can’t trust their numbers.” He adds, “I look for companies with a good management team, that have strong financial fundamentals, and I make them an offer they can’t refuse.” He much prefers talking business owners into selling him their businesses than the other way around.
Please feel free to share your bootstrapping successes here.
Forbes Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.