Lessons in bootstrapping

Every entrepreneur must decide whether to self-finance their business (aka, “bootstrap”) or to raise/access outside capital.

While it may seem like the majority of startups and small businesses go for outside capital — especially if you’re keeping up with tech and startup news — this isn’t really true.

Bootstrapping entrepreneurs are everywhere — from the owner of your local accounting firm to the people who power wash your roof and the creator of your favorite Chrome extension. In fact, the vast majority of businesses — 78% — launch and grow their business with self-financing.

But bootstrapping isn’t without its challenges. In this article, we’ll break down some key considerations that bootstrapped entrepreneurs face, and we’ll outline the best practices to come out on top.

Is it the right time to bootstrap your business?

Starting a business isn’t just a professional endeavor but a personal one as well.

When you’re relying on your own money to finance the early development, go-to-market, and marketing efforts of a new venture, it’s important to think about the impact that will have on your finances.

Some bootstrapped entrepreneurs don’t quit their day job until their business is generating enough to replace their full-time salary, while others use their savings to supplement (or even become) their income as the business is getting off the ground. Your approach might depend on your living expenses, dependents, and other responsibilities — in balance with how much cash you have available to cover all that.

The bottom line is that it’s important to have a financial cushion — and a plan — when bootstrapping your business.

Andrew Gazdecki, founder of Acquire.com says, “Having enough savings for a personal runway is really important, especially when you decide to go all in. It’s not absolutely mandatory, but having a financial cushion can make the transition a lot less stressful. You'll be able to focus more on building your business without constantly worrying about personal expenses. Try to save up enough for emergencies and at least 6–12 months of living expenses. This will give you the freedom to iterate, pivot, and grow your business without immediate financial stress.”

How to launch and grow a bootstrapped business

While some self-funded businesses will have access to quite a bit of capital, the purse strings will be tighter for others. And when capital is limited, launching and growing a business follows a bit of a different playbook than most venture-backed startups.

Top priorities include iterating quickly, optimizing for positive unit economics, and prioritizing sustainable growth.

Getting to market

While some venture-backed companies may have the luxury of spending months building a product without fully understanding their customer needs, bootstrapped businesses often need to cut to the chase.

Eric Ries'ss 2011 best-seller The Lean Startup popularized the lean startup methodology — a scientific and measurable approach to build-measure-learn while starting a company. The idea is to ship minimal viable products, gather customer feedback, and iterate and improve upon that feedback quickly.

For a bootstrapped business, going to market with a good-quality “starter” product that honors the customers’ needs and expecting it will still require active fine-tuning is often key to getting moving.

Unit economics

Unit economics are a measure of your company’s revenues and costs on a per-unit basis. This measurement explains the incremental value that a company generates with each additional unit (e.g., an item sold or a new customer). If your unit economics are positive, that means you’re profitable on a per-unit basis.

When you’re bootstrapping a company, your runway may be on the shorter side, and every dollar counts — so making sure your unit economics equation is positive from the early days is often critical. Keeping a close eye on this equation will help you forecast your financials and understand if, ultimately, the market is right for your product.

Growth and expansion strategies

If you have positive unit economics and feel ready to grow the business, it’s time to think about growth strategies that won’t break the bank. With potentially limited funds at your disposal, traditional paid marketing can be expensive and unscalable, at least at the outset.

Instead, bootstrapped founders might want to explore growth strategies that can effectively acquire new customers while keeping marketing costs low. Consider, for example:

• Founder-led sales: The founder drives the sales process themselves, rather than relying on hiring sales talent to acquire new customers.
• Community building: Here, the founder (or other key team members) build in public, create content about the journey, and allow their networks to follow along. Building a community around your business’s mission can be effective in attracting like-minded people to support you.
• Word-of-mouth referrals: Referrals from current happy customers can amount to meaningful new customer acquisition. Referrals are often high-intent prospects and need little convincing, having already trusted their referer to check out your company.
• Incentive offers: Providing cash or product rewards to new customers who sign up for your product can lower the cost of growth by ensuring the customer pays before receiving the incentive.
• Content marketing: Creating and distributing targeted, relevant, high-quality content can increase brand awareness, educate prospects, and convert prospects to users.
• Guerilla marketing: Sometimes, a low-cost but creative and memorable marketing “stunt” can catch the eyes of relevant people, sparking interest or a sales conversation.
• Bartering: Business-to-business bartering (think: exchanging ad placements, or swapping a guest blog for a guest blog) is more common than you might think. It can be an effective way to gain exposure to new audiences while increasing credibility through positive alignment with other respected businesses.

Managing your cash flow

Whether you’re starting small or growing fast, without outside financing, the lifeblood of a bootstrapped business is the cash it generates from selling goods and services. (That is, the money left over after your expenses have been paid that you can use to reinvest in the business or weather surprise expenses.)

With healthy amounts of free cash flow — a metric that can be calculated from figures on your statement of cash flows and income statements — you have the flexibility to invest in new product development, expand your team, or stash funds away for a rainy day.

Plus, healthy free cash flow can be critical to keeping your business running without taking on outside financing.

Accounts receivables and accounts payables

An important element of ensuring stable cash flow is understanding your accounts receivables (AR) and payment cycles.

Your AR cycle is the timeline between when you sell your product or service to a customer, and the time it takes for them to pay you.

A company’s AR cycle is usually influenced by whether you sell to other businesses or individual consumers. With consumer-facing businesses, AR cycles are typically very short, as most of the time you’ll request payment at the point of sale. B2B companies can have longer AR cycles, typically ranging from 30 to 90 days.

It should go without saying, but it’s important to use tools — like automated invoicing and a payment portal —  so that your accounts receivables are not delayed. This will help you get paid fast, realizing the cash inflow from recent sales. 

Now, on the other hand, your accounts payables (AP) are the amount of money you owe suppliers for goods and services you’ve purchased and have yet to pay for. Your AP cycle is just as important as your AR cycle and in part determines your cash position. An accounts payables strategy can be used as a mechanism to delay certain payment obligations if accounts receivables are delayed.

How to extend your cash runway

Even when the business is growing, cash flow isn’t always consistent — or predictable. If, for example, your business is seasonal, or the market has taken a turn, you might find yourself in a position with dwindling cash reserves.

If you do, consider ways to improve your cash position and extend your runway, like:

• Negotiating discounts with vendors
• Reviewing and discussing accounts payables terms with vendors
• Asking customers for accelerated payments
• Identifying and cutting non-essential expenses
• Paying operational expenses with a business credit card to delay cash expenses. (Of course, you’ll want to be mindful of interest charges.)
• Earning a higher yield on idle cash with products like Mercury Treasury*

Heather Endresen, owner of Viso Business Capital says, “Managing cash is the key to extending runway for small businesses. Getting comfortable with a 13-week working capital forecast and keeping it updated is a great practice to keep a business as liquid as possible and to identify areas for improvement, such as terms with vendors and collection of receivables. I recommend entrepreneurs get a model and a process in place to forecast working capital before they need it.”

What to prepare for as a bootstrapped entrepreneur

Although there are myriad challenges with running any business, one of the most overlooked for founders and entrepreneurs is finding a supportive community that can relate to your journey.

Bootstrapping can deepen this challenge. It often means managing a smaller team that may not include a leadership layer. You might also have no investors or formal advisors to turn to for advice, and only a minimal board.

This can lead to loneliness. Plus, with no boss to tell you that you’re doing a great job, and potentially less media coverage than a VC-backed company might get (at least for their fundraising rounds), you might not be getting the dopamine hits you’re used to.

Be sure to prepare yourself for the ups and downs of the journey by connecting with support groups, finding mentors, and making friends with people who understand what you’re going through.

Keep in mind that you own the journey

One of the key benefits of bootstrapping a business is that it is truly yours. You can run your business in perpetuity as a small team generating consistent income. Or you can use excess free cash flow to reinvest in the business, grow your revenue, and increase your company’s valuation.

Gazdecki reminds us that entrepreneurship is not one size fits all: “Maybe you’re not aiming to create a multi-billion dollar enterprise, and that’s perfectly fine. Success doesn’t have to be about huge scale. For many entrepreneurs, the dream is to run a business that pays the bills, lets them work on something they’re passionate about, and allows them to collaborate with great people.”

Bootstrapping a business is exciting — but not without considerations from your personal finances to finding efficient growth strategies and connecting with other founders who can relate to your journey. But for entrepreneurs who are up for the challenges, bootstrapping a business can be incredibly rewarding as you work on problems you love and chart your own path.

* Mercury Treasury is offered by Mercury Advisory, LLC, an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training. SEC registration does not mean the SEC has approved of the services of the investment adviser. This communication does not constitute an offer to sell or the solicitation of any offer to purchase an interest in any of the Mercury Advisory, LLC investments or accounts described herein. Past performance is not indicative, and is no guarantee, of future results. Mercury Treasury is not insured by the FDIC. Mercury Treasury are not deposits or other obligations of Choice Financial Group or Evolve Bank & Trust, and are not guaranteed by Choice Financial Group or Evolve Bank & Trust. Mercury Treasury products are subject to investment risks, including possible loss of the principal invested. Please see full disclosures at mercury.com/treasury.