Businesses can thrive without much capital

How many times have you heard an entrepreneur say, "If I only had the money I could hire the right people or advertise or develop the ideal product"?

We depend too much on money as the reason why companies are successful or ultimately fail in the marketplace.

History proves that money is not the sole determinant of success in business. In fact, many of the most successful businesses started without adequate capital. Using a bootstrapping business model is not a reason that your business will fail or an indication that your business is relegated to be a minor player in its market. As a stage in your company's growth, bootstrapping may be effective during product development or proof of concept phases when you can build value and traction in your business model.

Peter Hay in "The Book of Business Anecdotes" tells the story of the bootstrapping days of The New Yorker magazine. "In the early days of The New Yorker, the offices were so small and sparsely furnished that Dorothy Parker preferred to spend her days at a nearby coffee shop. One day, the editor found her sitting there. 'Why aren't you upstairs working?' demanded Harold Ross. 'Someone was using the pencil,' Parker explained."

Raising capital to grow a business typically requires an owner to give equity to an investor. During the early stages of growing the business the company may have a low valuation, and therefore, raising capital will necessitate giving up a sizable portion of the equity of the company. Bootstrapping enables a business owner to maintain a controlling equity interest in the business while building value.

One caution: Bootstrapping may not always be in the best interest of a company relative to the competition. I often counsel business owners who strategically need to create a first mover advantage in the marketplace to be aggressive in growing the firm, even if it requires raising outside capital at an early stage. In these cases, bootstrapping may take too much time and allow competition to gain a foothold in the market.

A few guidelines for effective bootstrapping:

-- Use customer contracts to help finance growth. I worked for years in the software development industry. It was standard practice to require customers to pay 25 percent or more of the value of the contract as an initial payment. With this money we were able to not only pay for the early work on the contract, but also to partially fund some of our R&D expenses and market development costs. Over the years we built a large enterprise with no outside investment or debt financing.

-- Orient your financial oversight to match a bootstrapping model. Manage for cash flow. When developing your budget, use a "bottom-up" forecasting approach.

-- Build your team and your compensation structure around a "long- term value" proposition. You will not be able to pay market salaries. Find professionals who will take a lower or deferred salary package along with options that will increase in value as the company is successful.

-- Market directly to the customer. Distribution channels and partnerships can take time to develop. You need cash, and you need it now. Find the customer, make the delivery and collect the cash as quickly as possible. Also, being close to the customer during the early stages will help you in receiving feedback and knowing what the market demands.

-- Outsource where possible. Identify what you do that adds real value to your product or service and then let others take care of the rest of the offering. You can integrate further up or down the value chain at a later date. Bootstrapping requires the entrepreneur to execute effectively and to be disciplined in the use of resources. Larry Bossidy says that "execution paces everything. . . . Execution is a specific set of behaviors and techniques that companies need to master in order to have competitive advantage. It is a discipline of its own."

Executing a bootstrapping business model can be a smart strategy in today's business world.

Gary Williams is affiliated with the BYU Center for Entrepreneurship. He can be reached via e-mail at [email protected].

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