Fund the Runway: Bootstrapping

March 5th, 2009 by Sharon Larsen

Today we discuss two other options for funding your startup, besides debt financing. 

 

 

# 2 Credit Cards

 

As crazy as it sounds, I have seen credit cards work financing wonders in the entrepreneurial world. I have an associate who was working for a company when it went defunct. He saw a quick path to cash, and, understanding the company’s business model, decided to roll the dice. He had no equity, but he had a credit card with a $12,000 limit. He drew out the money, took several team members with him, and started a new company. Off to the races they went!

 

Within two months, they were profitable. He put his team members and himself on full salary. One year later, he had purchased a fleet of BMWs and Mercedes, allowing his employees to drive them. Two years later he purchased a complete office complex for his business, and within three years sold the company for $20 million dollars—all from a $12,000 credit card.

 

As for me and my house, I don’t have the nerve. I personally don’t believe in exposing my family to that level of risk. However, my associate was in his late twenties when he did this. He had a small family, and his risk of failing and having to start over was not overly significant. He was bright and capable.

 

You have to assess your own risk threshold. Although a fun story, this is not a financial model I would recommend to most people.

 

Pros:

§  Credit cards are quick to cash.

§  You maintain ultimate decision-making power.

§  You retain ownership.

 

Cons:

§  There are high interest rates and merciless deadlines.

§  Long startup times make for heavy debt (and the servicing of that heavy debt).

§  There is an increased risk to family and dependents.

 

#3 Bootstrapping

 

You know by now that bootstrapping is my favorite method of funding. It’s critical to remember that to get your venture started, you have to chase cash. This won’t get you rich quick—the pie in the sky often has to be postponed while you build up your fuel reserve—but it makes up for its zigzag approach by giving you full autonomy and stability. Simply stated, you sacrifice your rate of ascent, but it’s your flight, Captain!

 

To bootstrap, many people dip into their own funds: retirement, emergency savings, or a 401K. Wherever you get the money, set your limit of risk and stick with it. (Remember those rules?) When you bootstrap, your initial efforts are often measured as opportunity versus strategy.

 

Our most recent venture is a perfect example. Ron and I came up with three venture ideas: SEO work, engineer outsourcing, and link building. We wanted to pursue link building, because we knew that it would be the most scalable, profitable, and successful; however, starting our venture with only $5,000 required us to get quick to cash. We knew the SEO idea would give us just that. With my contacts and skill in search engine optimization, we put a simple plan together and proceeded toward building a service business.

 

Although our SEO business required intense lifting and was neither strategic nor scalable, we knew it was quick to cash. A few calls and a well-timed trip to New York landed us several large SEO accounts. We got gas in the tank. As we built that business, we kept an optimistic eye out to transition into our other two desired opportunities. We zigzagged our way to our ultimate goal: the cash from SEO allowed us to engage engineers, which bridged to link building, which has now led us to where we create our own assets. It took nine months to make our move to where we are now.

 

Bootstrapping requires more patience and more brain power, but the pros outweigh the cons. You force yourself to literally watch every dollar and make sound decisions. Those attitudes are powerful allies. Additionally, chasing cash makes you zig and zag to the final destination. That slows down the whole process, but exposes more opportunities and allows more time for the analysis of your perceived ultimate destination.

 

Pros:

§  You dictate all of the rules.

§  The need to zigzag opens unforeseen opportunities.

§  Whatever your initial level of discipline, you come out that much stronger.

 

Cons:

§  Bootstrapping can be stressful.  It requires intense personal effort, firm commitment, and a high level of discipline to get the ball rolling.

§  You can’t go directly for the big opportunity.

§  You have to slow down.

 

 

Tomorrow we’ll talk about the fourth funding option, friends and family. 

 

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