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Can you tell me about bootstrapping and how young companies can make their way without outside investment?

We are a group of engineers and a first time corporate finance/accounting leader (me). Can you tell me about bootstrapping and how young companies can make their way without early outside investment? What methods are most tried and true? What if we need dollars to develop the very product to be sold (software)? Thank you.

Answers

Topic Expert
Ken Kaufman
Title: CFO
Company: Community Dental Partners
LinkedIn Profile
(CFO, Community Dental Partners) |

Bootstrapping is about making it with as few resources as possible. For a start-up looking to develop proprietary software, there will be very few people willing to invest, so bootstrapping may be your only choice.

First, you need to work on keeping expenses as low as possible. Working from home, buying used equipment, and doing everything to run your business economically is a big part of bootstrapping.

Second, you need to bring in as much as possible. Get as many paying customers as you can for the least cost, then use any extra proceeds to further develop your product(s) and/or get more customers. This is a balancing act. If you are building software, then build a small portion of your total product scope and sell it. Then use proceeds to add features and get closer to your total scope, and use that to get more customers to fund future development.

Third, rely on yourself, your partners, and other family and friends to fund the start-up. You may need to work for free for a while as well as use your personal credit cards or home equity credit line to finance the business. You may need to hire others for far below market wages by getting them to buy into your vision for the company. And you may have friends and family, not sophisticated investors, that would be willing to loan you some money.

Also, if you search "bootstrapping" in the books section of Amazon.com, there are some very good books on this very subject. I have not heard anything negative about any of them.

Good luck!

Ken Kaufman

Achaessa James
Title: Product Manager
Company: National Center for Employee Ownership
(Product Manager, National Center for Employee Ownership) |

At this stage of development friends, family and colleagues that assist you may say "Sure I'll help you but I want a piece of the action" and you may be tempted to offer them stock in your company or a promise of stock in your company after you've incorporated. Or you may want to offer consultants and staff stock options in lieu of pay. And, of course, as founders you'll want stock based upon your initial investments in the company. A book could be written (and probably has) about the dangers of using stock in these circumstances but the most important thing to remember is Be Very Careful - consult with professionals about the legal, tax, and accounting implications BEFORE making such arrangements. Such consultations will cost you very little in comparison with the cost of correcting any mistakes made.

Until you have consulted at least with qualified corporate counsel, make no promises to anyone about stock, stock options, or equity of any type, including convertible promissory notes. And by "qualified corporate counsel" I mean an attorney or firm that specializes in corporate law and private equity transactions - not your brother-in-law that just passed his bar exam and not your dad's family lawyer since 1963.

Topic Expert
Mark Richards
Title: VP of Finance & Operations
Company: RBA Consulting
(VP of Finance & Operations, RBA Consulting) |

I've been working with start-ups for the past five years - the best advice I can give you is to read "Getting Real" by 37Signals.

In looking at their advice is really focuses on the concept of 'under' designing the product (which gets you to Ken's advice above).

They advocate to make a simple product with fewer features to start. Sure it's a smaller niche of clients, but you can start selling faster which allows you to get clients and their cash sooner.

The other piece of advice I really liked was "Don't solve the problems you do not have" They use an example of why build for 100,000 user capacity, when 10,000 will do.

Easy read with good results.

Good luck.

Mark

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