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Bootstrapping versus seeking external investors

ENTERPRISE
By Pauline Muindi | January 27th 2021

Unless you’re one of the lucky few, chances are you started your business with limited resources – something that is known as bootstrapping. According to a study by Gallup, 77 per cent of small businesses rely on personal savings for their initial funding. Many successful businesses, including global companies like Spanx, Mailchimp, Tough Mudder, and BiggerPockets, started with bootstrapping.  

Some experts believe that bootstrapping can actually help your business achieve sustainable success. Due to limited funds, you are pushed to work harder and make the most of what you have. This leads to creative thinking and laser-focus on meeting market demands.

Unlike when you have external investors, you also have total control of your business and can make important decisions without having to consult any other person. You will have leeway to experiment and figure out what works best for your start-up. No loans also means freedom from debt and the pressure of scaling your business too quickly, which can lead to cash flow problems.

However, bootstrapping isn’t all rainbows and butterflies. It calls for you to be scrappy and frugal. You will be forced to penny-pinch since it could be a while before you break even and start making profits. This will probably mean slower growth for your business. In other words, you might take much longer to reach profitability.

Bootstrapping could also mean missing out on opportunities to reach new customers, or pivot your business if necessary. This approach to setting up a business is also quite time-consuming and stressful to an entrepreneur, since you will have to wear many hats. While raising venture capital isn’t an easy task, once you land adequate funding, you will have a team of experts to help steer your business in the right direction.

If you opt to bootstrap your business, here are some helpful tips:

Do What You Know

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Don’t start a business in an industry just because it seems cool and trendy, especially when you’re bootstrapping. While venturing in a totally new industry is admirable, the best way to start a bootstrapped business is by sticking to what you know.

For instance, if you have experience in the IT industry, it is best to start a business in that is IT-related. You will have inside knowledge and connections to make your business success more likely. If you’re dealing with people you have some history with, they’re more likely to buy your products or services.

Negotiate Everything

Negotiation is a very important skill that every entrepreneur should develop, especially when bootstrapping. Understand that everything can be negotiated. Having this approach to business will help you get the best prices and close business deals that seem out of reach.

For instance, you can negotiate the rent for your office space or shop, prices of your raw materials, advertising costs and so on. Every penny saved matters when you are bootstrapping. If you negotiate every chance you get and ensure you get the best possible deals, you will have significant savings that will make things a little smoother for your start-up.

Be Disciplined with Budgeting

To make the best of your resources, you will need to be especially disciplined with budgeting. Budget to the last penny – which means you won’t have money lying around to misuse. You will be forced to scrutinise every bill, find and negotiate the best deals, and generally make wise spending decisions for your business.

For instance, you’ll have to look for the most cost-effective marketing options that fit into your lean budget. Thus, instead of advertising on billboards, you might have to use social media and influencer advertising that is cheaper.

Get Used to Knocking Doors

When you’re starting a business with limited resources, you have to get comfortable with knocking on doors, making phone calls, and sending emails. You will also have to get used to rejection. Many of your emails will go unanswered, people will hang up on you, and doors will get slammed in your face. But for every 10 or 20 nos you get, you will get a yes. Remind yourself of this whenever you feel like giving up. 

To make getting “yes” more likely, take each rejection as a learning opportunity. You can ask potential clients why they said no to your proposal and what it would take to get a yes instead. You can also use this opportunity to hone your negotiation and marketing skills to have higher probability of success with your next call.

Work with People Who Believe in You

At the beginning, you might not be able to afford competitive salaries for your employees. At times, you might have problems assuring employees of steady pay cheques. You will need people who believe in your vision and are able to make some sacrifices to make it work.

Your team should be passionate and understand that the success of your start-up relies heavily on their hard work and performance. To get the best out of your starting team, consider offering them a state in the company in lieu of a competitive salary. Other attractive, yet cheap, incentives to consider offering include flexible hours, working from home, or prestigious job titles.

Accept that You’ll Wear Many Hats

Bootstrapping means you will have to embrace many different roles. One minute you will be negotiating with suppliers, and in the next, you might be cleaning the office or updating your Facebook page. Don’t think that any role is too low for you when it concerns your business.

If you don’t feel confident in handling a certain role, invest time and money to learn the basics. For instance, you can take a business accounting course to sharpen your accounting skills. You can also take an online marketing course to become better at social media management.

When you build your business to the level where you can delegate these tasks to employees or outsource them, an understanding of the basics will make you all the better at your management role.

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