Bootstrapping

Much of the noise on the internet and in business start-up communities is about the role and importance of venture capital and angel investors – external investors who provide funding in return for a slice of equity in the start-up.

Accelerators exist to help drive start-ups to achieve early stage equity finance. For some businesses this is a great route but it doesn’t necessarily suit everyone.

The reality of venture capital and angel investors is that the assessment criteria are very tough. Estimates vary but in excess of 90% of start-up pitches are rejected. External investors are usually looking for at least 20% per annum compound growth rate over the 5-7 years that they are looking to invest.

These estimates can vary considerbly based on perceived risk and the strategy of the investor

One of the reasons for this high benchmark is that a significant proportion of the businesses which attract the investment still fail, so the returns on successful ones must be high.

External equity investors can often bring more than just money. They can provide expertise which may be missing in the start-up as well as access to larger networks, including suppliers and customers.

An alternative approach is for start-ups to bootstrap their business from day one.

Some of the key features of bootstrapping are:

• Growing organically which can be a slower process

• Internal funding by recycling profits and cash flow back into the business

• Grants for funding research and development etc

• Crowd funding

• Stretching everything (by agreement)

  • Supplier payments

  • Customer payments

  • Getting “favours”

• Sweating the assets, making sure that everything is fully utilised

• Being creative

• Developing good management skills

• Sweating yourself, not taking a salary and even having a job to create income

• A stepping stone which might lead to investment on better terms

It can be very hard work but the benefits can be significant:

• 100% ownership of the business

• Simpler reporting and control processes

• Greater flexibility in timetabling key events and milestones

• No pressure to meet investor deadlines

Both approaches are relevant and important and some of the factors that will influence the entrepreneur’s decision will include:

• What is the scale and rate of growth which is realistic

  • Low or slow growth rates are not usually suitable for external investors

  • Some investors are interested in social purpose and slower growth

• Can you, as the founder, work with a stakeholder who expects a degree of influence as well as meeting their objectives on investment returns

• What happens when the investor wants to exit?

  • Is there scope for further rounds of funding which are acceptable to the initial investor?

  • Can the founder find the funds to buy out the initial investor?

  • This might be a significant amount.

• Does the investor bring valuable additional resources and skills in addition to the funding?

There are no right and wrong answers.

Much depends on the:

• vision and aspirations of the founder

• the nature of the business

• the state of the overall economy which can impact the overall conditions of investment that are required by the investor.