By, Rishabh Bhalla, Analyst at Espark-Viridian, India
Very often, the dilemma an entrepreneur faces is when and how much private investment should they raise from the market? I’d say, raising money for a startup is easy but building a profitable and sustainable business is tough. It is important to understand that correction of overly exuberant startup funding is around the corner and is resulting in finances to dry up.
Over the years, the overall efforts to run a business have slowed down. Entrepreneurs prefer raising investment from private investors, assuming that it is the shortest way to success. What they often overlook during the early stages of a business is the concept of bootstrapping, which itself is the best way to create a strong and concrete business with the help of internal sources.
Bootstrapping is basically a term derived from “pulling oneself up by your bootstrap” – Doing more with less. Instead of straight away diving into fundraising, ask yourself – “what would I do with the money and whether there are other ways to obtain the needed resources”.
How bootstrapping helps?
It helps the entrepreneur in staying frugal and realizing their hidden talents, for example, founder of a company with a financial background could be really good at marketing and product development. When you bootstrap, you are being forced and pushed to do better because deep inside you know that you have to pull it off with the resources in hand. Bootstrap helps you to do a cost analysis of your company and take in account details of every penny spent on the company. It gives a realistic estimate of the financial health of a company while making it more robust. Bootstrapping gives you a chance to basically analyze your cash burn, which in return helps you make your business strong from the core. It helps identify channels that produce high income or expand market share. Raising money is not a substitute for making money. Leverage your assets – look for a way to grow without cash(Licensing, joint ventures, and strategic alliances).
Don’t give up – entrepreneurship is a marathon, not a sprint. Rely on self-confidence, co-founders, friends and family for support through tough times. Whatever the scenario may be, never step outside the bounds of integrity and ethics of business and be aware of when to ease up.
What if it doesn’t work – Admittedly, it is strenuous and there is a drain of personal resources; questioning your own capabilities of whether you can run a business or not but it can happen in another scenario as well, where you have raised funds and still you close down.
What if it works- If successful, you have a bigger share of exit value (or a higher valuation when you raise funds) and equity of the company may well be the most valuable asset that any founder can have. Bootstrapping could be the best way to finance an early stage company.