By Sebastian Pedavoli
So you have a big idea. You’ve got your team. You’ve proven your idea has legs. Now you just need the money to really kick start your company.
So what do you do?
You could sell up everything you own; take out a huge bank loan (for a risky idea they’ll be hesitant to back), or maybe you could go down the venture capital road.
All have their pros and cons, but the decision will ultimately lie in what you want for your business and how much control you want to have in major strategic decisions.
Some of Australia’s biggest successes have done very well through venture capital, from Canva to Atlassian and Campaign Monitor. Others, like Xero, have taken that capital only after going to public markets first.
But among the hubbub of who has raised a million here or $50 million there, it can be easy to forget about the tradeoffs often involved in taking venture capital.
Not only will you be giving away a chunk of what you’re building for potential future gains, you’re also gaining new masters who don’t necessarily have the passion, ability or risk acceptance you do.
Many venture capitalists require liquidity preferences in term sheets that effectively translate to them taking minimal risk in giving you capital, while the founder gets left with nothing in event of a disaster.
Some founders may not even raise an eyebrow. But for others, it’s unthinkable. At least not in the current stage of your business lifecycle.
If this is the case, then perhaps you should consider bootstrapping your company.
Bootstrapping essentially means that you start your business with no money — or, at least, very little money — and you put back into the business all the money you earn from customers.
It might sound like a difficult path, but it’s becoming more and more popular. Atlassian and GitHub for example both bootstrapped their company using minimal resources – in Atlassian’s case, a $10,000 credit card – and a dedicated team, and are now, hugely successful.
The importance of bootstrapping is that you prove your product and business has value by getting actual customers and having them pay you for your product. They’ll want to work with you on making the products better and they’ll be your best evangelists.
But if you’re still unsure, here are five reasons why you should consider bootstrapping your company:
1. You’re in control
One of the biggest advantages about bootstrapping your company is that you maintain 100 per cent in control of your company.
Everything from the team, the product and overall vision of the company; you have the ultimate power and flexibility to make the decisions that can have long term implications for your business and your own life plans.
2. You’ll know your burn rate
Having control over the way your company uses its supply of cash over time can be critical to the long term success of your business.
Understanding your burn rate, knowing how much runway you have left and what it takes to make money, will set you up for long term growth.
Without it, you could lose key insights about what your company can survive, or gain an inflated sense of your financial situation, if you decide to go straight for raising capital to grow your product.
3. You can focus on profitability
For almost all businesses, profitability should be your main priority. This will mean even more to you when running on a shoestring budget.
You’ll want to micromanage your finances and make sure that you make every cent count, not only will it make you better at managing money in the abstract, it’ll also help you understand just how many costs there are to running a business and what fat you can easily cut.
4. It’s hard work
Be aware, you will work your ass off to get money in the door and likely work on projects you otherwise wouldn’t, but the tradeoffs, at least from my perspective, far outweigh these sometimes tough and exhausting times.
Luck is a big component of building a successful business but nobody ever made it (apart from lottery winners) with just luck and no hard work. Working with clients or building product additions that may be outside of your core focus can be grating, but it will help you understand the real world usages of your product and how to highlight and solve client pain points. It’ll also make you a better manager of projects and products in general.
5. You get a greater insight into the bigger picture
When bootstrapping your company, you’ll often be running on minimal resources; you might have a lean team or no team to speak of, which means you need to massively up-skill as a generalist or become a jack of all trades.
You’ll need to tirelessly consume every resource you can about running a business and everything that entails.
Need to build a new site? Looks like you’re learning a bit of web design. Want to build an app prototype? Looks like you’ll be learning how to use invision. You’ll pick up a plethora of skills that you may use time and time again and others that you’ll only use once, but you’ll keep on learning.
This will all help you establish a much better basis for knowing what you need to run and sustain a business, but also allow you to understand how much time and effort it takes for you to learn something new. It’s your responsibility to ensure profits keep coming in, and to keep the lights on.
It might sound obvious but the key to bootstrapping is building a product people want to use and get it out the door as fast as possible. Lots of companies do consulting and project work while they built their products and it’s a tried and tested way to gain the skills and acumen you need to run a business well.
It also gives you a core understanding of your abilities and the abilities of your team, which will put you in much better stead if you decide to raise capital later on; all while making you much more attractive if you’ve proven you can manage and grow a business on your own dime.
The prospect of going out alone, might sound like an almost Sisyphean task – and might feel like it too at times – but the end result is almost always worth it.
Sebastian Pedavoli is the Creative Director and Co-Founder at Proxima.
You can help us (and help yourself)
Now, there’s a way you can help us keep doing this: by becoming a SmartCompany supporter.