September 4, 2010

Bootstrapping Myths

Recently I was asked to speak about "Bootstrapping a Service Business" by Startup Saturday.  Though I knew (fuzzily) about bootstrapping as a concept, but I never knew the real meaning. Strange!

"Bootstrapping or booting refers to a group of metaphors that share a common meaning: a self-sustaining process that proceeds without external help. The term is often attributed to Rudolf Erich Raspe's story The Surprising Adventures of Baron Munchausen, where the main character pulls himself out of a swamp, though it's disputed whether it was done by his hair or by his bootstraps." – Wikipedia

This definition busted two myths that I had about "bootstrapping"

Myth 1) Bootstrapping is for startups

The keyword is "self sustaining" and "without external help". Since many startups think that they need external help, this term might be used to tell (some of) them – you are on your own!

Besides this, bootstrapping is something that every business should practice. Even a Fortune 500 company can bootstrap! And it will be good for the economy. We will have a more stable economy, where people self-sustain without external help to the greatest possible extent. In my opinion bootstrapping results in self-check (real viability of the project) and makes the organization self reliant, result oriented (i.e. if there are no results – no profits – no turnaround, then you do not survive) and disciplined.

So, conclusion is – bootstrapping is for ALL.

Myth 2) Bootstrapping = cost cutting – low spend

Bootstrapping is NOT about cost cutting or spending less. It is about spending in areas, which get you best ROI. In other words – "Invest. Don't spend".

It is important to make clear demarcation between investment and expenses for your business. Choose your investments wisely and and be frugal with your expenses. Anything, which has a DIRECT correlation with increasing your revenues, or satisfying a set of clients, or getting better technology (to get you an edge), can be a good investment (in that order). Since you have to self sustain, if your cash reserves are low, do not look at long term revenue impact!

Anything that wont make a difference in your revenue (medium of travel, hotel etc.) is an expense. I do not claim this to be a perfect definition, but it should work in most practical cases.

Instead of "low spend", think of "being cash positive" – "being profitable" and "good ROI".

Last but not the least, bootstrapping looks less glamorous and exciting, but in my opinion, the returns are worth the effort. It helps you retain most of the control / ownership of the company, which you can later dilute to get better returns for the "bootstrapped" effort that you have put in. And, yes – it makes you wiser and a grounded professional for sure.

So, happy bootstrapping!

Filed under Business Tips, Entrepreneurship by

  • http://www.webile.co.uk Arun Agrawal

    Bootstrapping is a fantastic concept where you pull yourself up with your own resources and step by step. While your project and mine can be self-sustaining where we plough back the profits to invest in further growth, some projects do require a large upfront investment which need a financier (mostly for products).

    However I totally agree with your comments about expenses. I have seen a few people get VC funding and then setup large office rooms, travel first class and stay in expensive hotels only for luxury without having any profits to show. Not good entrepreneurship IMHO.

  • http://www.webile.co.uk Arun Agrawal

    Bootstrapping is a fantastic concept where you pull yourself up with your own resources and step by step. While your project and mine can be self-sustaining where we plough back the profits to invest in further growth, some projects do require a large upfront investment which need a financier (mostly for products).

    However I totally agree with your comments about expenses. I have seen a few people get VC funding and then setup large office rooms, travel first class and stay in expensive hotels only for luxury without having any profits to show. Not good entrepreneurship IMHO.

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