Bootstrapping comes down to three simple strategies:
- Keep your expense overhead very low
- Use the personal resources of the team and and the team's friends and family (the only people likely to give you money when your getting started)
- Find ways to generate cash income very early on
Friends and Family
A common source of funds is borrowing from "friends and family". People who know you are more likely to give you money to help you start your venture.
There are a few things to keep in mind when obtaining friends and family money:
- Be sure they understand that startups are always risky, and there's a chance they could lose their money. Nobody should invest funds in a startup that they can't afford to lose.
- Keep in mind that if your venture does not succeed, you'll have some difficult communications to have with the friends and family who have lost money in your venture.
- Remember that if you get funding by selling stock, anyone who purchases stock in a startup must be an accredited investor. Anyone can loan you money, but not everyone can legally purchase stock from you.
Although friends and family money does have its drawbacks, the reality is that early in a new venture, it may be the only money you can get beyond your personal resources.
Keep your Day Job
One option is always to keep your day job while working on your startup during weekends and evenings. That has the advantage of keeping your salary. It has the disadvantage that you're only working on your startup part time, so headway will be slow. Also, be sure to talk to an attorney about any employment agreements you've signed with your current employer. You'll want to make sure that you have clear ownership of any ideas and/or product designs that you develop on your own time.
Savings, Credit Cards, and 2nd Mortgages
Most entrepreneurs start out by self-funding. In other words, your using your personal savings and credit cards to fund the company. Those who are fortunate enough to have substantial personal financial resources can potential fund a company for quite a period of time. But many people with relatively limited resources still begin their venture with funding from savings and personal credit cards, because at the beginning it is often the only funding available.
Only you can decide what level of self-funding you can responsibly afford. It's certainly a good idea to look at your available resources, plan your cash requirements, and go into the venture knowing exactly how long you will be able to self-fund. If you're approaching your self-funding deadline with no other funding options in sight, it may be time to consider looking for a job instead of starting a company!
Organic Growth (i.e., fund your company from revenue)
Funding your venture from revenues is, for many reasons, a very attractive option.
- You avoid selling a portion of your company
- You retain control
- You avoid the legal expenses involved in obtaining equity investmenvt
- You'll learn a lot about what customers need and how they buy
- You'll learn a lot about how much it will really take to build your product
- If, later, you do pursue equity financing, you'll be in a much stronger position to do that (at a higher valuation) if you have paying customers.
But how can this apply at the very beginning, before you have revenues from the product or service you plan to develop? It's typically through consulting, contract work to develop a product, or getting early purchase orders from a key customer.
Consulting
One option that some companies have pursued is to obtain early revenues by providing consulting services. If your startup team has a skill set that is in demand and that can be provided in a consulting model, then you can potentially fund part or all of your people expenses through consulting revenues, while working part time on developing a product. Even better, if customers are paying you to develop Intellectual Property (IP) that relates to a product you are developing, and you're able to retain the rights to that IP, then you are using consulting revenues to directly contribute to product development.
There is a danger. Clearly, doing consulting work reduces the time available to develop your product or service. Your headway will be slow, and your time to market longer than it would have been if you'd been able to focus on the business. That can cause problems and it certainly increases the risk that your startup will not be successful. But the advantage is that you have a funding source that doesn't involve dealing with investors and selling a substantial percentage of your company. And the reality is that it's what many entrepreneurs must do to have money to eat and pay the rent.
Develop the Product for a Specific Customer
Are there existing companies that will benefit from getting access to the product or service you are developing earlier than everyone else? That benefit might come from your product complementing or adding value to the partner's product. If there is a potential synergy, then explore the possibility of creating a strategic partnership and pursuing funding options with the partner. It is sometimes possible to develop contracts with partners that fund product development in return for delivery of a certain amount of product once it is developed -- while you retain the Intellectual Property. That essentially becomes revenue-based funding (if you structure it as a product sale) which means you're funding your business without giving away equity.
Early Purchase Orders
Even if your product isn't ready to ship yet, would a customer consider giving you a purchase order for a certain number of units of your product in advance, with at least a partial pre-payment? In such a case, the customer is funding you. That can be a real win-win, if your company gets the funding it needs, and the customer in return also gets an advantage such as early-access to technology before their competitors get it. Another potential advantage is for the customer to have strong input to the product-development process, ensuring that the resulting product will meet the customer's needs.
Seed Funds
Some seed funds will fund an idea. Others look for more headway. You can check out seed funds in the OregonStartup resource directory.
SBA
The SBA provides numerous programs to support small businesses. The SBA Programs page is a good place to start exploring (see Government Resources). Some of the loan-related programs include:
- Basic 7(a) Loan Guarantee
- MicroLoan, a 7(m) loan program for loans up to $35,000
- Loan Pre-qualification
Grants - SBIR and STTR
The SBIR (Small Business Innovation Research) and STTR (Small Business Tech Transfer) programs provide grants to small business for technology development
- Small Business Innovation Research (SBIR) Program The SBIR program has experienced explosive growth since its inception in 1983. In that first year of awarding activity, the program made 686 Phase I awards for $44.5 million to small high technology firms. In FY 2004, the program produced 4,638 Phase I awards and 2,013 Phase II awards for approximately $1.867 billion dollars.
- Small Business Technology Transfer Program (STTR) The STTR Pilot program began making awards in FY 19994. In that year, 198 awards were issued for approximately $19 million to small high technology businesses that collaborated with nonprofit research institutions to undertake R & D projects. In FY 2001, Federal participating agencies awarded 667 Phase I awards and 193 Phase II awards totaling just over $184 million dollars.
Crowdfunding
Crowdfunding is one of the sources that can be available to certain types of idea-stage startups - especially if your target customer is consumers. Read more about Crowdfunding in our tag_cloud.
State of Oregon Programs
The Oregon Economic and Community Development Division (OECDD) offers several loan and loan guarantee programs to small businesses. For more information see the OECDD website.
Here is a summary of their programs:
- Business Development Fund . . . fund works with banks to secure necessary funds.
- Business Retention Program . . . designed to help private sector companies. Program provides multi-industry expertise in finance, marketing, operations, turnarounds, restructurings, feasibility studies, etc.
- Capital Access Program . . . program helps lenders make more commercial loans to small businesses.
- Credit Enhancement Fund . . . loan insurance tool that lenders can use to help businesses needing extra security to obtain financing.
- Entrepreneurial Development Loan Fund . . . initial, direct loan to help companies get started in Oregon.
- Industrial Development Revenue Bonds . . . designed to help Oregon manufacturers grow. These are tax-exempt bonds, issued by the state of Oregon. They provide long-term financing for land, buildings and equipment.
Line of Credit
When you are getting into revenue, a bank may be willing to provide you with a line of credit. Or if you receive venture funding (or are close to receiving venture funding) then a line of credit with a venture-friendly bank becomes an option. (See Service Providers for a list of venture banks.)
Financing Receivables
When you have revenue, you may be able to work with a bank to finance your receivables (i. e., they loan you money based on the fact that you have a customer who bought your product and will pay you in 30 or 60 or 90 days).
Equipment Leasing
Leasing is one of the few sources of debt financing that is available to an early-stage startup. It conserves cash, so it's worth considering.
Even after you have purchased equipment and furniture, it's possible to have a leasing company purchase those assets from you, and lease them back too you. Although there are benefits to owning your furniture and equipment, it's also a big use of cash. And cash is the one thing you must conserve. (You'll need more than you think.) See Service Providers for a list of some of the leasing companies in Oregon.