How to Create a Profitable Bootstrapped Business
“Bootstrapping” is when an entrepreneur starts a company with little capital, relying on money other than outside investments. A founder(s) is said to be “bootstrapping” when they attempt to found and build a company from personal finances, or the operating revenues of the new company.
I like to simplify this by saying, “Sell things for more than it costs you to create them (plus business expenses)”.
This is in contrast to starting a company by first raising capital through angel investors or venture capital firms (equity financing). While angel investors, venture capitalists, and conventional bank loans are among the funding sources available to small businesses, not every company has the revenue stream or growth trajectory needed to secure major financing from them.
I’ll detail this all more out below, but here are some examples of bootstrapped businesses that later got outside capital:
GoPro was a bootstrapped company that eventually went public with a $3 billion valuation. Bootstrapped by Nick Woodman, who used his personal savings and a $35,000 loan from his mom. Woodman took a $200 million investment from Foxconn 10 years after starting the company. GoPro completed its initial public offering (IPO) with a near $3 billion valuation.
Estately was bootstrapped by its two founders, Galen Ward, and Douglas Cole. Ward quit his job in 2007 to start the company and convinced his partner to drop out of graduate school to join him. With enough personal finances to live on for a year, the two co-founders invested $4,000 total in purchasing a cheap server, paying for incorporation fees, and maintaining a runway that could cover miscellaneous expenses. 2010 1.3 M Angel round. The company grew from the $4,000 personal investment to a reported $1 million in revenue in 2014. It was also reported to have 17 employees.
Your business might always stay bootstrapped. Either way - starting off this way, bootstrapping founders must rely on:
personal savings
sweat equity
lean operations
quick inventory turnover
pre-orders (example)
A cash runway
small business loan (debt financing)
The pro of being bootstrapped is that you maintain more control over your business. The cons are an increased financial strain, and these funds may not provide enough investment for the company to become successful at a reasonable rate.
According to 2021 data from the U.S. Bureau of Labor Statistics, approximately 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only 25% of new businesses make it to 15 years or more.
So how do you ensure that your business is one of the ones that make it? First let’s start with the most common struggles:
Running out of money is a small business’s biggest risk. Owners often know what funds are needed day to day, but are unclear as to how much revenue is being generated, and the disconnect can be disastrous.
Inexperience managing a business—or an unwillingness to delegate—can negatively impact small businesses, as can a poorly visualized business plan, which can lead to ongoing problems once the firm is operational.
Poorly planned or executed marketing campaigns, or a lack of adequate marketing and publicity, are among the other issues that drag down small businesses.
As a CFO, I’m most experienced in the first one listed above - the financial aspect. While that’s one challenge, I consider it the foundation. If you can get the finances right, then you can hire and pay to solve the other challenges. You can throw money at those problems.
Don’t Run Out of Money
A primary reason why small businesses fail is a lack of funding or working capital. A business founder needs to be intimately aware of how much money is needed to keep operations running on a day-to-day basis. A founder is usually most versed in the product or service they are selling - so hiring a fractional CFO is important here - they will help the founder understand everything in this area of their business. This includes payroll, fixed and varied overhead expenses, such as rent and utilities, and ensuring that outside vendors/subcontractors are paid on time.
Owners of failing companies are less in tune with how much revenue is generated by sales of products or services. This disconnect leads to funding shortfalls that can quickly put a small business out of operation.
A Race to the Bottom
A second reason is business owners who miss the mark on pricing products or services. To beat out the competition, companies lazily price a product or service far lower than similar offerings, with the intent to entice new customers.
Unless this is part of your business model (perhaps you are in a liquidator type of business - I’ve had a client that did successfully this with DVDs many years ago) and you’ve done a thorough financial model and business plan that validates this - this will not be profitable. The costs of production, marketing, and delivery outweigh the revenue generated from new sales and your small businesses have little choice but to close down.
Solutions
Money
First establish a realistic budget for company operations
Be willing to provide some capital from your own funds during the startup or expansion phase
It is imperative to research and secure financing options from multiple outlets before the funding is actually necessary. When the time comes to obtain funding, business owners should already have a variety of sources they can tap into for capital.
Some common startup expenses to include:
Insurance, License, and Permit Fees
Business Registration Fees
Technological Expenses
Equipment and Supplies
Advertising and Promotion
Employee & Subcontractor Expenses
Emergency Savings (Most companies fail because they lack the cash to deal with unexpected problems during the business season)
Managing
Another common reason small businesses fail is a lack of business acumen on the part of the management team or business owner. In some instances, a business owner is the only senior-level person within a company, especially when a business is in its first year or two of operation.
While the owner may have the skills necessary to create and sell a viable product or service, they often lack the attributes of a strong manager and don't have the time to successfully oversee other employees. Without a dedicated management team, a business owner has greater potential to mismanage certain aspects of the business, whether it be finances, hiring, or marketing.
In addition to hiring, smart business owners outsource the activities they do not perform well or have little time to successfully carry through.
Next, a strong management team is one of the first additions a small business needs to continue operations well into the future. In general hire “from the top down”. It is important for business owners to feel comfortable with the level of understanding each manager has regarding the business’ operations, current and future employees, and products or services.
Business Plan (lack of)
Small businesses often overlook the importance of effective business planning prior to opening their doors. A sound business plan should include, at a minimum:
A clear description of the business
Current and future employee and management needs
Opportunities and threats within the broader market
Capital needs, including projected cash flow and various budgets
Marketing initiatives
Competitor analysis
Creating and maintaining a business plan is key to running a successful company for the long term.
I offer a free download of a traditional business plan on my website, but also highly recommend the Lean Business Canvas Model.
Marketing Mistakes & Lack of Customer Acquisition Planning
Business owners often fail to prepare for the marketing needs of a company in terms of capital required, prospect reach, and accurate conversion-ratio projections. When companies underestimate the total cost of early marketing campaigns, it can be difficult to secure financing or redirect capital from other business departments to make up for the shortfall.
Because marketing is a crucial aspect of any early-stage business, it is necessary for companies to ensure that they have established realistic budgets for current and future marketing needs.
Similarly, having realistic projections in terms of target audience reach and sales conversion ratios (Customer Acquisition Costs also known as CAC) is critical to marketing campaign success. Businesses that do not understand these aspects of sound marketing strategies are more likely to fail than companies that take the time to create and implement cost-effective, successful campaigns.
I highly encourage you to be thoughtful about each one of these aspects as a misstep in any of these will cause you a lot of stress. If you approach each one of these as a project, you can break them down into bite-sized, doable pieces. When things start to feel like they aren’t going well, return to each one of these areas and refocus.
A quick checklist
▢ Business bank accounts
▢ Business CCs (or ones that are only for it)
▢ Entity registration (and if you are registered in DE, make sure to check if you need a Foreign Entity Registration in your state, most states require this)
▢ Local city and state registrations
▢ Sales tax registration & an app to automate this (like Avalara)
▢ Get going with Xero (better than Quickbooks, etc)
▢ Understand the difference between a bookkeeper, CFO, CPA
In summary, because you don’t have the luxury of a cash cushion as a bootstrapped company - you need to be more vigilant with every penny. One of the first things you need to budget for is accounting expertise with your business. Without the information they can provide and advice they can give, you’re running blind. You won’t know your CAC, your budget, or your cash flow. Usually founders start to feel like they are struggling only way after a turning point, and by that time it’s too late.
Be the 25% that make it.
