July 06, 2023
#BackToBasics
Bootstrapped businesses are not bootstrapped indefinably.
In fact, there are three stages through which many bootstrapped startups pass, but only one of which requires the funder to reach into their pockets to fund the company.
In this, the third article on a 5 part series on bootstrapping startups, we will explore the three stages of bootstrapping: self-funded, customer-funded, and credit-funded and the objectives and milestones that founders must navigate at each stage.
Stage I: Self-funded.
This is the stage that most will equate with bootstrapping – funding a business with your income and savings. It might also include funding the business with profits from a sister company or working part-time to earn money needed to kickstart your startup before moving over full-time.
This stage aims to develop a basic offering, often termed an MVP (minimum viable product), that can validate whether your idea has product-market fit. I.e. your offering satisfies a customer need, and they’re willing to pay for it, use it and recommend it to their friends, family and peers.
However, the self-funding stage is immensely challenging, as it requires a significant commitment of capital and time, which may limit the initial scope or scale of the business.
Stage 2: Customer Funded.
Providing you achieve product-market fit, your revenue should eventually reach a level where it can fund business operations. At this point, you’ve reached the second bootstrapping milestone: Customer Funded.
This stage is where you reinvest any profits back into the business. It’s all about maximising profitability and scaling — a time when you ramp up marketing activity and look to increase employee headcount.
However, growth means increased operating costs, which means you must generate sufficient revenue to meet your current and future expenditures. For this, you have two options; reinvesting any profit into the business to fund expansion or progressing to stage 3: Credit.
Stage 3: Credit. (OPTIONAL)
Congratulations! You have achieved regular, predictable cash flow and are now better equipped to meet financial obligations, invest in growth opportunities, and plan for the future. You are also in a position to secure external funding from banks or investors, which can be ploughed into acquiring new customers, shoring up your business, or both.
And that’s what stage 3 is all about. Securing external funding gives you a leg up over the competition, allowing you to ramp up operations across the spectrum and invest that capital in areas that can help you secure more market share. But be warned that outspending does not necessarily equate with outperforming, and you’ll have a debt to serve.
On that point, it’s also worth reflecting that not all bootstrapping startups will reach this stage. Those who progress to Stage 2 might have little appetite for seeking external funding. A.k.a debt. This is because they are able to scale sufficiently based on Customer Funds alone – a strong indicator of a sustainable business model.
Bottom Line.
In conclusion, the journey of bootstrapping a business encompasses multiple stages, each requiring strategic decisions and perseverance.
Throughout the bootstrapping process, founders must navigate the delicate balance between financial constraints and growth ambitions. They learn the value of resourcefulness, adaptability, and astute financial management. By relying on their own funds and reinvesting profits, entrepreneurs develop a deep understanding of their customers, refine their offerings, and establish a solid foundation for future expansion.
Ultimately, the journey from self-funding to credit funding represents an evolutionary process for bootstrapped businesses. It is a testament to the founders’ ability to leverage available resources and capitalise on organic growth opportunities along the way.
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