It is easy to assume that securing funding is a great thing for startups – if only the company had additional financial resources it would be able to achieve so much more. However, having substantial cash injection is not always a good thing for the success of startups. In fact, some serial entrepreneurs prefer the constraint of having limited resources – bootstrapping their firm – and replicating the environment that was conducive to founding their original company. Below explores some of the benefits associated with bootstrapping a company, and why having limited finances may not always be such a bad thing.
Benefits of bootstrapping
One of the worst things about being flush with cash is that encourages wastage within a company. Having a limited budget really focused you on determining what is important to the success of the company, where you will devote your time and resources, and what priorities are important.
Bloat may not actually be helpful in achieving firm objectives
Connected to the above point – first that have a constrained supply of money focus attention on the key factors crucial to success. Having excess money may allow side-project distractions, that not only add little value to the long-term success of the company but also distract from the key objective.
Having a larger company, with more employees to manage, motivate and retain is not necessarily conducive to actually achieving specific objectives. In fact, one of the key rationales for why startups can be more effective at innovating – that their small size and limited bureaucracy is conducive to fast decision making – starts to get eroded if companies grow if only because they are flush with investor money.
Being cash-strapped inspires creative solutions
Being cash-strapped can force companies to come up with creative solutions to problems – ones that ultimately allow the company to be more profitable in the long run. Do you for example need a fancy downtown office location, or will remote working (or the cliché of a founder’s garage) suffice to launch the company.
Ensures that you set yourself up in a sustainable way
Ultimately, even if a company is flush with cash at its founding, it will need to evolve into a profit-making situation. Spending more money than is coming in is not sustainable in the long run, and many companies once-flush with money – including WeWork, Groupon, Zynga, and Buzzfeed – have had to go through downsizing to ‘right-size’ them and remove unnecessary areas added when cash was plentiful.
Having a focus on cash from the very beginning can avoid difficult situations when companies are required to downsize and remove less profitable parts of the business.
Avoid devoting time and resources towards seeking external finance
For founders that are not in the fortunate position of already having substantial reserves that they can use to launch a company, bootstrapping the launch of a company also has the advantage that it reduces the need for seeking outside finance.
Not only does external finance reduce the equity that founders have in their companies, but it can also save one of the most daunting and time-consuming tasks associated with founding a company – obtaining finances. Ensuring that, at least to the extent feasible, the firm does not spend excessive financial resources unnecessary can go a long way to reducing the pressure to obtain external backing.
It creates a sense of pressure that can drive success
The final reason why it can sometimes be desirable to bootstrap a startup is to create a sense of urgency and pressure that can drive individuals to success. Although it is not always true that external pressure can motivate companies to succeed (indeed, there are a lot of reasons why startups can fail), the expectation that the firm needs to be conscious of money, and find a way to generate additional returns can be put some pressure to focus on creating a profitable business model, that being flush in cash can sometimes avoid needing to consider (think WeWork).
Clearly, the financial requirements to start a company vary by industry and the startup’s scope – and for some firms it is unfeasible to launch the company on a shoe-string budget. However, for others, some financial pressure is not necessarily a bad thing for startup success. If you lack large financing or are making the conscious decision to avoid external investors, bootstrap the company (both out of choice or necessity) can be an effective approach for getting the company off the ground and ultimately profitable.
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