In business, the method of funding an owner / operator chooses will significantly influence a company’s trajectory and ultimate success. If you are an executive in a small business startup, you’re likely familiar with some of the funding options available, from venture capital to bank loans. One model of funding we are all familiar with is bootstrapping.
In a services business, one that has no proprietary systems or technologies, there’s a compelling case to be made for bootstrapping, also known as the practice of building and growing a business using personal savings and any revenues generated by the company itself. While sometimes challenging, if you are operating an IT services business, this approach offers advantages that should not be overlooked.
The Essence of Independence and Control
One of the most significant benefits of bootstrapping your services startup is that you maintain control and independence. In the IT sector, technological advancements occur at breakneck speed, and the ability to make swift, unencumbered decisions is a crucial competitive advantage. When you bootstrap, you retain full ownership of your company, free from the influence of external investors or the constraints imposed by lenders. This autonomy allows you to steer your business according to your vision and respond rapidly to market changes or emerging opportunities.
While at times having an independent board provides tremendous counsel and strategic input, going it alone offers you greater flexibility. Without a safety net, or constraints, you can pivot your service offerings or exploring new technological solutions without having to consult a board of investors or justify your decisions to external stakeholders. This agility can be the difference between capitalizing on a new trend and missing out to more nimble competitors.
But going it alone is also not without its risks. A board is a valuable tool. When cloistered within one’s own operation, one often misses opportunities, and spends more time reacting rather than planning. Such is normal human behaviour.
Fostering Financial Discipline and Efficiency
Bootstrapping should help you instill a culture of financial discipline within your organization. With limited resources at your disposal, every expenditure must be carefully considered and justified. If you make an error, the cash to cover the loss may just come out of your personal bank account, and that’s never a good feeling! As a result, entrepreneurs must be adept at innovative problem-solving and the development of lean, efficient business practices.
This financial discipline not only helps in the short term by ensuring the survival of your startup but also lays the groundwork for a sustainable, profitable business model in the long run. Since the primary operating costs are typically associated with human capital and technology infrastructure, financial prudence can translate into significant competitive advantages. As your company grows, these ingrained habits of fiscal responsibility can help maintain healthy profit margins even as you scale.
Responsibility does not mean avoiding any spendings. It does mean investing wisely in developing more cost-effective solutions for clients, optimizing your use of technology resources, or implementing creative staffing models that maximize productivity while minimizing overhead.
The Impact on a Customer-Centric Approach
When bootstrapping, apart from your bank account, your sole source of funding is revenue from customers. Some people will claim that this reality naturally shifts your focus towards providing exceptional value and service to your clients. In reality, providing exceptional value should ALWAYS be your primary focus in any business!
No matter what your business offers, nor your role in the organization, a customer centric outlook is key. If you are not considering how customers benefit from your efforts, what value are you deriving from your job? There has to be more than a paycheck involved for the role to have meaning. If it’s just a paycheck, you likely are not providing the best possible service or benefits to clients, nor anyone on your team! Eventually, the lack of a customer centric approach leads to a death spiral within an organization, and everyone is out of a job!
Mitigating Financial Risk
One of the most compelling arguments for bootstrapping a business is the avoidance of debt and its associated risks. Any debt is high risk. Equity is lower risk. Taking on any loans to fund your startup will create new financial pressures from the requirement to make regular repayments regardless of your company’s performance. Sometimes our companies have bad months, or quarters, but that’s your problem as all the bills still come due. This obligation can strain cash flow, limit your ability to reinvest in the business, and potentially jeopardize your company’s survival during lean periods.
Of course, equity funding has no such debt payment obligations, and ideally you are using some of the equity is used to provide a cushion or reserve fund to offset bad months (and get topped up in good months).
By bootstrapping, and not debt financing, you eliminate some stress and some of the risks. But you also have less capital to deploy to drive growth. Your business’ growth will be slower, but it will be on your own terms and should be at a pace that your business can sustain. You will need to build a cushion for downturns, to weather market fluctuations or unexpected challenges, and sometimes the right decision is to take the debt on, because the cushion is what you need to weather the fluctuations and continue to grow. So the stress of the debt repayments can also be the better option! It’s never a simple choice…
Long-Term Value and Exit Strategies
From a long-term perspective, by retaining full equity, you position yourself to reap the maximum share of any benefit from an exit strategy. Whether you’re aiming for an acquisition, merger, or public offering, owning 100% of a company means you don’t have to share in the proceeds. However, 50% of a much larger pie is still more that 100% of a break-even business. So, if the debt, or equity dilution, provides access to much stronger growth, then it’s definitely worth considering.
Because debt is not dilutive, it can translate into a substantially higher payout compared to a similar business that has been diluted through multiple rounds of equity funding. While we all hope for as little dilution as possible as we navigate our way to an exit, the years spent getting there will be stressful, no matter the path chosen.
Regardless of the path, a well-managed and profitable business with a strong customer base is a valuable asset in the IT services market.
Navigating the Challenges of Bootstrapping
While the benefits of bootstrapping are clear, it’s important to acknowledge and prepare for the challenges this approach presents. Limited capital can constrain your ability to scale quickly or invest in cutting-edge technologies. In a rapidly evolving sector, this could put you at a disadvantage compared to well-funded competitors.
To mitigate these challenges, focus on leveraging your agility and customer relationships. Prioritize niche markets where your specialized expertise can command premium rates. Invest strategically in technologies that offer the highest return on investment for your specific service offerings. Consider creative partnerships or collaborations that allow you to access resources or capabilities without significant capital outlay.
The Power of Self-Reliance in IT Services
For startups within the IT services sector that are considering various funding options, bootstrapping may not offer the rapid scaling possibilities of venture-backed companies, bootstrapping provides a solid foundation for long-term success. If funding is for anything other than growth in a services business, then you should not take it on.
The journey may be challenging, but the rewards – both in terms of financial success and personal satisfaction – can be substantial. As you navigate the competitive landscape, consider the strategic advantages and disadvantages that bootstrapping can offer. With careful planning, innovative thinking, and a commitment to excellence, any viable startup has the potential to become a formidable player.