Life lessons in business: Bootstrapping

First of all, congratulations to James Burton for winning the free copy of The Emyth Revisited that I mentioned in my last business post. James, send me your address to [email protected].

One other bit of housekeeping: I was glad to see that the new season of Shark Tank has started. If you want an entertaining way to learn business, watch that show. It is actually real (though not a complete picture of what is really happening) and I love watching it. Besides getting good ideas, you learn what makes a business idea viable and you also learn how successful entrepreneurs think.

Let’s talk about starting a business. There are a few directions you can go. The first direction is to come up with an elaborate business plan for how your business will look, develop a budget for how much it will cost to get out of the ground and go find the necessary money (usually through debt or investors) to get started.

The second way is bootstrapping. Bootstrapping means no formal business plan (because you don’t know what is going to work yet) and it means you choose to start very small, testing the idea to see if it works before you throw tons of money and resources at it. It means you let the business develop as you go, changing things rapidly as you see what is working (just like water running downstream naturally finds its own optimal path). Most importantly, it generally means you avoid leverage/debt and trying to find investors. You let the business generate the profits to fund its own growth.

Bootstrapping is out of vogue today. Everyone thinks that before you start a company, you have to have business cards and invest $10,000 in a logo and you need a office in a fancy complex and ten employees minimum and a massage therapist that comes on Fridays to keep office morale up.

I am not going to say that approach never works. It does work sometimes if the idea is great and the execution is tight. Sometimes, there are spectacular successes. However, the majority of successful businesses do not start that way. They start in a garage like Apple did or they start in a tiny single retail location like Wal-Mart did. Or perhaps they start in a dorm room like Facebook did.

If bootstrapping works so well, why is it out of vogue? The answer is simple: because the majority of business people think wrong. In fact, the vast majority of businesses fail within a few years (80% fail with 18 months according to Bloomberg). However, successful business owners are overwhelmingly bootstrappers at heart. I don’t have the statistics but that is something I know instinctively from my dealing with the business community for a long time. Even on Shark Tank you see the bootstrapper mentality from the sharks. Obviously, they are on a whole different level of bootstrapping today but they all started small, all still think that way, and all tend to admire the successful bootstrappers that pitch businesses.

The essence of the so-called American dream is bootstrapping. It is the idea that almost anyone can scrimp and pinch and fight to get a tiny little business off the ground that can grow into something big. You don’t have to be wealthy to do it and you don’t have to know wealthy people. You just have to be street smart and humble enough to be small for a while.

I started my business with $1,000 in 1999. That $1000 was not spent on anything but initial inventory and essential things I needed to get a website up and take payments from customers. In fact, here is my first office in our tiny 800 square foot house in Rhode Island. On the top right shelf, you see our inventory which was worth about $100. There were no business cards, no business plan, no employees and certainly no massage therapist.

Over the years of course, things have changed dramatically. At the moment, the kids and I have close to $100,000 in inventory in the basement and Kelsey is ordering thousands more every day. However, my bootstrapping mentality has not changed. For example, I am not going to spend much money on inventory I don’t know I can sell. I might test with a small order but I am certainly not going to spend a lot.

The reason I am going into this is because I want you to bootstrap rather than listen to conventional “wisdom” and waste money on a business that may fail and destroy your life. Here are some do’s and don’ts.

1. Do plan but forget about rigid, detailed business plans. If you are starting a new business, you don’t know what the plan should be until you start to figure out what is going to work. Let the business itself tell you what the plan should be and flow with it. If you do have a business plan, it should be an extra flexible one.
2. Do spend money. There is a balance here. You have to be willing to spend some money or you will never succeed. You just don’t have to spend as much as you think. I have seen some people stunted because they were just unwilling or too scared to spend money on things they obviously needed.
3. Do postpone non-essentials. You don’t have to have a professional logo to start a business. (I still do my own logos in fact.) You don’t have to have fancy business cards. You don’t need a company car. Save your money for the things you have to have until you have the money to invest in the non-essentials.
4. Do invest in employees but not until you have proven you need them. There is little responsibility you will ever take on that will weigh on you like the reality that you have people depending on your business to feed their families. Work hard yourself as long as you can. When you are tapped out, bring in employees but do it slowly.
5. Do avoid debt and outside investors almost all the time. The top reason by far that businesses fail is debt. You can increase your chance of success dramatically by just choosing not to have any. And bringing in outside investors is a pretty sure way to ruin your quality of life. If they are family members, Thanksgiving will probably get pretty uncomfortable. If they are venture capitalists, you will become their slave. It is far better to build your business slowly than grow it fast at the expense of your quality of life.

I am a natural bootstrapper but very frankly, I have gone through times where I left my bootstrapper ways and did dumb things. Those are stories for another time but suffice it to say that those excursions never worked out and I would be a lot better off today  if I had avoided them. I have learned these lessons the hard way. Bootstrapping is the way to go in almost every situation.