While choosing not to raise money for your business can make you more vulnerable in the short-term, it is exhilarating to be in complete control of your business destiny. Your ascent within an industry may be slower than those bolstered by outside capital, but you have the freedom to determine each step in your entrepreneurship path.
Bootstrapping a startup
There were two main reasons why we decided to fund ourselves and not raise capital.
The first — and most obvious — reason was ownership. Every founder starts with 100 percent undiluted ownership. Outside funding chips away at both ownership and emotional investment as you trade equity for investment; sometimes young entrepreneurs give up too much too fast. I know plenty of founders who sold out too early.
The second reason we wanted to support ourselves was the freedom it allows, though it is a double-edged sword. Having the freedom to determine our direction enabled us to exit certain profitable industries when it became apparent consumers were no longer receiving value. Without investors, it was easier to shift directions. In our case, closing one door opened a new one that may have remained closed to us had we been restricted by outside agreements and opinions.
However, there are trade-offs. When it’s all on you, the pressure is enormous. To succeed, you have to get creative about cash flow.
Our solution was to work with our bank and leverage receivables. That way, we could borrow based on a percentage at any time. Depending on the contract, our customers can pay us on a net 30 to net 90 days basis. The ability to borrow against our receivables has helped take the pressure off daily cash flow.
Self-fund your business
Constant creativity is necessary to navigate the tight budget of self-funding. I take every company expense — from office space to the coffee we have in the break room — as a challenge to secure amazing deals and promote future growth.
Here are three ways to creatively and effectively grow your startup without relying on money from outside investors.
1. Don’t ask friends and family
Betting your own money and losing it to strangers is difficult, but losing your friends’ or family’s money can add pressure you don’t need. Instead, focus on making deals that make economic sense. When you invest your own money, you simply don’t have the luxury of making deals that aren’t profitable to some degree.
For example, when our building owner wanted a percentage each month that we couldn’t afford, I applied a little creativity to the negotiation. We came away with a lease that enables us to pay less in the early years and make increased payments toward the end. It frees up money today based on the projection that we’ll be making more money in five years.
2. Get creative to get what you need
Here’s an important principle to live by: “It never hurts to ask.” When you self-fund your business the need for habitual frugality makes you ask creative questions that will help you get what you need.
In our company, we’ve asked for different things — all of which enabled us to free up money. For example, I went to our customers early on and asked them to pay sooner in exchange for discounts and incentives. We also asked our media and advertising partners for larger credit lines so we could do more in the short term. We even vet our partners and credit the same way a bank does. If my own money wasn’t on the line, I’m not sure I would have done this level of diligence.
3. Be a good neighbor
Lift your head up and think beyond the day-to-day. It’s not always easy to find the time, but community engagement not only helps to build your network, it also pays dividends.
Our company is a member of the Downtown San Diego Partnership. Our involvement is about the bigger picture, not just our own interests. As the organization works to revitalize downtown San Diego, our partnership benefits from the community at-large building a favorable environment for startups.
Self-funding a business isn’t right for every startup founder, but I recommend giving it some serious thought. It keeps you focused on the bottom line around the clock — and that’s never a bad thing.
This article has been edited.
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