(bootstrap funding – 5 minutes)
So you’re the proud owner of a start-up. Congratulations! You are an outstanding individual with the vision and tenacity to build an amazing enterprise!
You’ve got an amazing idea and you’ve taken the first steps to building your own business.
Now, about the money needed to start the business…
Bootstrap funding: The Basics
Ok, so you need money to start your business. Those are the facts of life. A business is an investment and you need to put money into it before you can get more money out of it.
We’re going to take a look at what funding looks like for start-ups at the very beginning. This is also known as bootstrapping. From the moment an idea is born all the way to finding a purchaser for the business or taking your company for its first public listing. Funding can either come from internal equity, external equity or debt sources.
Getting Bootstrap funding off the ground
You have an idea, or maybe a reasonably profitable side hustle. You’ve tried the self-employed life and think ‘Hey, I can do this full-time!’. So you decide to go into business.
Internal Equity
At this stage, most business owners are looking to start off with their personal funds. This is known as ‘Internal Equity’ AKA ‘Your own cash’. Let’s take an example:
Terry wants to start a car detailing business. He works full-time as a mechanic and has a few of his clients wanting him to work on detailing their cars. It will cost $2,500 for him to buy the tools and chemicals needed to start detailing client cars. He takes $2,500 out of his savings account and uses it to buy materials to start his business.
Terry has just used $2,500 of his own money as internal equity to start the business.
Internal equity is cheap, safe and carries almost no risk. Provided of course you are not blowing your entire life savings on starting a business (please don’t do that). You are only accountable to yourself (and your spouse/partner if you share a savings account). Also, no one will put money into your business idea until you show some commitment first.
If you don’t have the savings necessary to start your business, another source of funding is:
Debt borrowing
My old finance lecturer used to say:
“All start-ups will look to borrow money from the three ‘F’s – Family, Friends and Fools,”
Lending money to a brand new start up is VERY RISKY. Banks won’t lend you money on the sole basis of a ‘killer idea’. If you have no track record, banks won’t even sniff in your general direction.
Hence why many businesses just starting up borrow from their families and friends. If you have a great relationship with your parents, it’s easy to borrow money from them. They may even give it to you interest free. I know some parents will just gift you the money to start-up (in which case it becomes internal equity).
Friends are trickier. Your acquaintances will be unlikely to lend you money. Perhaps your very best friend may lend you some money. To preserve the friendship, I would highly recommend having a loan contract drawn up. This loan contract should specify instalments, interest rates and due dates for payments. Never make a loan on a verbal agreement. Many friendships have been broken up over debt. Protect your friendship with a loan contract.
What about Fools? If you can’t borrow from friends or family, (or you’ve fully tapped them) you can try asking the general public for funds to borrow. Good luck convincing total strangers to lend you money though. That being said, it does sometimes happen. I have loaned money to a client to start a new shop. BUT I only did so on the basis of:
- A loan contract
- The fact that they were our clients and that as their accountants, we’d be keeping a close eye on their business
But if you really want to get the general public to fund your start-up, give this a try:
Crowdfunding
Look, crowdfunding isn’t just for boardgames, videogames and questionable fan-fiction novels. It is a platform that can launch new businesses.
I used to be part of a social enterprise that got it’s $30,000 start via crowdfunding. We were an ambitious little business that wanted to help former refugees gain employment in the hospitality industry. So we started a little pop-up restaurant and crowdfunded the business via pre-sales of table bookings. COVID unfortunately killed the business but we hope to be able to revisit the idea someday.
Check out sites like kickstarter.com or gofundme.com to list your business idea. Crowdfunding usually works on the basis of pre-sales – you are selling a product or service that doesn’t exist yet, but with the crowdfunding, you should be able to deliver the product/service at a later date.
You can also check out sites like fundable.com or pledgeme.co.nz if you want to sell investments in the business instead.
What happens after bootstrap funding?
You start ACTUALLY running the business.
If your business is a profitable operation, you can use profit from the business to fund future growth. This is a variation of internal equity called internally – GENERATED equity. In accounting terms, we call it ‘retained earnings’.
From here on, you can keep reinvesting profits into the business to fund future growth. Invest in better systems. Hire new team members. Embark on a few marketing campaigns. Network your butt off. Do whatever it takes with the funds that you have to get your business to where you want it to be!
BUT
If you realise that you need multi-million dollar funding to actualise the next phase of your business, then you have to start looking at external sources of capital funding. Capital funding may be applicable if:
- You need to invest in a highly skilled team/expensive infrastructure to stay ahead of the competition (often true for IT/Software start-ups)
- You don’t mind diluting your control in the business