By Omoruyi Edoigiawerie, Esq
Many entrepreneurs shoot for the stars as they build phenomenal products and services. However, funding is a very fundamental aspect of the growth of every start-up. While venture capital investments in start-ups appear to be popular and the in-thing, most entrepreneurs still rely on the traditional age-long funding method of bootstrapping to fund their start-ups.

Bootstrapping is unarguably the most popular method for funding a new business. The majority of start-ups are bootstrapped. It is often said that what makes this type of funding an entrepreneur’s first option is simple – it allows them to maintain control over the business at least in its formative years. But Bootstrapping also requires discipline, ingenuity, and resourcefulness.

This week, I will discuss this age-old funding mechanism, telling you everything you need to know about bootstrapping and how it can help you grow and maintain control of your business, especially in the early years.

*Bootstrapping defined

Bootstrapping refers to the process of starting a company with only personal savings, including borrowed or invested funds from family or friends, as well as income from initial sales.

Self-funded businesses do not rely on traditional financing methods, such as the support of investors, crowdfunding, or bank loans. Rather, as the name suggests, entrepreneurs must “pull themselves up by their bootstraps’’ by using their capital to launch.

As long as founders are aware of the associated risks, bootstrapping can be a very effective financing method for start-ups looking to get a foothold, especially in their early years.

To further understand the importance and applicability of bootstrapping, let’s explore its benefits and shortcomings.

Ayu: Unmasking Atiku tail wagging PDP dog

*Benefits

1) Ownership and Control of Your Business: Bootstrapping means founders can continue to own 100 per cent of their business. Thereby reducing dilution of ownership.

2) Control over Direction: Once funding is received from third parties as an investment in the business, exterior pressure and responsibility to satisfy the interests and investments of those who have invested are capable of affecting the founders’ objectivity and dedicated commitment to attaining the objectives of the business. The reason is simple, their end goal may not always be in tandem with that of the founders and their timeline and values are oftentimes different than yours. So if the control of the business is important, bootstrapping is probably the way to go.

3) Keeping Your Business: If the business is envisioned to be self-owned and multigenerational then bootstrapping is the most realistic alternative for funding the business.

4) It provides a sense of accomplishment: For some entrepreneurs, building something from the ground up without outside help is its reward.

5) Being Forced to Build a Business Model That Works: Most failed businesses struggle due to a poor business model. However, bootstrapping entrepreneurs are forced to develop processes that produce immediate, lasting cash flow, bypassing this outcome.

*Disadvantages
1) It can be risky: Self-funded businesses can run out of funds faster and thereafter struggle to scale. This can limit a start-up’s ability to reach its full potential, stunt its growth and incur losses for the founders who have invested their resources in it.

2) It reduces the Chances of Survival: One of the key reasons for business failure is the lack of funding. Cash flow shortages are very integral. No matter how impactful the business objective is, without funding the business will not survive. When the business runs into a crisis its ability to realize its intended objective is adversely affected thereby reducing the chances of survival.

3) It Limits Growth: The main reason that entrepreneurs go out to raise external capital is to scale big and fast. For many that are their strategy to survive and thrive. Without outside capital, there is a strong likelihood of limited growth and visibility, the extent of the business reach, and the ability to compete meaningfully with other similar businesses.

These limitations can stunt growth potential.

4) It Impedes Top Level Business Support and Opportunities: Funding is just one of the benefits of fundraising for start-ups. I have seen from experience that it may not even be the most significant aspect of the external impact on the business. Enrolling others who have a vested interest in the business’s success can attract top-level help. It can put board members, shareholders, influencers, and big deal makers with the keys to sizable sales channels in your corner. Bootstrapping a business limits that support and opportunity.

5) It is Extra work: Founders are going to have to hustle harder, work more hours and manage more roles as a bootstrapped start-up. This is because they have less of a budget for recruiting the relevant human resource expertise they need to build the business.

*How to bootstrap a start-up

I often tell my clients that Bootstrapping is not always so simple, but rather there is an art to it. Here are a few tips that founders can use as a guide as they Bootstrap.

• Reduce Costs: The following are practical ways to reduce costs –

• Buy used equipment

• Rent when possible.

• Start your business as a side hustle, so you don’t have the pressure of immediately making enough money to offset your salary. I can’t say this enough.

• Start your business from home to reduce office costs.

• Hire freelancers or work with consultants rather than hiring full-time employees.

• Carefully consider your manpower costs. In some aspects, businesses may decide to hire interns, budding talent, or young professionals who have less experience and are cheaper. However a note of warning here; sometimes you need expertise, especially when your business is in the early stages and it is beginning to take on bigger assignments. At this point you have a reduced margin for errors and mistakes as these can impact negatively on your business. So what I often advise clients to do is to consider what they require and the most cost-effective means of achieving it.

It is better to hire an experienced expert whose bill may be more but will complete the assignment in a shorter time frame than a trainee who will charge less but take longer.

• Buy used equipment and only what you need.

• Start your business as a side hustle, so you don’t have the pressure of immediately making enough money to offset your salary.

• Start your business from home to reduce office/ operational costs.

• Hire freelancers or work with consultants rather than hiring full-time employees.

• Increase human resource capacity without Increasing People Costs

• Partner with a cofounder who can share the work and financial burdens of bootstrapping with you.

• Find trusted advisors and mentors who can sit on the advisory board. They will provide you with valuable insight and also gives your start-up credibility.

• Collaborate. Founders need to find trusted friends and colleagues who have skills they can “donate” to the business.

• Create a means of trading sweat equity for work done for the business – this way you provide a service in turn for the service you have also received.

3. Increase Capital

• Ensure a profitable business model. Look to build a business that generates revenue quickly.

• Apply for grants. Grants are essentially free money. Find one that fits well with your business and apply. Ensure you are checked on all the requirements and that your internal business processes meet the criteria for an award of the grants.

*Other funding options for start-ups

• Angel Investors: Angel investors are early-stage investors. They are often independently wealthy private individuals, though angel investing networks do exist, in exchange for equity.

• Venture Capital: Venture capital and private equity typically invest in more established businesses with high-growth potential.

• Crowdfunding: Crowdfunding is another bootstrapping-adjacent funding model. Crowdfunding is the process of raising capital through small amounts of money from large numbers of people. Crowdfunding “investors” don’t get equity. Instead, they usually receive the product or other perks in exchange for their “investment.”

• Business Loans: A business loan allows you to borrow capital from a lender that must be repaid, plus interest. Business loans allow you to retain full control of the company. Whether or not this is the right choice for you depends on your business and the loan conditions.

*Conclusion

Bootstrapping continues to be an attractive option for start-up entrepreneurs with relatable benefits. It is however very important for founders to be aware of the risks it poses and its impact on the company’s chances of scaling sustainably.

Omoruyi Edoigiawerie is the Founder and Lead Partner at Edoigiawerie & Company LP, a full-service law firm offering bespoke legal services with a focus on start-ups, established businesses, and upscale private clients in Nigeria. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. His firm can be reached by email at hello@uyilaw.com