How to Launch your Startup Without Venture Capital
I’ve bootstrapped two successful computer networking companies from idea to exit that each returned more than 100x to the founders. It can be done, and in fact, is usually far easier than the venture route since bootstrapping doesn’t have the artificial constraint of needing to reach $100M in revenues within 5 years.
The challenge of bootstrapping is funding the development of the product and early growth of the business. A bootstrap business needs to begin generating revenue as quickly as possible and expand using the income the product brings in. But it still takes money to get off the ground.
Fortunately, there are plenty of sources of funding to make launching your startup possible.
1. Founder Funds
The simplest way to build a business is to have the team fund it yourselves. If you don’t have the savings, you can develop the product at night while working a regular job during the day, or your spouse can work to bring home the bacon while you’re in the kitchen baking a new product.
2. Friends & Family Loans
Friends and family are typically the first investors in any startup, helping build the MVP. For a venture business, friends and family usually invest through a SAFE. For a bootstrap business, the funding mechanism needs to be different.
A SAFE only works if the company is planning to raise a large equity round at some point. Offering common shares is an option, but having outside investors adds overhead and reduces flexibility. As a shareholder in an S-Corp or LLC, they’ll have to report your K-1 on their tax forms. And you won’t be able to divide earnings between salary and dividends to minimize taxes.
Instead of offering friends and family equity for their assistance, consider structuring their investment as a high-interest loan. If you’re successful, they get a nice return as soon as you start generating profit.
If you’re inventing new technology in critical areas from health and medicine to energy sustainability, there are many government, corporate, and NGO grants available to assist you. SBIR/STTR grants have paid for the research, development, and testing of countless technology companies.
4. Product Pre-sales
If you’re building a new product that customers truly need, many will be willing to pre-pay for it. (If they won’t, that’s a sign that you may not have found product-market fit.) For consumer products, there’s Kickstarter and Indigogo. For B2B products, enterprise customers can pay a deposit or NRE for the development cost.
As industry experts, clients will hire you as consultants to solve their problems for them. What you build for them will be the core of the product, and you’ll have a built-in pilot customer with invaluable input on exactly what features and functionality they need.
6. Sales and Production Partners
Once you have an MVP, distributors and resellers can help with co-advertising or marketing to reduce your go-to-market expenses. Manufacturing partners may allow you to pay as you sell instead of having to finance large production runs yourselves.
7. OEM Sales
The biggest cost of bringing a product to market is not development but the sales and marketing effort to get it in front of customers. Partnering with established companies that are already selling complementary products can eliminate the cost of marketing the product and building a sales team.
The product will be white-labeled, meaning you’ll put their their name on your product so they can sell it as their own. Typical revenue splits are 50% of the sales price to the original manufacturer.
Similar to OEM sales, licensing takes it a step further. Instead of making a product, you license the patents, software, know-how, and other intellectual property to partner companies so they can manufacture a product based on your technology.
Revenues will be far lower than selling products yourselves (typical royalty rates are 3–5% of product cost), but for hardtech products like chemicals and materials, licensing eliminates the costs of building and running factories.
I’ve previously written that licensing is not a suitable business model for venture businesses, but it is an almost perfect way for hard science startups to bootstrap to profitability.
Once you have sales, especially for a hardware product, working capital can be a new challenge. You need inventory to ship the product, but customers typically won’t send payment for 45–90 days after delivery. A finance company can loan you money using the invoice as collateral while you wait for customer payment.
10. Small Business Loans
The mission of the Small Business Association is to help businesses get started. While they have a somewhat factory-era mentality, if you’re building production facilities or buying hard assets, they can be a great source of startup financing. They also provide low interest loans to pay for growth once the company is profitable. They work by guaranteeing loans by banks and finance companies, so check with your local business banker.
Even with these funding sources, bootstrapping isn’t easy. The startup needs to be scrappy and spend its limited funds wisely.
Until there’s revenue, the founders have to forego a salary and do as much as possible yourselves to keep out-of-pocket costs to a minimum.
But once the company reaches profitability, as founders of a bootstrapped business, you get to keep all the profits yourselves.
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