During the e-luma presentation, Paul briefly mentioned the term "bootstrapping." This is a term that we should all be highly familiar with as we commence our ventures with limited financing.
Bootstrapping is the concept of minimizing the use of external financing in order to preserve ownership of the company. It involves maintaining a tight budget and using the resources one has as efficiently as possible. Bootstrapped ventures tend to have lean operations, in which almost all spending (including salary) is poured directly into the growth of the business.
By reducing the need for additional capital, entrepreneurs can boast significant savings just from financing costs alone. Capital is expensive - both debt and equity. Debt can cost founders up to 20% per year and is a very risky proposition if the venture is not generating stable cash flows. Equity is often considered even more expensive than debt. Each round of equity financing requires the founders to give up a certain portion of the company's ownership. By resisting the urge of raising additional equity for early-stage ventures, founders can maintain complete control of the business and further reduce the cost of equity for future rounds of financing. Additionally, fundraising takes time, in which preserving this effort will provide more time to focus on growing the business.
Bootstrapping is a widely practiced concept and is something we should all consider during the early stages of our ventures. As long as we have sufficient capital to operate, raising more money will only increase our financing costs and reduce the efficiency of our spending. Bootstrapping can be difficult, especially during the first 2-3 years of early-stage ventures; however, it will force us to dedicate ourselves and our capital to the success of our ventures.
Here are some common articles that discuss bootstrapping:
http://www.entrepreneur.com/article/201102
http://www.entrepreneur.com/article/55776
http://www.powerhomebiz.com/vol25/shoestring.htm
Bootstrapping is the concept of minimizing the use of external financing in order to preserve ownership of the company. It involves maintaining a tight budget and using the resources one has as efficiently as possible. Bootstrapped ventures tend to have lean operations, in which almost all spending (including salary) is poured directly into the growth of the business.
By reducing the need for additional capital, entrepreneurs can boast significant savings just from financing costs alone. Capital is expensive - both debt and equity. Debt can cost founders up to 20% per year and is a very risky proposition if the venture is not generating stable cash flows. Equity is often considered even more expensive than debt. Each round of equity financing requires the founders to give up a certain portion of the company's ownership. By resisting the urge of raising additional equity for early-stage ventures, founders can maintain complete control of the business and further reduce the cost of equity for future rounds of financing. Additionally, fundraising takes time, in which preserving this effort will provide more time to focus on growing the business.
Bootstrapping is a widely practiced concept and is something we should all consider during the early stages of our ventures. As long as we have sufficient capital to operate, raising more money will only increase our financing costs and reduce the efficiency of our spending. Bootstrapping can be difficult, especially during the first 2-3 years of early-stage ventures; however, it will force us to dedicate ourselves and our capital to the success of our ventures.
Here are some common articles that discuss bootstrapping:
http://www.entrepreneur.com/article/201102
http://www.entrepreneur.com/article/55776
http://www.powerhomebiz.com/vol25/shoestring.htm
No comments:
Post a Comment