“Contrary to popular belief, nobody is waiting in the wings to throw money at you just because you have a new and exciting business idea.”
This is according to Clive Butkow, non-executive director at Grovest, where he heads up the GroTech fund, which is looking to raise ZAR200 million (US$12.8 million) to invest in highly scalable, post-revenue South African tech startups.
He is also the former chief operating officer (COO) of Accenture South Africa, and has 28 years management consulting experience.
According to Butkow, the democratisation of entrepreneurship means that to start a technology business that can disrupt just about any industry only requires a laptop, a broadband connection and a garage.
“A few years ago this would have cost millions in seed capital, however today you can start this type of company without spending your credit card limit,” he said.
Butkow says there is nothing wrong in bootstrapping an early-stage startup, which does not preclude the possibility of raising funding in the future. Here are some ways of successfully bootstrapping your company while you focus on building a customer base.
Start a business that can be self-funded
“This might sound obvious, but seems to be missed by many. Some business ideas and business models just don’t suit self-funding,” said Butkow.
“If it’s the type of business that requires a massive capital outlay, hitting large scale before revenues come in, or significantly long and expensive research and development, then it’s likely not the sort of business that can be self-funded.”
He said if you know you will be self-funding the startup initially and then bootstrapping it to success, it is necessary to start a business with low capital outlay, a short development cycle, and a business model that will bring in revenues as soon as possible.
Join a startup incubator or accelerator
“These organisations are very popular these days, and are often associated with major universities, community development organisations, or even large companies,” Butkow says.
“Most provide free resources to startups, including office facilities and consulting, but many provide seed funding as well.”
Negotiate an advance from a strategic partner or customer
“Fund it through selling your idea or product to a customer who will fund it upfront,” he said.
“Find a major customer, or a complementary business, who sees such value in your idea that they are willing to give you an advance on royalty payments to complete your development. Variations on this theme include early licensing or white-labeling agreements.”
Convince people to defer payment
Butkow says another good way of bootstrapping is to convince people to work for rewards later, such as back-end revenue, options, or a percentage of initial sales.
“You can also trade equity or services for resources and other startup help,” he said.
“This is most often called bartering your skills or something you have for something you need. An example would be negotiating free office space by agreeing to support the computer systems for all the other office tenants. Another common example is exchanging equity for legal and accounting support.”
Get a job (or a loan)
“You may need to find some extra work consulting or a full time job while you keep your business idea and passion alive,” Butkow says.
“You can also seek a bank loan or credit card line of credit. In general, this won’t happen for a new startup unless you have a good credit history or existing assets that you are willing to put at risk for collateral.”
Build connections and leverage partnerships
“When you’re self-funded resources are generally slim and often it’s only a single founder or a small team of founders building and promoting the business,” Butkow said.
“It can be slow and hard going. However, one of the quickest ways to expand your available resources is to build relevant connections and bring on other businesses as partners. Now you’ve got other people promoting your business, setting up deals or customer meetings, sharing marketing costs, cross promoting products or services, making relevant introductions and much more. Suddenly, the ability to get things done is considerably increased.”
Keep a close eye on cash flow
“There’s a reason why experienced entrepreneurs suggest cutting your revenue projections in half, doubling your cost estimates and doubling your expected timeframe. It’s because this is much more realistic when starting a business and you should take this into account when forecasting cash flow. Cash is king. It’s the king of kings when you’re self-funded,” Butkow says.
“As a self-funded startup, you want to be particularly resourceful with the way you use your finances. It is easy to take an optimistic view of the future and overspend now. Don’t. If you’re self-funding, you need to keep your burn rate to a minimum and extend your runway as long as possible. Progression of the business is very likely slow, everything takes much longer than expected and a big part of succeeding as a self-funded startup is surviving for as long as possible.