Don't buy in to the capitalization hype

Filed in archive Bootstrapper Tips on July 6, 2008

Photo courtesy of iStockphoto, Tan Wei Ming


Many will tell you, like this recent post from Zoony Interactive, that one of the keys to business success is capitalization:

Although the term "bootstrap entrepreneur" describes most small business owners, having enough capital to be able to keep your business afloat is vital to your survival.

But don't believe the hype about needing big finance as a cushion for business success.

Here are some bootstrapping tips that should keep you away from the capitalization hype and improve your chances for business success:

• Never make cash projections before making sales. Business plans that make earning projections without having sold a product or service to a single customer are questionable at best. Try a little test marketing to find out what they will pay for your service or whether they even will.
• Let cash flow be your capital. While supporters of adequate capitalization insist enough financing provides a "cushion" for your business, ultimately your venture will rise or fall on how much money it can bring in for the value it creates. Bootstrappers find this out sooner rather than later when financing is expended and debts are amassed.
• Avoid big risks and pare down your startup. Startup guru Greg Gianforte insists one of the appeals of bootstrapping allows entrepreneurs to start with as much as they have or feel comfortable spending. Growth is financed by cash flow not risked capital or assets.
• Keep your full-time job. This is a piece of advice some would question, but a job gives you cash flow as you grow your business. Structure your startup as something that can be done in your spare time.
• Make money don't borrow it. Some bootstrappers have started their ventures on plastic but generally it's best to focus on generating cash flow even if it's from only one component of your business plan. From there you'll have the resources to expand.

Try think of your business with these tips in mind and avoid thinking about the capitalization pitfall. Entrepreneurs should focus on creating value not on chasing investment dollars.