The importance of bootstrapping cannot be emphasized. Most businesses fail because of a lack of cash and bootstrapping’s main objective is to do the most with the least amount of cash.
Bootstrap – adjective
A situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to find and build a company from personal finances and/or from the operating revenues of the new company.
Most startups do not have a bunch of cash lying around. The importance of bootstrapping is all the more critical for them. Businesses have to make do with what little they have. We often tell our clients that as the CEO/Founder, they are also the janitor. One potential client wanted to hire a marketing manager for her startup. Hiring a marketing manager was vastly beyond her revenue allowance. She should have allowed us to consult on how to manage her own marketing campaign. She then could’ve saved a fortune by being her own marketing manager.
The temptation to abandon bootstrapping is strong, especially when investors come knocking. One of my clients attracted large investors with a business plan I had prepared for him. Initially, I budgeted a modest salary for him in the financial projection. He saw that there was a good amount of retained earnings (something investors want to see) and had since budgeted a larger salary for himself. I had to tell him to reduce his salary. I am not alone in emphasizing this sentiment:
- A red flag goes up for Mark [Cuban] when a Shark Tank contestant says that he’d be comfortable with a six-figure salary. Ultimately, Mark and all the other sharks walk away from the deal.
- Serial entrepreneur Neil Patel, founder of Crazy Egg and KISSmetrics, reflects on how glad he was keeping a $5,000/mo. salary even after raising $4,000,000 in seed and series A rounds for KISSmetrics.
Your Startup Guru advised a client to pay himself less and take in dividend income instead because it is taxed at a lower rate. In business, cash is king, and the CEO doesn’t want to be the kingdom’s worst drain.
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