Bootstrapping to Extend Cash Flow
William H. (Bill) Payne, Senior Program Consultant, Kauffman Foundation
Startup, high-growth ventures usually operate with negative cash flow for several months, if not a few years. As Mark Brennan describes in his article, Focusing on Cash Management, it can be quite advantageous for entrepreneurs to forestall initial and subsequent fundraising through fastidious cash management. Bootstrapping is one way to extend existing cash, thus postponing the need to raise money. Here are a few ways to bootstrap your company and extend your cash runway (defined as the number of months a company has before running out of cash at the present burn rate).
Keep Your Day Job
There are several ways to extend your cash runway using the salary earned by working for others to minimize or eliminate the need for a salary from your startup business.
- Keep your day job (or convert your employment to part-time) and work on your business during off hours;
- Your spouse keeps their job to cover personal expenses while you are working full-time on the new business; or
- You or your partner in the new business work part or full time to provide the cash necessary to sustain the two households while the other partner works full-time in the new business.
Use Personal Assets for Startup
Exhaust your personal assets and credit (including home equity and credit cards) as well as the cash you receive from friends and family prior to raising money from professional investors (angels and venture capitalists). Many startup companies are sustained for months on credit cards until the company can achieve positive cash flow from earnings. But, be careful. All debt (including credit cards) must be repaid. Careful planning is required to successfully utilize this strategy.
Minimize Salary Expense
Until your company achieves positive cash flow, insist that the management team take minimal salary offset by generous equity compensation (options or outright equity grants). Salary minimums are defined by the current reasonable family expenses of each team member.
This tactic accomplishes two objectives: preserving precious cash and providing management incentives for the team in the form of equity. Your leadership as the CEO/entrepreneur is necessary to make this tactic effective. The willingness of the management team to minimize salary expense until the company can afford competitive salaries from positive cash flow will also impress partners, investors, and bankers.
Early Commercialization of Products and Services
Here is another classic bootstrapping method used by entrepreneurs. While your ultimate product is maturing in the development laboratories and going through beta testing, begin sales of other products, and services in your bag of tricks. Consulting in your areas of expertise can bring needed cash into the company at this early stage, extend the cash runway of the company, and postpone the need to raise money on the outside. Caution: if you adopt this tactic, manage and balance your time carefully, creating cash for the company without slowing the commercialization of the product defined in your business plan.
Extending the cash runway using these methods puts off or sometimes even eliminates the need for raising money from professional investors. Raising money later allows time for the entrepreneur to achieve milestones in the business, thus raising the valuation at the time of outside investment. A higher valuation at the time of fundraising decreases the amount of equity required for investors and increases the equity remaining for the entrepreneur.
© 2006 Ewing Marion Kauffman Foundation. All rights reserved.