Author and consultant Sramana Mitra says bootstrapping is a smart way for entrepreneurs to get their businesses going.
In some ways, it’s easier to be a startup now than ever before, says Sramana Mitra, an entrepreneur, strategy consultant and founder of One Million by One Million (1M/1M), a global virtual incubator that aims to help one million entrepreneurs globally to reach $1 million in revenue.
Easy access to inexpensive technology, including open source software and cloud computing, has dramatically lowered the barrier to entry for entrepreneurs developing high-tech products and services. Even more significant, startups can now tap a “tremendous freelance workforce,” says Mitra.
“Entrepreneurs for very little money can get a prototype and launch it quickly by using a global pool of developers,” she says, noting that One Million by One Million works with software development teams in India, the Philippines and different parts of the U.S. “It’s a very effective way of scaling companies right now.”
But even with these advantages, it is far from easy being an entrepreneur, Mitra says. There are some scary statistics to back her up. A 2012 study by Harvard Business School lecturer Shikhar Ghosh found that some three-quarters of venture capital-backed startups failed to return investors’ money. A Regnier Institute study found that fewer than half of 539 ventures founded in the decade between 1991 and 2001 survived more than two years.
With figures like this, it is no wonder that venture capitalists “want to come to the rescue of victory,” Mitra says, explaining, “There are lots of hurdles to clear. VCs want entrepreneurs to take as much risk as possible, to come in with a business model as mature as possible.”
Given that, most startups put financial skin in the game by bootstrapping, a topic Mitra has addressed in several books, including her latest titled “Bootstrapping Using Services.”
“Bootstrapping is the most universally applicable method of getting a startup off the ground,” Mitra says, whether or not they go on to raise venture capital.
Three Startup Funding Models
There are three primary types of bootstrapping for entrepreneurs:
Self-financing. In the most well established form of bootstrapping, startup founders use their own savings and credit facilities and/or ask friends and family to contribute funds.
Bootstrapping using services. With this model, startups sell services to a customer or customers while retaining control of their intellectual property and using the knowledge they gain to further develop their product. “It is an especially savvy and effective way of building business-to-business companies like software companies,” Mitra says. She offers several examples of companies that have done so in a recent Harvard Business Review article.
Bootstrapping using a paycheck. With this model entrepreneurs develop their ideas while still holding down a job working for someone else, usually working nights and weekends. This is only advisable if the entrepreneur is developing a product or service that will not compete with those provided by his employer. Software giant Oracle is among companies actively encouraging these kinds of “intrapreneurs,” Mitra says. This model is attractive because of the relatively low risk involved in comparison to self-financing or bootstrapping using services.
Mitra calls this kind of information” tribal knowledge” and says one of the goals of One Million by One Million is to “help extract this tribal wisdom and democratize it” so that fewer startups will fail.
Ann All is a journalist based in the United States who has covered business and technology for more than a decade, writing about everything from business intelligence to virtualization. She has written extensively about outsourcing, including authoring the popular Straight to the Source blog for IT Business Edge.