Amar Bhide, the Glaubinger Professor of Business at Columbia University, has studied the practices of scores of successful entrepreneurs. In his 1992 HBR article “Bootstrap Finance,” he recommends the following principles and practices on how to start a business on a shoestring budget:
Get operational quickly.
There’s nothing ignoble about starting with a copycat idea or product. Big ideas can consume enormous amounts of time and money before they start to generate real money.
Look for quick, break-even, cash-generating products.
Take baby steps towards blockbuster products (if that’s even what you want!) “A business that is making money, elegantly or not, builds credibility in the eyes of suppliers, customers, and employees, as well as self-confidence in the entrepreneur.”
Consider high-value products or services that you can sell directly.
Convincing customers to give up familiar products or services is very challenging, especially if you don’t have a large budget for marketing or advertising. Consider goods that you can sell directly, which lowers costs of sales. Or try to partner up with more established outlets to reach customers (for example, if you are making sweaters, think about persuading a major catalog to carry your products).
Don’t chase high-priced talent.
While you need top-notch employees, you probably don’t have the means to compensate veterans. Don’t settle for lesser-caliber talent — but look instead for diamonds in the rough. Compensate for your startup status by offering advancement and opportunity for growth.
Keep growth in check.
Beware new customers whose demands force you to undertake significant new costs. Beware sales that force you to lay out significant money without an unassailable guarantee that you will be made whole. Beware of growth that forces you to add more fiscal strain on your company than you can reasonably expect to meet over time.
Focus on cash, not profits, market share, or anything else.
No metrics matter if you can’t pay your bills.
Cultivate banks before the business becomes creditworthy.
Many banks won’t lend to you unless you prove that you merit the loan — which might be difficult without investment capital in the first place. Yet you can place yourself in a position to qualify. Be sure to keep good records, have solid balance sheets, and make a point of making contact with potential bankers, if only to ask for advice. This lays the groundwork for securing a loan down the road.
From the book The Startup Garden: How Growing a Business Grows You by Tom Ehrenfeld (McGraw Hill, 2002)
- Pros and Cons of Financing a Business
- 12 Tips for Getting Your Bank Loan Approved
- How to Raise Money to Finance a Franchise
- Six C’s of Credit: Bank Loan Requirements
- Understanding the Kinds of Capital for Your Business