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When it comes to launching a new product, one of the most important decisions you’ll have to make involves financing. How will you get the capital required to develop and launch your product? The choice boils down to two different options: bootstrapping or investor funding. Each option has its own advantages and disadvantages, so the decision should be based on what best fits your company and its needs.
In this post, we focus on bootstrap funding and its pros and cons. In our next post we will evaluate investor funding.
Bootstrap Funding
Bootstrap funding refers to foregoing outside startup investment and, instead, self-funding. According to Kelly Hoey of Inc.com, “Bootstrapping means the founders hustled sales and used their own funds - and in the process, made their companies profitable - without external funding, reaping rewards beyond financial, that are, more often than not, exclusive to bootstrapped companies.”
Bootstrapping offers several advantages over investor-funding. First, bootstrapping affords the most control over product development. If you’re footing the bill, you call the shots. This is particularly beneficial for smaller companies that have the flexibility to maneuver along with the market without waiting for approval from various committees or locking horns with reluctant investors.
When you self-fund, you can allow your product to grow organically without the external influence of investors pushing for rapid growth and higher profits. Left to develop on a more slow and steady course, your product may evolve into a robust resource that produces revenue for years to come. Nick Woodman, who spent 10 years slowly building his business GoPro into a giant success, has to say about bootstrapping,“I think a challenge is obviously that you don't have all the resources that you would have if you went out and got an investment. Maybe you can't grow as quickly as you'd like to, but an advantage is that you only have yourself to answer to. You can style your business and your approach exactly the way you want to. You don't have the pressure of outside investors that you're beholden to who want to weigh in on how you're building your business. I think that's really important and beneficial to a business in its early stages. Bootstrapping allows you total creative freedom. For example, if you decide to approach your business in a certain way that makes it a two or three year process to get to your first product, you can do that, versus being rushed into it by investors.”
Bootstrap funding also forces you to be more creative, both in terms of monetary and time restrictions. If you have a shoestring budget, you’ll have to carefully determine where to invest your money and what can wait until you’re more profitable. Likewise, with a smaller team, you’ll need to manage your time well in order to accomplish everything your product requires. As Zach Cutler notes at Entrepreneur.com, “Not having funds to throw at problems forces you to come up with cost-effective, creative ways to solve them. It makes you a better problem-solver. It makes you look for less conventional answers to conventional problems.”
Self-funding doesn’t preclude later investment funding. If you’ve developed an impressive product array already, you are a more attractive candidate for investors because they know you have what it takes to succeed. You may decide later down the road that your company needs investor funding and/or expertise to expand. Woodman continues, “Because we bootstrapped it, GoPro has been profitable since the beginning—modestly, at first, but now it’s a very healthy business. We didn’t need the money. We decided that what we needed was more experience. We wanted to bring more experienced people into the company and build out a more experienced board of directors that could help the company network and help us with strategy. We realized that one of the best ways to do that was to bring on some investors that have terrific networks and experience and could help us scale the business. Because we didn’t need the investment money we were able to go raise the money from people that we wanted to work with and with favorable terms versus being under the gun to raise money and maybe forced to take money from people that wouldn’t be as good of a fit for the business. That was a strategic decision that’s worked extremely well for GoPro because we love our investors and they’ve been very helpful to us.”
However, bootstrap funding is not without its share of challenges. For starters, your initial growth is limited by your ability to meet customer needs. If you experience wild interest in your product but can’t keep up, you may lose prospective customers. You also might not have the resources needed to take advantage of time-sensitive opportunities that could contribute to your growth.
On the other hand, if your product outpaces interest in it or just doesn’t sell well, you may be stuck with an unprofitable product that has tapped you of your available resources.
Any initial revenues your business earns will usually have to be reinvested, meaning it may be a long time before your business produces enough revenue for you to live on. If your product needs more investment than you have available, you may be put into a financially-untenable position. While it may be tempting to bring investors on board this point, they will take advantage of their upper hand position, which could stymie future growth.
Pharmaceutical Industry Considerations
At Pharma Acumen, our focus is on the pharmaceutical industry and businesses that sell their services to large and small biopharmaceutical companies. Before you decide to bootstrap your next product launch for the pharmaceutical industry, several factors must be taken into consideration.
The first is cash flow. Pharmaceutical companies typically take 60-90 days after receiving an invoice to pay. If your company is strapped for cash or relies on a short sales cycle to make ends meet, investor capital may be a better option for you.
Similarly, if you’ve reached an agreement with someone at a pharmaceutical company, the approval process may take so long that he or she has forgotten or loses enthusiasm for your product. Or, even worse, your contact may have gotten a new job somewhere else. Any time or resources you’ve put into readying your product for that particular client will be lost. If you don’t have investors to keep you afloat when this happens, you may have cash flow difficulties.
It’s also important to keep in mind the considerable legal and professional costs associated with doing business in the pharmaceutical industry. To cover your bases, you’ll need to have reliable legal help to review the terms and agreements you reach with prospective clients. Finding the right attorney and drawing up solid documents can get pricey quickly.
Do you have experience bootstrapping a business? What is your advice to those just starting out?
Stay tuned: Our next post will evaluate investor funding as a revenue source for new products.