Growing a Business? Why ‘Bootstrapping’ Beats Raising Money

(DGIwire) — Most people think raising money is the first step in growing a company. But entrepreneur Marty Schultz sees things differently. According to him, raising money does not guarantee success—in fact, it may guarantee failure! As a mentor-speaker, angel fund investor and award-winning innovator who has grown five companies with a combined valuation of more than $300 million—his opinion is worth taking seriously.

“The money-raising process is rigorous, with many potential pitfalls along the way,” says Schultz. “For example, VCs expect a return of anywhere between 10-to-1 and 20-to-1 on their investment within two years. So if someone is raising half a million, a company has to be worth at least $5 million in 24 months. Why this insistence on a high return? Because for every 20 companies VCs invest in, only one might ultimately prove to be a successful, money-generating enterprise.”

Considering the stiff competition among entrepreneurs who have similar ideas, especially in the digital era, money can be very hard to raise, Schultz notes. But even when the money is there, challenges loom. It will take six months to go through the money-raising process, during which the business is completely on hold. If the company fails to get the money, management has wasted their own time and money, two valuable commodities for startups. And when money is raised, the CEO of the company is now an employee of the company’s investors. If the CEO disagrees with the investors’ plans, he or she might be outvoted; if the CEO messes up, he or she might be fired.

Instead of raising money, Schultz believes that a different strategy—which he calls “bootstrapping”—is much better. In fact, he built each of his five companies by bootstrapping, starting with no money and building them up as viable businesses.

According to Schultz, one of the core tenets of bootstrapping is talking—as in old-school “face to face”—to every potential customer. Entrepreneurs will quickly see if their idea solves, or doesn’t solve, their customers’ need. When this is done dozens of times, the entrepreneur will have a road map for a product or service that will sell and customers will buy. The entrepreneur may find the technology they built was totally wrong; their marketing ideas might be off-target; or they may find one customer that wants to finance them to build their product or service the way their industry really needs it. The overall key, Schultz says, is being creative, passionate and persistent—which is all someone really needs to succeed. Other key components of bootstrapping include engaging the ideal mentors and board of directors; being able to pivot the focus of a business quickly based on customer need; and learning the ins and outs of competitors’ businesses.

“If there’s one thing I’ve learned after decades of building and selling businesses, it’s that the bootstrapping strategy is incredibly powerful when put into action—and it genuinely beats a focus on raising money when getting a company off the ground,” Schultz adds.