The goal of every bootstrapped startup is to get to a point where the business can generate enough cash to sustain itself. Until then, the focus should be about survival. Here are four reasons why you should make money before you spend it:
- Out of cash means out of business.
Every business owner knows this -- when you run out of cash, you are out of business. If that prospect keeps you up at night, you are not alone. The best way to prevent this from happening is to create a culture where you make money before you spend it. That way, you never get ahead of yourself by investing in projects that may threaten the survival of your business.
- You may not raise outside funding.
If you read blogs like TechCrunch, you might get the impression that all it takes is a great idea to get investors knocking at your door to fund your business. That is far from the truth. In reality, only 5 percent of startups actually get Venture or Angel funding. The other 95 percent are funded through personal resources of the founders and sometimes with money from friends and family. Even if your idea has a good chance of being funded, it takes an average of three-to-six months to raise investment funds. Spending money in hopes of raising Angel or Venture funding is dangerous because by the time the money materializes, it may be too late.
- When it rains, it pours.
In business, you are going to experience some near death experiences. Some of them may be outside your control. My current startup, GiftCardRescue.com had a scary experience recently when monthly revenue unexpectedly fell by 30 percent due to a larger than expected seasonal drop, runaway expenses, and the loss of two key suppliers. It took two months to recover. If we had stayed true to our rule of making money before we spend it, this would not have happened.
- You can delay raising money.
One of the advice I give startups is to delay seeking external funding until they are either profitable or -- at the very least -- close to cash-flow positive. Raising money when you are profitable puts you in a stronger negotiating position. First, it reduces the amount of equity you have to give away. When I went on the ABC show "Shark Tank," I was offered a $200,000 investment for 50 percent equity in my business, GiftCardRescue.com. At the time, projected revenue for that year was $100,000. The deal fell through and that was a blessing. It's been two years since that episode and now revenue is in the millions. I am glad I bootstrapped the company to this point, because I can now raise money knowing that I do not have to bet the farm doing it.
Kwame Kuadey is an entrepreneur, startup advisor, and public speaker. Kwame started his first company, GiftCardRescue.com on a shoestring and bootstrapped it into a profitable, multi-million dollar business.
The Young Entrepreneur Council (Y.E.C.) provides its members with access to tools, mentoring, community and educational resources that support each stage of their business’s development and growth. Our organization promotes entrepreneurship as a solution to youth unemployment and underemployment.