Bootstrapping seen as useful tool for startups that can afford it

Bootstrapping is one way entrepreneurs can build out the basic structure of their companies, but it comes with its own risks — namely, running out of money.

“I think it’s really important for the entrepreneur to realize that you have to live on a budget, no matter how small your budget is,” said Jacquin Davidson, CEO and president of Davidson Associates.

Davidson is a startup veteran who manages Milwaukee’s WERCBench Labs and also holds an associate professor position at Marquette University. She spoke at the Wisconsin Entrepreneurs Conference in Madison yesterday as part of a panel on startup funding. The conference is put on by the Wisconsin Technology Council.

“You have to make sure you have planned out how long that money is going to last, and you have to be able to make some income to go against that,” she said.

Self-funding is a very common strategy for startups, with investing website Investopedia claiming as much as 80 percent of new startups are funded through funders’ personal dollars.

Some panelists saw bootstrapping as a solid default strategy for startups, while others said it depends greatly on the type of business. All panelists agreed it can be useful.

Lorrie Heinemann, president and CEO of the Madison Development Corporation, said entrepreneurs should think about having a backup source of funds “whether it’s a second job for yourself, or maybe you have a significant other.”

She pointed to Epic as one major bootstrapped success story, noting CEO Judy Faulkner’s husband is a doctor.

“If you’re going to bootstrap, you have to understand your sources of capital that are going to get you to the next level until your customer base can catch up,” Heinemann said.

Michael Adam, founder of DocLaunch and a Marquette University instructor of blockchain technology, said bootstrapping shouldn’t necessarily be a default strategy, “because it depends on what your product is, what industry you are in.”

“I’m always of the mindset that the best kind of funding is customer funding, So if you can bootstrap far enough to get your MVP, and get your product going… I think it can be a good default, but it doesn’t have to be,” Adam said.

Davidson argued that bootstrapping should be a default strategy for startups, as it worked for her in past business ventures.

“Banks didn’t want to have anything to do with us, like most banks don’t want to have anything to do with a company that hasn’t had successful profits in the past several years,” she said.

John McDonald, a lawyer with Godfrey & Kahn, says each startup’s funding strategy must fit the situation, so there’s no one-size-fits-all.

“You really need a solid plan; it really flows from there,” he said. “I think bootstrapping is a phenomenal way to start off a company and bring it as far along as you possibly can, and by doing so you can create a value that makes that capital raise go easier and less dilutive to yourself.”

–By Alex Moe