No matter how scrappy or ‘lean’ a founder is, proving out a new idea requires money to get started. You need to show some level of traction before funders will be willing to take a risk to put their money behind a new venture.
Two simple ways to get started are 1) through self-generated resources, also known as bootstrapping, or 2) rallying your personal network to support your idea.
Bootstrapping is a term used to describe businesses that scale without taking on outside funding. Instead, founders self-fund the business.
Funds can come from personal savings, by funneling money earned from another job or income stream back into the business, or from revenue earned directly from the business.
At minimum, entrepreneurs invest ‘sweat equity.’ After all, expending time and effort to bring your idea to life comes with a financial opportunity cost. This paired with bootstrapping is often a necessity in the earliest stages when a business carries the most risk due to lack of market validation and track record. Self-funding allows you to build credibility and prove market demand so that you can make a strong case to outside funders should you decide to go that route later.
Some entrepreneurs will move through this initial phase more quickly than others. Some will begin bootstrapping their idea and, depending on the business model, industry, or vision for the company, may never seek outside capital (although this is less common the larger a business grows).
Global Entrepreneurship Monitor 2016 found that the choice to bootstrap is often due to inaccessibility of other types of capital, especially for women entrepreneurs “who may face unequal treatment from traditional lenders, both in developed and developing countries (World Bank, 2015)”
The founders keep full ownership of the company unlike accepting equity investment, and there are no additional costs like interest or fees when accepting debt financing.
Since growth is limited by founders’ savings or revenue earned, the speed of scaling can be slower than if one were to accept outside investment.
Without outside funders, founders may miss out on the advice, mentorship, and network that is often attached to capital.
When Acumen Fellow, Krupa Patel, first envisioned Silverleaf Academy, an affordable primary school in Tanzania, she knew it would require personal investment to get it off the ground. This early personal investment allowed the team to gain enough traction to secure the next phase of funding from an innovation fund.
“The four of us co-founders all clearly had alignment around the absolute necessity that something like this needed to exist in Tanzania so we self-funded to begin. The four of us put whatever personal capital that we had to begin to just start it. Soon after that, we got UK Government funding from a specific Innovation fund that wants to see more Innovations meeting the pain points of the education sector and also the health sector. We got a three-year runway with them that almost fully funded us to be able to go from ideation to implementation.”
- Krupa Patel, Founder, Silverleaf Academy
Similarly, Yuliya Tarasava, Acumen Fellow and co-founder of CNote, was driven to develop a tool to empower financial freedom. She spent the first several months conducting market research and confirming the idea had potential. For Yuliya, the initial investment was not just personal savings but also the ‘sweat equity,’ the cost of her time and work bringing this idea to life.
Venture Capitalists also recognize the value of bootstrapping. This former VC shares three reasons why he decided to stick to bootstrapping when he became an entrepreneur and found himself on the other side of the table: 1) Prioritize profitability and sustainability over growth, 2) Freedom to make mistakes openly and 3) Reserve VC connections for the right time and opportunity.
For many social enterprises, scaling entirely through self-funded earned revenue is a challenge. It’s not impossible, but the necessity for outside capital depends on how large and how quickly you aim to grow.
At the end of the day, the decision to seek outside capital is a personal one - there is no right or wrong answer to your funding strategy.
Social entrepreneur, Maneet Gohil, shares his thought process on the decision to evolve past self-funding alone:
“I wanted to run it all the way bootstrap only because that’s where the fun is: you make money and then you put more money into the business, and grow it, and then make more money. But later I realized that it would take a lot of time for me and there are a lot more opportunities for impact and that impact can be escalated if I raise funds.”
- Maneet Gohil, Founder, Lab10
Friends + Family
As the title suggests, this type of capital is raised from friends and family.
Raising funding from your immediate personal networks is, in a way, an extension of bootstrapping. Entrepreneurs can tap into their close connections to supplement their own savings invested into the company.
Mixing family and money can be a delicate situation. It’s best to document the agreement from the very beginning to ensure there is a shared understanding of repayment terms and conditions.
Friends and family are not necessarily deterred by market trends or lack of company track record because they believe in the founder(s).
When there are repayment plans, friends and family may be more lenient to shifting agreed upon terms.
Accepting funding from friends and family has the potential to strain relationships should there be miscommunication about expectations like terms and conditions of repayment, or if the money is never ultimately returned or recovered.
Acumen Fellow, Khizr Tajammul, shares his approach to organizing friends and family to grow Jaan Pakistan, a clean cookstove company in Pakistan, before they had much traction:
“We didn't have anything to show to anyone. We had imported a number of products and tested them in the marketplace. We didn't have traction. We didn't have revenues. We had an idea. And at the idea stage, I think the easiest thing to do is to turn to friends and family, and that's what we did.”
- Khizr Tajammul, Founder, Jaan Pakistan
One inherent limitation of a friends and family round is that it is not an option for everyone. Allie Burns, CEO of Village Capital, shares how her team is looking for ways to support entrepreneurs through this early-stage funding gap that disproportionately affects women and people of color.
New membership-based organizations such as Pipeline Angels are expanding access to early stage investment by using members as a friends and family round for women and non-binary femme social entrepreneurs who many not already have support.
The Global Entrepreneurship Monitor (2016) predicts that crowdfunding will play a larger role in facilitating informal investment from friends and family: “In the era of massive social networks that can be tapped by entrepreneurs, it is likely that crowdfunding will increasingly take the place of asking close relations for funding directly.”
Part 2 of this series goes into options to raise capital over short-term engagements to continue building momentum in the early days: crowdfunding, competitions and fellowships. These specialized methods can secure quick injections of capital and provide the necessary boost you need to keep charging forward.
Danielle Sutton is the Content Animator at Acumen where she surfaces stories to inspire and activate social entrepreneurs. In an age of information overload, she believes in learning 'the right thing at the right time' to intentionally design impactful social enterprises. You can usually find Danielle digging into the Acumen course library, playing in the mountains, or exploring marketing on The Sedge blog.