Self-funding is the number one form of financing used by most entrepreneurs to start a business, and for good reason. Bootstrapping allows you to test a business idea with little or no external risk. Self-financing means you can chart your own course and don't have to answer to partners, investors, or lenders.
And while self-financing means you assume all the financial risk, self-financing also means you retain all the profits.
There's a lot to love about self-funding your startup. I self-financed mine.
But there are also downsides.
1. You may have to get by on little or no income.
When I started my company, for several years I did not take a salary. Every penny we made went back into the business. Implementing marketing and advertising plans. Purchasing supplies. Establishing a stable infrastructure. Developing software and applications. Hiring key employees.
As with many startups, the list of necessary expenses went on and on.
When I finally did take a salary, for years it was well below my pay grade at another company. Fortunately, I was single and didn't have a family. If I had, it would have been close to impossible to survive those early years of building a business.
Self-finance your startup by relying on a relatively small amount of savings, along with the revenue you generate, to fund operations may be a luxury you simply can't afford.
2. You may experience significantly greater stress.
Every startup is stressful (but hey, that's part of the fun).
When you self-finance your startup however, you desperately need to make every penny count. It's harder to take intelligent risks. It's harder to think longer-term.
It's harder to make decisions that will help your business grow when your sole focus is on surviving today.
When every decision can feel make-or-break, it's a lot more stressful.
Which can lead to plenty of sleepless nights. Like the old joke goes, entrepreneurs sleep like babies: every two hours, they wake up crying (as with most jokes, there's a grain of truth involved).
3. Your business may grow more slowly.
Generally speaking, funding fuels growth. Funding allows you to hire more people, implement bigger marketing and advertising campaigns, and create, test, and roll out products and services at a faster rate.
Bootstrapping typically results in slower growth but that's not a bad thing. Many businesses decide not to grow, at least for some period of time. That's definitely the case if you need to keep your full-time job while you launch your business at night and on weekends.
While self-financing does mean you maintain complete control over your business, you will have to accept that control will be over a business that grows more slowly.
4. You can't invest in market validation.
Some startups require significant capital. For example, when products must be manufactured ahead of time rather than created on-demand (like if you're starting a clothing business, you'll need to place a reasonably-sized order with a factory to ensure the cost per unit affords an appropriate profit margin).
That's where market validation comes in: determining whether a profitable intersection exists between your products or services and what customers want (and are willing to pay for.)
There are certainly low-cost ways to validate a market. Talking to potential customers about their pain points and needs. Creating a simple landing page for an upcoming product or service to gauge interest. Creating a minimum viable product (MVP) and seeking feedback.
Even so, without significant capital to validate a market, you will have to rely on limited feedback and a healthy dose of gut feel.
Not that there's anything wrong with that but it does involve greater risk -- and increased stress.
5. You'll need to bring a product or service to market fast.
Short-term results matter most in a self-financed startup, especially when short-term revenue and cash flow provide the funds to keep your business afloat, and to help it grow.
Which means you need to generate revenue and profits before your cash runs out.
That's also okay. Generating revenue and profits means you provide genuine value to your customers.
Self-financing may give you a longer runway, but eventually your business will face the same test every successful business passes: providing real value to customers who are ready, willing, and able to pay a profitable price to receive that value.
Only you can decide how long a runway you need to feel comfortable.