MBA2307 Why You Should Always Bootstrap Your First Business

Summary

The $100 MBA Show: MBA2307 - Why You Should Always Bootstrap Your First Business

Host: Omar Zenhom
Release Date: May 11, 2023
Duration: Approximately 12 minutes

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Introduction

In episode MBA2307 of The $100 MBA Show, host Omar Zenhom delves into the compelling reasons why aspiring entrepreneurs should bootstrap their first business. Drawing from over two decades of entrepreneurial experience, Omar provides actionable insights on building a business with minimal resources, emphasizing financial prudence and personal growth.

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The Case Against Debt and Investors for Your First Business

Omar begins by addressing the common avenues entrepreneurs consider for funding their ventures: loans and investors. He underscores that both options inherently involve taking on debt, whether it's a bank loan, credit card debt, or the obligation to deliver returns to investors.

Omar (00:50): “Taking on a loan to fund your business or even taking on an investor means you're taking on debt.”

He argues that for first-time entrepreneurs, this financial burden can be particularly daunting. Debt not only adds financial pressure but also introduces external expectations, which can hinder the organic growth and learning process essential for a budding business.

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Understanding Ignorance Debt

A central concept introduced in this episode is "ignorance debt." Omar explains that this form of debt arises from the cost of inexperience. Without prior business knowledge, entrepreneurs are prone to making costly mistakes as they navigate the complexities of running a business.

Omar (02:15): “You're going in with no perspective, with no experience, with no prior history of running a business. So you're going to pay the tax on your ignorance through the mistakes you're going to make.”

This ignorance debt is inevitable and serves as a crucial learning mechanism. It teaches entrepreneurs fiscal responsibility and the intricacies of business management through real-world challenges.

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Learning Through Failure: The Piano Analogy

To illustrate the inevitability of mistakes and the learning curve associated with entrepreneurship, Omar employs the analogy of learning to play the piano. He compares the initial stages of business-building to a novice pianist experimenting with different learning methods, making errors, and gradually refining their skills.

Omar (03:30): “You had to fail a few times. You had to fall on your face. You had to spend some money and waste some money. And the same goes with building a business.”

This analogy underscores that failures are not only expected but are integral to the growth and eventual success of any venture.

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Strategies for Bootstrapping Your First Business

Omar offers practical strategies for aspiring entrepreneurs to bootstrap their first business effectively:

1. Service-Based Models

Launching a service-oriented business requires minimal upfront capital. Examples include consulting, graphic design, fitness coaching, and other professional services where the primary investment is time and expertise rather than significant financial resources.

Omar (05:10): “Businesses like a service-based business, whether it's consulting or graphic design or fitness coaching, whatever it might be, the point here is that you're exchanging time, your time or somebody else on your team's time for money.”

2. Leveraging Distribution

Another approach is to create products that can be distributed widely without substantial additional costs. This includes writing books, developing online courses, or creating digital assets like graphics or software that can be sold repeatedly.

Omar (05:45): “You can write a book and sell it many times, you do it once and you sell it several times. You can create a course and you can sell it several times.”

3. Starting Small with Minimal Capital

Omar emphasizes the importance of starting with a business model that aligns with one’s financial situation. He suggests low-capital ventures such as affiliate marketing, YouTube content creation, or self-publishing on platforms like Amazon.

Omar (07:15): “You can start a website and a blog and be an affiliate marketer for less than $100. You can start a YouTube channel for free and start building content and becoming a creator.”

By keeping initial costs low, entrepreneurs can afford to experiment, make mistakes, and pivot without facing severe financial repercussions.

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Making the Transition: When to Seek Investment

While Omar advocates for bootstrapping the first business, he acknowledges scenarios where seeking external funding becomes viable. Once the business demonstrates traction—such as consistent revenue, product-market fit, and a loyal customer base—it is in a stronger position to attract investors or secure loans.

Omar (09:00): “Once you've bootstrapped this business, let's say it's a success and you're making good revenue and you have a good business model and you've shown that there's product market fit and customers love your product... you have a much better position now.”

At this stage, having a proven track record makes the business a more attractive and less risky investment opportunity, allowing for greater leverage and favorable terms.

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Maintaining Financial Control

Omar highlights the paramount importance of maintaining control over one’s finances. Bootstrapping ensures that entrepreneurs are not under the constant strain of financial obligations, thereby reducing stress and allowing for more strategic decision-making.

Omar (11:30): “One of the reasons why I really believe that you should bootstrap your first business is because you want to have control over your finances. You don't want to be under financial pressure. Financial pressure is one of the worst stresses of humankind.”

By keeping expenses low and avoiding debt, entrepreneurs can navigate the uncertainties of business with greater resilience and adaptability.

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Conclusion

Omar Zenhom wraps up the episode by reiterating the benefits of bootstrapping for first-time entrepreneurs. He encourages listeners to embrace the learning process, remain financially prudent, and focus on sustainable growth. By starting lean, entrepreneurs can effectively manage ignorance debt, build a solid foundation, and position their business for future success and potential investment.

Omar (12:00): “Stay lean in the beginning, pay off our ignorance debt, grow the business pivot if needed, and make some money along the way.”

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Key Takeaways:

• Bootstrap First: Use personal funds to avoid debt and maintain financial control.
• Understand Ignorance Debt: Accept that mistakes are part of the learning process.
• Start Small: Opt for low-capital business models to minimize financial risk.
• Build Traction Before Seeking Investment: Prove your business concept before attracting external funding.
• Maintain Financial Prudence: Keep expenses low to reduce stress and enhance business resilience.

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By following Omar Zenhom's advice in this episode, aspiring entrepreneurs can navigate the challenging early stages of business-building with greater confidence and strategic insight.

Transcript

[A]

Got a 7am meeting on a Monday expensing breakfast because it's in policy wasting all afternoon submitting an expense report for that breakfast. If your company used Ramp, you could submit expenses with just a text.

[B]

Yay.

[A]

Free your team from expense reports today. Switch your business to ramp.com.

[B]

Hey yo, welcome to the Hundred Dollar MBA Show. Powerful business lessons you can count on in just 10 minutes. I'm your host, your coach, your teacher Omar Zenholm. I'm also the co founder of Webinar Ninja, an invented software company I started with my co founder back in 2014. And in today's lesson you will learn why you should always bootstrap your first business. Listen, this is my personal advice from my own experience and what I've learned being around so many entrepreneurs in the last 20 years. Taking on a loan to fund your business or even taking on an investor means you're taking on debt. It's pretty clear when you take a loan from a bank that that's debt or you're using credit cards or whatever it might be. But also if you're getting an investment from an investor, you're indebted to the investor to give them a ROI or they are expecting a return on investment. And the reason why I'm not a big fan of doing this for your first business is because this is not the only debt you'll have to deal with. I'll explain in today's episode. What I want you to do instead is build a business on your own wits, on your own money that you can afford to lose. Because feeling the pain of losing that money is important and you will lose money. This is going to happen, okay? But it's going to help you learn how to run a fiscally responsible business. I'm going to break it all down in today's episode and show you some of the options that you can look into when it comes to funding your first business without taking on debt or investors. Let's get into it. Let's get down to business. Now I mentioned at the top of the episode that when you take on debt, whether it's a loan, credit cards, whatever it might be, or even an investor where they're looking to get a roi. This is not the only debt you're going to have to deal with when you're starting your first business, you got to deal with ignorance debt. It's a real thing. What's ignorance debt? Well, you're going in with no perspective, with no experience, with no prior history of running a business. So you're going to pay the tax on your ignorance through the mistakes you're going to make. And there's no way around it, okay? You have to go through it. This is how you learn how to become a great entrepreneur. And every entrepreneur story has this built in. If you read any biography, you listen to, founder stories, podcasts, or whatever it might be, they are going to go through tribulations, some mistakes, some problems. They're going to learn the hard way, and that is the ignorance that they have to pay. And this is normal. This is how it is. Let me give you an example. Let's say you wanted to learn the piano, okay? You are new to piano. You don't know anything about piano. You've never learned it. You don't have any idea of how play any songs, or you don't know the notes or anything like that, okay? When you start out, you have all these options. You can get a private lesson in person. You can do a virtual lesson over a video call. You can use one of those apps that listens to your music. Music or listens to what you play and corrects you. You can buy an online course on Udemy, for example. You could just teach yourself by listening to the song and try to repeat it. There's all these different options, and you're not gonna know what's best for you and what's gonna help you progress fast until you just choose one. Okay? You're just gonna choose one of these paths, right? You're gonna choose maybe an online course, and you're gonna see how you progress. And maybe you're gonna realize, oh, I'm not progressing as fast as I should. Let me try something else. Let me get a private lesson. Once a week you get the private lesson. You realize, oh, man, the private lesson is not enough. Once a week is not enough repetition. It's going to cost you too much. If I do it more than once a week. Let me try using one of these apps. You try one of these apps, you start progressing. You're finding that this is actually what you needed all along, and it helps you learn how to play the piano. You had to fail a few times. You had to fall on your face. You had to spend some money and waste some money. And the same goes with building a business. This is what's going to happen, and there's no way to avoid it. It's a rite of passage. Failure is a rite of passage for every successful entreprene. So since you have to pay that debt, since you got to pay that tax of ignorance, when you start out and we all do. I paid it tremendously and I didn't have all the resources that are available now with the Internet and AI and all these experts at your fingertips on YouTube. I definitely paid that debt. So the point here is that you're going to pay the ignorance debt. That is bad enough. That means your likelihood of success is far less than it is going to be if you are experienced. So you don't want to risk, risk money or debt and put yourself in a really bad position knowing that these are your chances. This is what you're going to have to pay off in terms of ignorance debt while you're paying the other debt and other finances. So this is why I highly recommend it's great to play with house money. What I mean by that is you want to be able to build a business on your own cash that you can afford to lose. This allows you the freedom to try things, work on things, fail, and know that you're not going to be in financial trouble or your reputation as an entrepreneur is not on the line. If you have an investor, it's a small world. If you get an investor to back your idea and your idea doesn't do well or you fail, you go out of business, it's going to be very hard for you to raise money again. Even if the investor doesn't even know about it, they're going to ask about it in your next pitch. What happened to your other business? It's better to go after investors or take on debt when you have some wins under your belt. When you know what you're doing in business, you know what kind of entrepreneur you want to be, you have some successes, you have some track record that shows that, hey, I've learned the hard way. I'm now able to be able to make solid decisions in my area of expertise. So if you're starting your first business, how do you do without taking a loan or taking on investors? Well, you'd start with a low capital required business, A business that doesn't require you to have a lot of upfront capital. Businesses like a service based business, whether it's consulting or graphic design or fitness coaching, whatever it might be, the point here is that you're exchanging time, your time or somebody else on your team's time for money, a service. Or you can create a business that has leverage of distribution. Meaning like you can write a book and sell it many times, you do it once and you sell it several times. You can create a course and you can sell it several times. You can Sell a set of assets like some graphics or icons, sell it many times or you leverage your own skills. If you are capable to create something small and then build slowly like a software company if you're a programmer and you can program it yourself. Or you could just start really small by just having a few customers to validate the idea and you can keep your costs down. Now, software is a little bit complicated because most software companies that actually give a lot of value to the customer require a lot of funding, meaning server costs, engineering costs, all that kind of stuff. But it is possible to run a very small, lean software company if you are kind of the head of design, development, everything. The point here is that you're going to choose a business model that works for your financial situation. The good news is that a lot of these businesses don't require much capital to start with. You can start a website and a blog and be an affiliate marketer for less than $100. You can start a YouTube channel for free and start building content and becoming a creator. You can be an author and write a book and self publish a book on Amazon for a few hundred dollars. We all can scrape together a few hundred dollars. Save some money on the side. Side hustle, consult to do something to earn a few bucks to get started. This puts you in a much better position so that you can learn at your own pace. Afford the blows and the mistakes you're going to make that you know it's happen and still land on your feet because your costs are low.

[A]

Got a 7am meeting on a Monday expensing breakfast because it's in policy wasting all afternoon submitting an expense report for that breakfast. If your company used Ramp, you could submit expenses with just a text.

[B]

Yay.

[A]

Free your team from expense reports today. Switch your business to ramp.com.

[B]

Now. Once you've bootstrapped this business, let's say it's a success and you're making good revenue and you have a good business model and you've shown that there's product market fit and customers love your product. You have traction. You've been doing it for years. You're in a much better position now. A much better position to get funding of any kind, whether it's a loan from a bank or an investor. An investor now can say, wow, this person knows how to make money. This person knows how to run a business. They have proof, they have data. I say this all the time. If you ever watch Shark Tank, the first question they ask is how many sales do you have? Because if they know that you can make sales with this product, they're happily going to invest. This gives you leverage. This gives you an opportunity to say, hey, I know what I'm doing. You can trust me with your investment. I'm going to get you a return on investment. This is not an unknown entity. I have a track record of experience, of finances, of money. You're just riding the train. That's what investors want. They want a bullet train that's going somewhere that they want to go and they just want to hop on that train. You're driving that train. They don't want a train that's sluggish or needs their help or need them to, you know, shovel coal in the back so they could keep going. They want to just put their money and they want you to do all the work and they want to see success. If they see you are already getting success, you're already reaping the benefits, you're already being profitable and making money and you have customers that are happy, it's a no brainer for them. It's like, yes, where do I sign? This puts you in a better position and allows you to then, hey, you've already paid off all the ignorance debt. Not all of it. I should say most of it because we always keep learning and we have a proven track record and now we're in a position where we're getting some cash to just take us to the next level to give us that super boost. You're getting your mushroom like Mario does and get superpowers. Right. And it's just going to take things to an absolutely new level, rather asking for the money when it's a do or die. Thanks so much for listening to the $100 NBA show. If you love what you hear, hit subscribe, hit follow on your favorite podcast app. Just hit the triple dots on Spotify app podcast and hit follow. So you get our next episode automatically and access to over 2,300 episodes in our back catalog. Before I go, I want to leave you with this. One of the reasons why I really believe that you should bootstrap your first business is because you want to have control over your finances. You don't want to be under financial pressure. Financial pressure is one of the worst stresses of humankind. Right? It's the worst. Okay? And if you can keep your costs low and you can run your business for peanuts, you can always find a way to make sure you cover the cost, even if you're not making any money. But as soon as your costs go up and you start building this huge dream and you owe money to people, the dream starts fizzling out because it's not enjoyable anymore. The stress gets to you. I don't want anybody to have to endure any of that kind of financial stress. I've been there before. It's not fun. That's why we want to stay. Lean in the beginning, pay off our ignorance debt, grow the business pivot if needed, and make some money along the way. Thanks so much for listening and I'll check you in tomorrow's episode. Re I'll see you then. Take care.

[A]

Got a 7am meeting on a Monday? Expensing breakfast because it's in policy wasting all afternoon submitting an expense report for that breakfast. If your company used Ramp, you could submit expenses with just a text.

[B]

Yay.

[A]

Free your team from expense reports today. Switch your business to Ramp.