Bootstrapping: Definition, Overview & Example
What do you do if you have a great business idea but not much access to capital? One way to get your business off the ground is by bootstrapping.
Bootstrapping is funding a company yourself or with the operating revenue of the business.
To learn more about bootstrapping and its pros and cons, keep reading.
Table of Contents
- Bootstrapping is the process of funding a company by yourself.
- It can also be done using the operating revenue of the business.
- Bootstrappers can often face cash flow issues.
- It is a model that encourages simplicity and flexibility.
What Is Bootstrapping?
Bootstrapping is when an entrepreneur starts a company without outside investments. Instead, they rely on personal savings, sweat equity, or operating revenue to finance the business. This is in contrast to starting a company with funds from venture capital or angel investors.
First-time entrepreneurs often choose to bootstrap. This strategy allows them to build a company without having much previous experience. In addition, it doesn’t require pitching to investors or creating a traditional business plan to secure financing.
However, even experienced entrepreneurs may opt for bootstrapping when launching a new idea. It facilitates a lean, agile approach and doesn’t require giving away equity.
Bootstrapping comes with downsides as well. First, all of the financial risks lie with the founders. And any initial personal investments may not give enough runway for the company to succeed.
Most bootstrapped companies go through a few stages of growth.
This stage starts with a low amount of capital coming from personal savings or family and friends. Founders in this stage may be working another full-time job while launching their own business on the side.
In this stage, sales have reached the point where they can cover operating costs and fund further growth.
Bootstrapped companies in the credit stage are focused on expansion. They may seek loans or try to raise venture capital. These funds are used to hire more staff, purchase equipment, or fund other essential business activities.
Almost every single successful business out there has gone through some form of bootstrapping. In fact, there are a number of companies who are almost entirely bootstrapped before gaining outside funding or getting access to venture capital.
Starting a business and making it successful is a difficult and somewhat rare thing to do. It takes confidence, discipline and a lot of hard work.
Here are some examples of companies that bootstrapped their way to success.
MailChimp – This email marketing platform was started over 20 years ago. It’s now worth over $10 billion. The co-founders initially built MailChimp as an extension of their design firm. Then, they used their operating revenue to fund growth.
Shopify – The e-commerce giant originally began when the founders of a snowboarding site needed a better shopping cart. So, they created one of their own. They lasted for six years without any external funding and are now worth over $166 billion.
GoPro – The founder of GoPro moved back home with his parents to save money for launching his business. Now, the adventure camera company is worth over $1.3 billion.
Zoho – This B2B software company was bootstrapped by the brothers who founded the company. The company now has over 10,000 employees worldwide and brings over $600 million in annual revenue.
Advantages of Bootstrapping
There are many reasons people choose to bootstrap their company during the beginning stages. These include:
Bootstrapping means the founders retain 100% ownership over their business. In contrast, working with investors means diluting your shares over multiple funding rounds. If you can make it work without giving away your share of equity, that’s a better option in the long run.
It’s not just financial ownership that matters. Giving away equity also means giving up complete control of your vision. Do you want to leave it up to a vote when it comes to important decisions? Or do you want to control the direction? For example, do you want to sell the company in 10 years or establish a generational business? Investors are usually looking for an exit.
Building a startup is challenging, but it also gives you the independence to be creative and do things differently. Investors will have their own opinions regarding timelines and working styles. By bootstrapping, you are free to do things your way.
Sense of Accomplishment
Don’t underestimate how good it feels to look back and say, “I made this!”
Creating a Business Model That Works
Bootstrapping forces you to build a profitable business model. If you can create a product that gives a positive cash flow, you can take a sample size of these results to investors later. In contrast, high valuation startups that rely on venture capital are riskier. They scale quickly but may remain unprofitable for years.
Bootstrapping is one of the best ways to gain market-tested business experience. If the business fails, you won’t have to pay off heavy loans. But if you succeed, you become very attractive to investors looking for people who produce results.
Focusing on Core Business
Raising capital is time-intensive and stressful. Founders who look for funding often spend more time pitching to investors than building their core product. In contrast, bootstrapping allows you to focus on your core activities. As a result, you can devote all your energy to crafting a market-ready product.
Disadvantages of Bootstrapping
Despite the many benefits of bootstrapping, it doesn’t come without risks and drawbacks. These include:
Startup Survival Rates Are Low
It’s estimated that around 90% of startups and small businesses fail within a few years. And one of the top reasons for failure is running out of money. Sometimes, even an excellent product can’t save a bootstrapped company from hitting the end of its runway.
Entrepreneurs fundraise to help them scale quickly. However, if you choose to bootstrap your company, you won’t have as much capital to hire staff or market your product. Depending on the type of business you start, this can be a major hurdle to success.
Money is just one of the reasons why startups seek outside capital. A significant reason to get investors on board is to work with people already embedded in an industry. Your shareholders’ advice, connections, and experience are often where the real value lies.
Keeping a startup afloat is challenging and stressful. You have to wear many different hats when you bootstrap and learn on your feet. That’s why many bootstrapped startups run out of momentum before they can get off the ground.
Keeping Things Organized
Access to capital means hiring staff to do bookkeeping, taxes, and organizational duties. Unfortunately, bootstrapping means you have to do all this yourself. Sometimes, it’s these mundane administrative tasks that end up taking up a lot more time than you anticipated.
Higher Financial Risk
When you’re funding your company yourself, you assume all of the financial risks. Don’t take on large loans or borrow money from friends and family unless you’re sure you can pay it off.
The Top 8 Tips on Bootstrapping
For a lot of small business owners, finding a reliable source of funding is one of the biggest barriers they face. There are a number of methods that small businesses can use without having to seek venture capital or any other form of outside financing.
Here are the top 8 regular bootstrap tips on how to bootstrap your business.
1. Find a Business That Makes Money
This sounds like an obvious first point. But it’s still incredibly important to consider. If you want to bootstrap your business, then it’s unlikely that you can pick an unpopulated market. Instead, focus on models that have a rich history of generating money quickly.
Things like website design, or event planning are great examples of business models that are constantly in need. Getting a sample size list of businesses that are known to make money is a great place to start.
2. Create a Solid Business Plan
A business plan is an essential document. It helps to provide an in-depth description and a clear overview of how you see your business developing and growing. It can be seen as your business’s mission statement, or its road map to success.
It’s not imperative to have a business plan. But you’re very unlikely to see a successful, self-funded business that wasn’t started with a thorough and detailed business plan in place.
3. Know Your Market
A large amount of new businesses fail within their first one to five years. One of the main reasons behind these failures is the owner not knowing their market inside out.
Knowing your market isn’t a simple task. It’s not just knowing that people like the product and will probably buy it. You need to be able to spot trends, predict fluctuations, and essentially know the market like the back of your hand.
4. Focus On Your Operations
Being able to bootstrap your business means you need to focus on the minute details. Nothing can escape your attention. You need to know the ins and outs of things such as marketing and accounting. These operations are the key framework that you can build your business around.
5. Stay Frugal
As we mentioned before, cash flow is a common issue for bootstrapping entrepreneurs. This is why it’s vital that you stay smart and frugal when it comes to your finances. By keeping a keen eye on your outgoings, you can learn the financial ropes.
It’s also important to note that it’s unlikely you will draw much, if any, salary when you’re starting out. Any money that you make should be going straight back into your business.
6. Be Your Own Best Friend
This carries on from staying frugal. Do whatever you can yourself. The early days of your company you’ll find it hard to find the money to hire outside help. It’s much cheaper, if a lot harder, to do as much yourself as you can.
As you grow your business and it becomes more profitable, you can start to hire outside help. But it’s unlikely to happen at the beginning.
7. Team Up
If you want to go fast, go alone. If you want to go far, go together. Having a business partner can literally halve the stress, financial strain, and effort that comes with bootstrapping a business.
Having a partner who has the same level of investment as you means that you are doubling your manpower and your skill sets. It’s also incredibly helpful to have another perspective when it comes to making important business decisions.
8. Ask For Advice
There’s nothing wrong with asking for some help now and again. If you know someone who has a history of starting a business, or even just someone who knows your field, ask for help. This is especially true if you don’t have much experience yourself. Taking on others help and advice can help you grow as an entrepreneur and help to set you up for success.
Bootstrapping is one of the most available options for startup entrepreneurs. While this strategy carries many risks, it also brings a lot of benefits. Remember to plan ahead in case you secure outside funding.
If you want to build a company by bootstrapping, you’ll need to rely on your own skills or learn new ones. This includes managing your finances and running marketing campaigns. FreshBooks has a list of tools to help any entrepreneur run a company.
FAQs on Bootstrapping
How Do You Decide Whether to Bootstrap or Fundraise?
Each company is different, so it depends. If your product has a unique value proposition in a highly competitive market, fundraising can help you scale quickly. If you have an innovative idea, bootstrapping can help you test the market and build a company that matches your independent vision.
What if I Lack Business Experience?
Entrepreneurs without business experience may find it hard to raise money from investors. Bootstrapping is one way to gain valuable experience that will serve you well if your company achieves success.
How Do You Make Bootstrapped Companies Succeed?
There’s no single formula for success. Bootstrapping takes a lot of hard work and determination. When you bootstrap, set aside a significant portion of profits to reinvest in scaling the business. Even if you don’t have investors, try getting an experienced mentor on board to guide you and make connections.
What Are Some Other Tips for Launching a Startup?
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