A startup’s guide to bootstrapping
Bootstrapping is a way for new businesses to get up and running without taking external investors' financing.
There are several reasons why an entrepreneur might want to do this. Some people are merely ambitious and want to achieve success without any outside help.
For some innovators it's a business decision: retain 100% of your equity and, if your company snowballs, you get 100% of the gains.
And for some people, it's about balancing the amount of equity they give away in the seed financing stage, compared with the amount they want to retain for Series A, B and C funding rounds.
Whatever your reasons may be, there are some essential things to bear in mind when "booting" a startup.
By staying aware of these issues and anticipating when they will arise, you can give your business the best chance to grow quickly and substantially.
What is bootstrapping?
The name derives from the concept of 'picking yourself up by your own bootstraps' and the fact that without an outside force, this is theoretically impossible.
Bootstrapped companies are ones that get off the ground without the help of external investors.
The difference here is that although you might not take in external funding, there are still outside forces that can help your company to grow.
For example, you might have personal savings of your own that you can put in as seed financing, or real estate that you can release equity from if you are very confident your business will be a success.
You might have customers willing to pay a deposit upfront, as well as suppliers prepared to offer you a line of credit.
While none of these things is 'investment' in the equity sense, they all help to give you a certain amount of working capital and credit that you can use in your early days to get established.
By growing your small business organically, you can start to pay back these creditors and fulfil those initial orders, so you don't incur any costly interest or late fees.
Once you reach a stage where your cash flow and credit positions are sustainable, orders are coming in, and you can fulfil them, you have reached a key milestone in bootstrapping your business and can start to look towards future expansion.
Well-known businesses and projects that were bootstrapped
Bootstrapping startups doesn't necessarily limit their growth, as these well-known examples will prove:
Google famously started in a garage, and reports say co-founders Larry Page and Sergey Brin paid for their first computers using personal credit cards.
Using personal credit for bootstrapping comes with an element of risk, as some personal credit cards carry high interest rates, which will need to be paid off in time.
It's worth noting that there are other credit solutions, however, such as Brex's credit card for startups.
Mark Zuckerberg's 'Facemash' project was never intended to redefine the way we keep in touch with friends, family and complete strangers online, and is hardly a traditional business.
But it still falls into the category of bootstrapping: Zuckerberg wrote the initial code on his personal computer with a little help from fellow students.
It was only after the social network gained traction in 2004 that PayPal co-founder Peter Thiel made a venture capital investment into helping it to grow further.
Bootstrapping can fund unconventional business ventures too. Kevin Smith paid most of the production costs of the 1994 cult hit movie Clerks on credit cards.
In late 2015 he posted the film's final budget details to Facebook - at a total cost of $27,575, Clerks went on to gross over $3 million at the box office, a 100-fold yield.
The list of bootstrappers goes on, including many of the biggest digital technology and data-driven businesses, as well as classics like Coca-Cola.
What are the advantages of bootstrapping?
Bootstrapping a business carries some clear advantages, as well as some that are not initially so obvious.
Many of the main reasons why people bootstrap a business are financial, for example:
- A desire to retain 100% equity in the business and receive 100% of profits
- A desire to avoid taking conventional finance that incurs interest/penalties
- A desire to be financially sustainable from the early days of a startup
Other reasons are more personal and could go to the heart of your character as an innovator and entrepreneur.
Some examples of more personal motivations for bootstrapping a startup include:
- Firm belief that your business will gain significant value quite quickly
- Unwillingness to share decision-making powers with outside investors
- Reluctance to put personal relationships at risk by taking pre-seed funding from friends and family
Remember too that bootstrapping is not just a technique used during the early days of a new startup - it can also be employed later in the life of your business.
Bootstrapping a mature business
In principle, whenever you invest in your business using money generated by your company itself, you are bootstrapping.
For some successful long-term companies, bootstrapping is the clear first choice when expanding or innovating, for all the reasons already mentioned above.
Using funds generated internally allows business owners to retain equity in their firm while reinvesting profits in more money-making ventures.
It's a similar technique to that used by investors when they put their dividends back into their portfolio, allowing their investments to grow organically over time.
You can deploy bootstrapping at any stage, whether it's for the first time or as a method you use again and again - and even if you have already held an equity finance round.
Just be aware that major shareholders might object to using company profits to fund new ventures if it prevents them from receiving a dividend payout in that financial year.
What are the disadvantages of bootstrapping?
The disadvantages of bootstrapping a startup depend on who you are and what resources you have at your disposal.
In some cases, despite lots of hard work, bootstrapping a new business puts you at greater personal risk, as you could lose your life savings if the company fails.
However, this compares with the risk of losing friends and family relationships if your venture fails in the early stages and loses large amounts of your loved ones' money.
There are also personal reasons why it can be beneficial for you to let an external investor take a stake in your company.
Examples include business angels and startup incubators who might be able to offer you advice on how to build your business and get your products on to the market.
If you're new to running a startup business, this experience and expertise from third parties could make a crucial difference in determining whether or not you are successful and just how much profit you make.
Top tips for bootstrapping your startup
Bootstrapping startup businesses is no mean feat. You'll need to adopt a lean approach to spending and careful control of any credit you take on.
Cash flow is important in any business but, during bootstrapping, it's your blood supply. Just as you keep a close eye on your business debts, also keep a tight grip on your credit control.
If you can keep the cash that is owed to you coming in at a steady pace, while clearing any invoices, bills and debts you owe to suppliers, you take a huge first step towards having a company that is sustainable for the long term.
Finally, be honest about times when you can no longer do it alone. There are many different types of finance available, from business loans and equity investment, to peer-to-peer finance and business angels.
Whenever your company needs some extra funding to expand or meet a one-off cost, but you are certain that your business fundamentals are still sound and on track, it might be time to consider the alternatives to bootstrapping.
In the end, it's about doing whatever works best to get your business established, tap into new growth markets, and generate the maximum possible profits for yourself and any shareholders.