What is bootstrapping? Pros and cons of self-financing.
When you have a business idea that you want to launch, one of your first needs is funding. For many founders, bootstrapping — a tough but rewarding financing option — is the right solution. So, what is bootstrapping anyway?
In this article, we'll cover the concept of bootstrapping, and help you weigh the pros and cons of this common financing option. We'll also offer a handful of tips to help you successfully take this route if you decide it's the best choice for you.
What is bootstrapping?
Bootstrapping is the practice of self-financing a business. Using only existing resources (translation: no venture capital or major loans), bootstrapped companies build their businesses from scratch.
The term "bootstrapping" comes from the iconic expression "to pull oneself up by one's own bootstraps." When you choose this type of funding, you'll be keeping yourself afloat using your personal savings — perhaps with a bit of support from family or friends — and the sales you make once you launch your business. Your time and money will drive your expansion, which can be both stressful and satisfying.
Should I bootstrap my business?
Bootstrapping isn't perfect for every new business. As you compare the numerous types of funding, you'll need to weigh the pros and cons of bootstrapping to determine if this self-financed path can help you achieve your goals.
When you choose to fund yourself, you'll reap the benefits of a mostly DIY approach. These benefits include:
1. Full ownership.
Bootstrapping is a one of many great funding options that don't dilute ownership. When you bootstrap your business, you and your co-founders will remain the sole owners of your company until you decide otherwise. As such, your team will receive 100% of the profits.
2. Greater control.
Without investors to keep happy, you'll have better control over the direction your company takes. If you want to try an alternate product design, shift your business model, or completely change where your company is headed, you won't have to worry about getting the go-ahead from anyone else.
This control will allow you to focus more on building a strong foundation and perfecting operations through trials without worrying about the errors, which could help you develop more sustainable growth.
3. Limited debt.
Bootstrapped companies may open a credit card to build business credit or make one-time purchases. But they're never reliant on outside funding to move operations along. Most of the debt you accrue (if any) will be promptly paid off, so you won't have to worry about owing on a massive loan if things don't work out as planned.
While bootstrapping is a great way to develop the company you want without incurring much debt, it can also be a stressful venture. These are three of the downsides of choosing this route for funding:
1. Financial risk.
The most obvious risk with bootstrapping is putting your own money directly into the company. When your business takes a hit, whether due to lack of sales or an unexpected expense, it will impact you directly.
Despite having less debt to worry about, self-funded businesses are at higher risk for stagnant cash flow and running out of money altogether.
2. Less credibility.
Without backing from established investors, it can be harder to find the connections you need to build your brand, prototypes, and more. You'll have to develop your customer base and find collaborators on your own without funding, guidance, or introductions from someone who knows the startup landscape well.
3. Slower growth.
Bootstrapped companies often aren't able to achieve exponential growth. You'll probably focus on developing your minimum viable product or otherwise keeping your operations afloat. As such, you may not have thousands of dollars to spend on Google, social media, and other marketing channels to generate interest.
At the same time, you might not want to generate too much interest when you're bootstrapping. With a relatively low budget, you may not be able to keep up with intense demand. Keeping your business's growth slow may be the safest option.
2 famous bootstrapped companies.
Despite the downsides of the practice, bootstrapping is part of many business owners' success stories. As many as 80% of startups are self-funded, including some brands that are now household names. Here are two real-world examples of companies that made it big without outside financial help.
Before GitHub received a $7.5 billion valuation from its new owner, Microsoft, it was a bootstrapped company. The software development platform's founders bootstrapped their company for its first four years before taking on the first outside investor. As they launched the company, the founders were still working day jobs, working on GitHub remotely, and paying themselves small (but growing) paychecks to keep the project funded.
Today, millions of developers use GitHub to store code of just about any programming language. GitHub's founders now have estimated net worths in the billions.
Spanx founder Sara Blakely is a well-known bootstrapper who started her business with just $5,000 in her savings account. Instead of seeking outside funding, she cut huge costs by taking a hands-on approach to building her prototype, developing her packaging, and even completing her patent.
Thanks to her efforts, Blakely now remains the sole owner of Spanx — a fact that has helped her achieve her $1 billion net worth.
3 tips for bootstrapping successfully.
The bootstrapping process can be challenging — there's no way to pretend otherwise. Capital is often a big game changer, so operating on an initially small budget requires extra legwork.
Luckily, you won't be the first one to bootstrap your business. There are a ton of proven practices that you can implement to maximize where your personal savings can take you. Here are three:
1. Know where to cut costs.
When bootstrapping, many businesses choose to take the lean startup approach. Using this method, they focus on developing a minimum viable product. Doing so helps get your revenue flowing, and gives you valuable data points about your customers and how to improve your product.
As you focus your funds on creating this MVP and giving yourself the minimum paychecks you need to continue working on the project, you'll need to figure out unique ways to cut costs. Perhaps you'll be like Sara Blakely, filing your own patent. Or, you may use tactics like these:
- Working remotely instead of from an office
- Building your website instead of investing in web development
- Offering employees sweat equity to keep paychecks affordable
- Spending more time on organic marketing and outreach instead of paid ads
2. Make connections.
Your support network can make a significant difference when you're bootstrapping. When you don't have major investors to back you up, great connections can be your best resources. Start networking to find yourself potential customers, collaborators, mentors, and people who will help you spread the word about your business.
3. Don't go all out.
It can be tempting to put everything into an idea you're passionate about. However, you need to play it smart. Building a business is already a gamble, and bootstrapping can exacerbate this fact. Throughout the bootstrapping process, you should always have a backup plan and be willing to walk away if necessary.
Having a backup plan doesn't necessarily mean keeping your full-time job until your business is stable. You can commit to pursuing your dreams. However, you’ll need to set some personal savings aside for yourself — not to be touched by your business — and know when you need to back out.
Get the rewards and limit the risk.
Bootstrapping is an excellent funding approach that keeps ownership in-house and limits the debt you accrue. While it comes with financial risk since you're using your own funds, you can take smart steps to alleviate the drawbacks of self-financing, and solely reap the benefits instead.