Bootstrapping is the process of starting a business without outside capital or other forms of external funding.
Instead, a new company’s owners bear the costs and liabilities of the new venture. They will need to use their own savings, revenue generated from other pursuits, and personal debt, such as credit cards and loans, to cover the costs of the new business.
The lack of external finance means that owners of startups often adopt a simple business model in the early days. As a result, bootstrapped businesses tend to have smaller teams and pursue a leaner minimum viable product (MVP).
This doesn’t mean that a bootstrapped business won’t eventually seek outside investment. As a business matures, many founders pursue outside funding to fuel growth.
For example, GoPro’s founder Nick Woodman initially bootstrapped his company from selling bead and shell belts out of his VW van. His limited cash helped him simplify his product idea. Woodman eventually sought outside investment capital after a successful product launch in 2004.
What businesses suit bootstrapping?
Not all businesses are ready to self-fund. So who should consider bootstrapping their business?
- Founders of online businesses (such as SaaS startups) don’t require much fixed-cost spending, especially for founders who can create the product from scratch. Online startups typically don’t need a large upfront investment in property, operations, logistics staff and so on. As a result, these types of businesses can often come up with an MVP without the need for external funding.
- Serial entrepreneurs with the expertise and internal capital to start a business quickly. If you’ve sold successful companies before, you’re more likely to have enough money in the bank to fund your next venture. The key here is to guide the business to reach profitability as quickly as possible.
Remember, bootstrapping your business requires you to be clever with your scarce capital. It’s quality over quantity here. It’s better to have one strong product offering than many weak ones.
When it comes to growing software-as-a-service platforms, bootstrapped businesses need to ship an MVP as soon as possible – and will need to ensure that they trim down unnecessary features and avoid mission creep.
Bootstrapping: Pros and Cons
What are the benefits of bootstrapping a business?
Founders retain full control of the business
If you fund your business with equity issued to outsiders, you will have to dilute your share of ownership of the company. This will likely mean you will have to give up some control of the business, too.
Even if you fund your business through debt capital from an angel investor, these initial lenders tend to be more involved because they want to protect their investment. And you need to remember, investors – even great ones – may not share your vision for the company.
The classic example here is Apple Inc. Steve Jobs bootstrapped his computer business in the early days and enjoyed sole control over the firm.
Once Apple went public and sought external funding, the company’s board of directors meddled with business decisions and eventually ousted its leader. This loss of control is all too common in the startup world.
It encourages stronger ideas and more careful business decisions
A company that self-funds will typically have few resources to play with. This means that the founders are forced to be more careful with the limited finance they have at their disposal.
But if a company successfully navigates the bootstrapping process, it will likely mean the business can go on to enjoy success in the future.
This is because ideas, business models and products that are able to thrive when cash is in short supply have proved their worth.
Bootstrapping lets bad businesses fail earlier. Startup financing can prop up products that were dead on arrival. For founders, bootstrapping reduces the cost of failure.
What are the disadvantages of bootstrapping a business?
Bootstrapped startups can fail too early without cash flow
It’s true that founders can quickly find out whether their business plan is viable through bootstrapping, but bear in mind that business owners who fail to provide a venture with enough capital in the early stages run the risk of scuppering a project before it has had enough time to find its feet.
With the proper level of investment – perhaps from an external source – the startup may have survived and become a success.
Increased personal risk
Founders put themselves at considerable risk by offering their personal finance to fund the business. If your business fails and goes bankrupt, you lose the money invested.
This risk is shared by external investors in a normal business – and with limited liability, you can protect your own assets in case of failure. There’s simply more on the line when bootstrapping.
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