“Bootstrapping” is derived from the phrase “to hoist oneself up”. It is a method of starting one’s own business with one’s resources.
A bootstrapped startup is a business that starts and grows without the help of external investors. Bootstrapping a company does not imply that you’ll not seek external funding; it simply means that you will not solely rely on investors such as venture capitalists for support.
When bootstrapping a business, it is mainly self-funded or wholly funded by you and/or the founding team. However, keep in mind that growth may be slower than funded businesses because you’re starting and scaling without the intervention of investors.
- Customers/audience – When you’re bootstrapping your business, customers are often your hope as you seek to provide services and sales to them. You must be focused on offering quality, valuable products and services to establish a strong, loyal customer base.
- Organic growth – As stated above, customers can help your bootstrapped business grow, although this can be slow, organic growth. This is because you’re much more focused on customer acquisition rather than acquiring capital from venture capitalists.
- Cash flow – Cash spent and received will mostly make up the cash flow of your business. Future investors can look at the cash flow books to have a glimpse into your business history.
- Reinvesting in the business – Revenue generated is ploughed back to generate more for growth and expansion purposes.
- Viable business model – At this point, your business begins to have a realistic, feasible and solid structure worth investing in.
- Improved customer base – Loyalty is earned when the customers can rely on your business. Hence, growth kicks off.
Sustainable ways of bootstrapping your business
- Debt and owner financing – Putting your money into the company.
- Sweat equity – Putting in significant effort rather than employing people to run the operations. While this is not sustainable in the long run, it is a good approach for raising your business from the ground up in order to make some headway.
- Cost management – Cutting your operating expenses to the bare minimum.
- Income-based financing – Earning early revenue through the sale of services and products, with which cashflow can be used to fund the business continually.
Pros and Cons of Bootstrapping
- Flexibility – This cannot be over emphasized as you have the liberty to carry out business operations in ways that suit the growing process. This means being able to adjust swiftly to new situations as they emerge. You can always adjust your strategies to overcome unexpected challenges.
- Growth mechanism – Taking the risk of growing your business from scratch without money being pumped into it strengthens it to thrive through the hurdles of building from the ground up.
- Business perception – Customers, revenue and profit are the main focus to keep the business going rather than scalability. As much as you want to scale, you’re more likely to concentrate on unit economics, considering the company’s revenue and profitability. Profits and long-term business strategies will allow the company to grow and scale, especially because it is a self-funded venture. With these, the business is more likely to succeed and grow unlike funded startups that are more concerned with rapidly accelerating and expanding at 5 to 10x pace.
- Business control – Unlike funded businesses that lessen their ownership through external support, you’ve 100% control of your startup’s vision and operations. Moreover, in shared business ownerships, founders are likely to lose their companies due to investor funding, even at early stages. However, you’ve the power to make full decisions regarding your business.
- Slow scaling – You must rely on revenue and profits to scale due to insufficient funds. This will affect your business’s growth, unlike funded businesses with full access to capital that can keep their businesses running faster. This means that you must contend with slow growth in the early years until you accumulate enough customers, revenue and profits for rapid growth.
- Limited network connections – You might face the challenge of limited network connections, unlike funded businesses that get introduced to other venture capital companies. These companies connect investee companies with other venture capital companies for collaboration, thereby fostering rapid growth.
- Overwhelming risks – Bootstrapping your business means that you’ll bear all the risks there is to raising a business from the ground up. The operational and financial risks rests on the founding team who takes responsibility for whatever goes on as the business grows.
You can consider running a rapidly growing or slow-scaling business. Fast growing businesses often use funding from venture capitalists. Here, external investors provide capital, security, scaling speed, and advice/network, but they can also exert influence over you based on their preferences. Whereas, slow scaling businesses bootstrapping have complete control over the rate at which the company expands.
Even if you intend to raise venture capital, bootstrapping is a great way to start your business.