Do you want to know what is bootstrapping in business? If yes, this article has your answers.
When starting a business, there are different funding options available, and bootstrapping is one of them.
If you are considering bootstrapping to raise capital for your business, you need to know more about it.
Thankfully, this article discusses what bootstrapping is and other important things relating to it.
So, if you want to learn more on this topic, stick with us until the end of this article.
Without further ado, let’s get right into it.
What is the Meaning of Bootstrapping – What is Bootstrapping in Business
Put simply, bootstrapping means building and growing a business using one’s finances.
This means using your money and other personal resources to start up a business.
It also involves building and scaling a business from scratch without external assistance.
From its definition, bootstrapping can also be otherwise called self-funding.
Bootstrapping requires diligence and self-trust; without these elements, bootstrapping cannot work.
With bootstrapping, business enthusiast does not need to stress themselves with borrowing money or partnering with an investor.
It removes the stress of paying back a business loan or relinquishing a part of your business.
Bootstrapping gives you complete autonomy over your business since you won’t be partnering with or borrowing money from anyone.
Bootstrapping Stages – What is Bootstrapping in Business
Companies that bootstrap typically go through three stages.
Therefore, you need to know these stages if you are thinking of bootstrapping for your business.
This way, you can identify and make the best of your stage.
Therefore, let’s take a brief look at these stages below.
At this stage, the business owner may start their business while working for someone else.
They will fund the business using debt, personal savings, or money from family and friends.
Here, the business has a customer base and is now generating profit.
The profits will be used to run the business and grow funds.
Once the business generates enough money to fund its expenses, then it can grow even further.
At this stage, the business owner has to focus on funding specific aspects of the business.
This could be like buying new equipment, hiring new employees, etc.
At this stage, the business can now get external assistance by taking loans or finding venture capital.
This would enable the business owner to expand the business properly.
Requirements for Bootstrapping a Company – What is Bootstrapping in Business
You can’t just decide to bootstrap your business without knowing what you are getting into.
To successfully bootstrap your company, you need certain things like great ideas and skills.
Let’s look at some things you need to bootstrap your company successfully.
Every business owner, even potential ones, knows that a business is only as good as its idea.
You cannot have a sustainable and successful business if you do not have a solid idea for it.
So, before you bootstrap a business, ensure you properly consider the business idea.
Once you have your idea, you should figure out the best way to execute it.
Sure, a brilliant idea is excellent, but you need to execute it to make it more useful.
The best way to execute your big business idea is to divide it into smaller ideas.
And execute the best part, then execute the other sections of the idea later on.
Your profit is what you will use to fund your business when you get to stage 2 (customer-funded) of bootstrapping.
Therefore, to successfully bootstrap your business, you have to focus on generating profits.
You won’t run your bootstrapped business the way you would run an angel-funded or venture-funded business.
Bootstrapped businesses have to grow steadily and get paying customers so that the business revenue will keep the business operational.
Finally, you can’t bootstrap a business if you do not have the necessary skills needed to run that kind of business.
You must train yourself to improve if you are not that much of a business person.
Work on becoming more resourceful, careful, enthusiastic, and accountable.
All of these traits should make you a better business person.
Apart from hard skills, you also need to develop certain soft skills.
You have to be resilient, courageous, and passionate.
Without these, it won’t be easy to bootstrap a company successfully.
Ideal Companies to Bootstrap – What is Bootstrapping in Business
Bootstrapping isn’t a funding method suitable for all types of businesses.
There are mainly 2 types of businesses which bootstrapping is ideal for; companies in their early stages and serial entrepreneur businesses.
An early-stage company is ideal for bootstrapping because it typically doesn’t need a large flow of capital, most especially from external sources.
This offers the business enough time and flexibility to grow.
A serial entrepreneur is an entrepreneur that has started up several companies with unique ideas.
And a serial entrepreneur company is a company started by a serial entrepreneur.
These companies are most likely founded with the funds the serial entrepreneur gets from selling one of their other companies.
This is why serial entrepreneur businesses are ideal for bootstrapping because the business owner most likely has enough money (gotten from the sale of one business) to fund the business.
Advantages and Disadvantages of Bootstrapping – What is Bootstrapping in Business
Bootstrapping is just like most business concepts; it has its advantages, but it also comes with some drawbacks.
Knowing the drawbacks and benefits of this funding method will help you make an informed decision when making choices for your business.
That said, let’s discuss the advantages and disadvantages of bootstrapping below.
Advantages of Bootstrapping
The following are some major advantages of bootstrapping:
One of the most important benefits of bootstrapping is that it allows you to have absolute ownership over your business.
Most other funding methods involve giving up a certain percentage of your business, especially with venture capital funding.
When you give up a part of your business, you will still be the business owner, but your control over it won’t be absolute.
You won’t be able to decide autonomously.
You would have to consult the shareholders in your business whenever you want to make a business decision, but bootstrapping does not come with this issue.
When you bootstrap, you retain absolute ownership of your business.
Even when your family members or family invest in your business or give you money to fund your business, you would still be the absolute owner of it.
The reason is that most family members don’t request a share in your business.
They do it mostly out of goodwill, and this source of funds is still considered bootstrapping.
There are many disadvantages attached to having other investors as shareholders in your business.
However, bootstrapping saves you from all these, making it a safer and better option for startups.
When you fund your business with money from angel investors or venture capital, you would be under a lot of pressure.
Investors are always looking to make their money back as soon as possible.
So, naturally, they will pressure you and the business to ensure it starts generating profit.
But a new business often takes a while to start making profits.
Soon, you’d find yourself under pressure to make profits.
And as a new business owner, the last thing you want to do is work under pressure.
It will make the whole work of running a business more tedious and overwhelming.
In some cases, it might even cause the business to perform poorly.
But this kind of pressure is little, if not nonexistent, when you bootstrap.
No investor, venture capitalist, or loan agency will be breathing down your neck.
You can focus on running and growing your business at a steady pace.
It is a Trusted Funding Source – What is Bootstrapping in Business
Other funding sources are not as stable and trusted as bootstrapping.
For example, these funding options are not always readily available for venture capital and angel investors.
You may not get them at the time when you need them, but when you bootstrap, you can always bank on the fund.
You can always be sure that money will be available when needed.
Knowing that the fund is readily available when you need it will motivate you to start and grow your business.
You Don’t Have to Report to An Existing Structure – What is Bootstrapping in Business
One of the things you will be subjected to when you do not have autonomous ownership of your business is that you will always have to report to an existing structure.
This is what happens with venture capital.
While it might not seem like much, having to report to a system every time you wish to do something in your business can get frustrating.
Yes, reporting to an existing structure will promote transparency and prevent illegal activities in the business.
But it will also make the whole decision-making process slower.
It also gets frustrating because it undermines your authority as the business owner.
In addition, the investors can even discard ideas that would be good for the business but would not favour them.
Whereas with bootstrapping, you do not have to report to anyone.
You are autonomous and can make any decision you feel will be great for your company.
Therefore, it eliminates all the disadvantages of reporting to an existing structure.
You Don’t Have to Go Through the Stress of Finding Investors
Getting investors for a business can be quite a challenge.
And even when you find investors, you have to go through the stress of convincing them that your business is worth investing in.
All of these aren’t necessary with bootstrapping because you would fund your business.
You do not have to spend time looking for investors or convincing them to invest in your business.
Improves Your Experience and Competence
Finally, bootstrapping will make you more competent and experienced in handling business challenges.
You will learn more about yourself as a business person when bootstrapping than you would if you get an investor or venture capital.
You’d learn to be a better leader because you will make most, if not all, the decisions for your business.
Disadvantages of Bootstrapping
The following are some major disadvantages of bootstrapping:
It Isn’t Always Ideal
You cannot use bootstrapping in every situation and for every business type.
Sometimes, the business you want to run may not permit gradual growth.
And as you likely know by now, bootstrapping isn’t for a fast-paced business.
If you happen to bootstrap a business that doesn’t support gradual growth, that business might not be sustainable.
Higher Failure Risks
The risks involved in bootstrapping are quite high and can also affect the growth and sustainability of the business.
Another reason some bootstrapped businesses don’t survive is a lack of revenue; profits alone most likely won’t be enough to run the business.
Also, when you start a business, you have to dedicate a lot of time to it.
But with bootstrapping, you likely won’t get financial rewards for your effort.
This can be discouraging and make you give up if you are not determined.
With bootstrapping, cash flow is quite limited.
This may pose an issue when the fund isn’t enough to operate the business.
The fact that the business owner is the one handling everything about the business can cause trouble like stagnation down the road.
This is because the business owner’s experience and knowledge may be somewhat limited regarding business acumen.
Bootstrapping a business can be quite stressful, both physically and psychologically.
Bootstrapping will significantly affect your finances, and this can cause several stressful situations for you.
All of which you need to handle while also dealing with the stress of running a business.
Managing Risks May be Harder – What is Bootstrapping in Business
If you choose to fund your business with venture capital, you also get to enjoy certain benefits.
One benefit of this funding method is that you would have a financial team of advisors helping you every step of the way.
This is because the investors also have a share to lose if the business goes bankrupt.
Hence, they will be careful not to make decisions that will not put the business at risk.
This team will act as the perfect risk management tool and help minimize business risks as best as possible.
But you cannot have this when you bootstrap.
You will make your decisions all by yourself.
If you are not a savvy business person, some of your decisions may be too risky and affect the company adversely.
Examples of Companies that Bootstrapped – What is Bootstrapping in Business
Bootstrapping is not one of the easiest methods of funding a business.
It requires resilience, skills, and a truckload of determination.
This, however, does not mean it is not doable.
Many successful companies have proven how possible it is to start and scale a bootstrapped business successfully.
Determined entrepreneurs built these companies from scratch without external assistance.
Some started in tiny garages and basements with little to no employees, equipment, etc.
All the business owners had were their funds, determination, and resilience.
But they were able to build their companies to great heights.
This section of this article will encourage you and let you know that if they can do it, you can too.
Let’s look at two examples of successful bootstrapped businesses.
MailChimp is among the biggest and most popular email marketing businesses in the world.
This business is worth about 10 billion dollars today.
Its owners, Ben Chestnut, Mark Armstrong, and Dan Kurzius, bootstrapped the business and were able to turn it into what it is today.
Another successful bootstrapped business is Shopify.
This multi-dollar business wasn’t always what it is today.
When Tobi Lutke decided to turn his dwindling snowboard business into an e-commerce store, he had to fund the business with earnings from his customer’s subscriptions.
It was only after six years of running the business this way that the founders of this company started accepting external funding.
Other successful bootstrapped companies include Apple, Dell Computers, Coca-Cola, Microsoft, eBay, Meta (Facebook), Spanx, Lynda, Shuttershock, and GoFundMe.
Conclusion on What is Bootstrapping in Business
Bootstrapping is a business funding method that involves starting a business with personal funds and resources.
This business concept is quite popular, and several successful businesses started this way.
One of the major advantages of bootstrapping is that it offers the business owner complete control over their business.
But while this advantage is quite appealing, bootstrapping also comes with its drawbacks; a major one is that the chances of the bootstrapped businesses failing when compared to other funding methods are quite high.
Therefore, before you bootstrap your company, consider all the information in this article and these principles of bootstrapping.
This way, you will surely make an informed decision.