What Is Bootstrapping?
Bootstrapping is the practice of self-financing a business with its own capital. Thus, bootstrapping can refer to an entrepreneur investing their own funds to finance a startup, or it can refer to a more established business using their own capital to fund growth (like opening a new store, hiring new employees, expanding product offerings, etc). Starting a business from scratch can provide autonomy but invites challenges a VC-funded startup typically avoids. So, here are some advantages and disadvantages of bootstrapping your business.Advantages of Bootstrapping Your Business
- You maintain your equity.
- You control the major decisions for your business. You won’t have to get approval from outside investors.
- If you decide to seek external investment from venture capital (VC) later on, it may be easier to get a clean capitalization structure if you don’t have previous investors.
- You don’t have to worry about repaying a loan with potentially high-interest rates. Most private loan options for startups come with a pretty high cost of capital because of the risk to the lender.
- Less outside stress. When you bootstrap your business, you don’t have to deal with the pressures of external funding that can add a lot of stress to a time that is already stressful for any entrepreneur.
Disadvantages of Bootstrapping Your Business
- Your business may grow at a slower rate (at least at first).
- It requires you, the entrepreneur, to take more financial risk.
- It can be difficult to find the capital you need and manage it well enough to ensure your cash flow stays steady.
What Are the Other Options for Funding a Startup?
- Friends and Family Funding: Many entrepreneurs choose to fund their businesses by asking friends and family. In some cases, friends and family invest in exchange for equity. In others, the funds are provided as a loan. For some, the money is “gifted,” allowing entrepreneurs to bootstrap with a little background help (lucky).
- Angel Investors: Angel investors are early-stage investors. They are often independently wealthy private individuals, though angel investing networks do exist, in exchange for equity.
- Venture Capital: Venture capital and private equity typically invest in more established businesses with high-growth potential. A venture capitalist isn’t looking to start a fire, they’re looking to pour gasoline on something that’s already working.
- Crowdfunding: Crowdfunding is another bootstrapping-adjacent funding model. Crowdfunding is the process of raising capital through small amounts of money from large numbers of people. Crowdfunding “investors” don’t get equity. Instead, they usually receive the product or other perks in exchange for their “investment.”
- Business Loans: A business loan allows you to borrow capital from a lender that must be repaid, plus interest. Business loans allow you to retain full control of the company (you don’t have to give up any equity), but they can come with a high cost of capital. Whether or not this is the right choice for you depends on your business and the loan in question. If you want to know more about alternative ways to finance a startup, check out our complete guide to startup funding.
How to Bootstrap a Startup
Now that you understand what bootstrapping is, here’s how you can apply it to your business.Reduce Costs
- Buy used equipment.
- Rent when possible.
- Start your business as a side hustle, so you don’t have the pressure of immediately making enough money to offset your salary.
- Start your business from home to reduce office costs.
- Hire freelancers or work with consultants rather than hiring full-time employees.
- Carefully consider your labor costs. In some areas, you may want to hire junior talent, professionals who have less experience and come cheaper. That said, sometimes you need expertise, especially when your business is in the early stages and you don’t necessarily have a clear plan for junior employees to follow. Consider what you need and who can deliver the best result at the cheapest cost. Sometimes it’s better to hire a seasoned professional who will bill for 2 hours than an entry-level employee who will spend 2 weeks on the same project.
Increase People Power without Increasing People Costs
- Partner with a cofounder who can share the labor and financial burdens of bootstrapping with you.
- Find trusted advisors and mentors who can sit on your board of advisors. As a result, they can provide you with valuable insight and having a board gives your startup credibility.
- Collaborate and barter whenever possible. Find trusted friends and colleagues who have skills they can “donate” to the cause. Or, you might find a way to trade sweat equity for their work– be it designing your website or setting up your company bookkeeping.
Increase Capital
- Pursue a profitable business model. You’re looking for a business that generates revenue quickly. An ecommerce business is a good example of a business that will generate revenue from sales. Then you can use the profits to continue to fund business growth. On the other end of the spectrum, you want to avoid situations like pursuing a large, 6-month purchase order with a big box store. In that case, you’ll likely have high upfront costs, and it will take a long time to get paid.
- Use business credit cards. This might sound scary because we’ve all been taught to fear personal credit card debt, but business credit cards can be a helpful tool for bootstrapping a business, so long as you keep on top of your payments and your cost of capital. It’s accessible to businesses that don’t have established credit (and it will help your business build a credit history). If you have a large purchase to make, like a piece of equipment, you can open a business credit card with a 0% introductory APR (annual percentage rate). Then schedule the payments over the introductory period so that it’s paid off in full before it starts accruing interest.
- Apply for grants. Grants are essentially free money. So find one that fits well with your business and apply.
How to Bootstrap Your Company’s Growth
If your company is already established and generating revenue, you’re in the customer-funded growth stage. And here are a few key things that you can do to help bootstrap your business:- Look at your profit margin. How much do you have from actual sales?
- Establish how much capital you need. Do you have enough to cover operating expenses? If not, how far short are you?
- Look at your consulting costs. Is there anything you’re outsourcing that you/your team could do instead?
- Consider working with contractors instead of hiring more full-time employees. That way you keep your costs low, and it gives you flexibility if you need to cut personnel costs month-to-month.
Source: https://foundr.com/articles/building-a-business/finance/what-is-bootstrapping
