Bootstrapping: Meaning, advantages, disadvantages & more

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Thinking of bootstrapping a startup but not sure if it is your best option? Here is a detailed look at the practice and what it can mean for your ideas and future.

Bootstrapping a startup can be a difficult thing to do. But many founders have done it and succeeded time and again. So, it is possible.

To bootstrap a startup means to fund it entirely without external capital. You could use your savings or borrow money from your friends and relatives. But, that’s it.

Rooted in the phrase “pull yourself up by your bootstraps”, this process is so difficult that many assume it an impossibility, especially when it comes to tech startups. So, these founders often opt for angel or VC funding.

This article looks at the bootstrapping process to see how things can play out and if its pains can be worth it in the long run.

What is Bootstrapping?

To bootstrap a startup means to launch and grow the company without outside investment. A bootstrapped company operates without angel or venture-capital investments of any kind.

This often means that the founder or founders are responsible for keeping the firm’s operations running until it breaks even or becomes profitable.

Bootstrapped startups are usually lean and efficient, but they take much more of the founder’s time and sweat equity than an angel or VC-funded company.

On the positive side, a lack of outside investment also means a lack of outside interference in the startup’s operations. Founders of bootstrapped startups usually have more freedom and control over their company than those who got ‘outside money.’

Who can bootstrap a company?

Anybody can bootstrap a startup, as long as he or she can provide what the company needs to grow to profitability. This includes capital, expertise, and sweat equity.

There is no minimum capital requirement here. Because each startup is different and so, has different needs. You will need to check things by calculating how much the company will need until it becomes profitable.

Some businesses need little capital, while others are more capital intensive. Still, some businesses or products can quickly become profitable, while others need more time.

There is also no fixed timeframe here, but most businesses break-even between 6 months and 3 years. So, you should be prepared to endure for up to 3 years, although the break-even can come earlier.

Breaking even is when your business makes enough income to offset its running costs. Then, once it makes more income than it takes to run it, the company has become profitable.

Advantages of Bootstrapping

There are many advantages of bootstrapping a startup, although it ultimately depends on your story and what you hope to achieve.

Here are some of the top advantages:

  • Independence – Being a boss means you can do whatever you want, whenever you want to. Nobody to answer to, no investors to please.
  • Maintain control – Lots of great businesses have lost their core values because investor money and influence crept into the company. By bootstrapping your startup, you maintain complete control of the enterprise.
  • Focus –  The lack of an external investment means you can focus your energy on your company’s core goals and not on the desires of any investor. You can aim to provide better value for your customers, as opposed to more profit for the investors.
  • Zero or less debt – Being debt-free comes with a great feeling. It feels so much better when you are under no obligations to anyone.
  • Sense of Achievement – If you can pull it off and the startup matures into a profitable company, then you become a hero. You will feel good about yourself and all your efforts and sacrifices will be worth it.

Disadvantages of Bootstrapping

Bootstrapping also has its disadvantages because building a company can be a tough job. Especially with limited capital.

Here are the major advantages:

  • Higher failure risk – The major reason that businesses fail is because they run out of money. So, a bootstrapped startup with limited funds automatically has a higher failure risk.
  • Cash flow stress – Being forced to work with limited funds means you will have to optimize and re-optimize strategies to save as much as you can here and there.
  • Extra work – You will also have to work a lot harder to make ends meet.
  • Hampered Growth – Business expansion usually requires money. So, if funds are limited, then the startup may not expand as quickly as it would have if there was enough capital.
  • Stress – Being a founder is stressful enough. Running a startup on a shoe-string budget is even more so. And it will affect your relationships.

Bootstrapping stages of a Startup

There are 3 stages that a bootstrapped startup must go through before it becomes a mature company. They are the beginning, the customer-funded, and the credit stages.

Here is a closer look:

  1. Beginning Stage – This is the earliest stage of the startup. The founder uses his savings to start the company and may also borrow from family and friends. Depending on the type of business, the founder might still have another job or focus full time on the startup, if he has enough capital.

  2. Customer-funded Stage – As the business grows and revenue increases, there will come a point when the income generated by the business is enough to keep it running. And all extras are profit. But because this is a growing company, many founders choose to invest a large part of the profits back into the business.

  3. Credit Stage – By this stage, the company has matured and produces a steady and healthy amount of profit. But there can still be room to grow or competitors to deal with, and this can require a heavy amount of investment. In such a situation, the founder can take out a loan or get venture-capital funding. In many situations, however, it never gets to this if the company’s cash flow is sufficient.

Funding Methods

Although venture-capital funding is out of the question in a bootstrapped startup, the founder still has to provide the capital to run the business. Here are the best funding sources for a bootstrapped startup.

  • Personal Savings – This is the major source of funding for most bootstrapped startups. The founder uses his savings or inheritance to fund the venture while hoping for the very best.

    Make no mistakes about it though, this route is like a double-edged sword. If you succeed, then you are a hero. If you fail, then you fail hard, because you are risking everything. But for those who have enough funds, this is no problem.

  • Friends & Family – The second-best source of funding for bootstrapped startups. If you can convince your brother, sister, mom, dad, uncles, or wife about your idea, then great. But you need to be careful here.

    Quarreling over money with relatives is messy. So, avoid it if you can. But if you have a well-to-do family or relatives, then go for it. Jeff Bezos, the Amazon.com founder, initially funded Amazon with his parents’ $300,000 retirement fund. Oh, and they kept asking him “ What’s the Internet?”. That was back in 1994.

    Other founders include Michael Dell, who got a whole $1,000 to start DELL Computer in his dorm room. Facebook also got funding from Zuckerberg’s and Saverin’s parents. And even Africa’s richest man, Dangote, got a loan from his uncle.

  • Personal Debt – Another avenue is to incur personal debt. This can range from credit card debts to anything else you can get in your name. But watch it, because if things don’t work out, then your creditworthiness will suffer.

  • Business Credits – Startups can also get help in the form of credit from other firms. If you have a supplier, for instance, you can negotiate to pay after 30 or 60 days to help your business grow. Many companies are happy to do this for their business customers.

  • Subsidies & Grants – Look around you. Chances are there is a government program around you that you can benefit from. This is especially for industries or activities that they wish to support.

    You do not need to be ashamed of accepting government money, as long as you use it for the right purpose. A 2015 report about Elon Musk found that his 3 companies, Tesla, SolarCity, and SpaceX benefited from a combined $4.9 billion in U.S. government subsidies.

Strategies for Success

Things can get tough when you are bootstrapping a startup because you are operating on limited funds, unlike startups that receive funding.

The success of your venture, therefore, will depend a lot on your insights and creativity. You will have to learn to do things differently to survive or even thrive.

Here are a few strategies to consider:

  • Start Small – The greatest piece of advice for any founder. No matter how big you want your company to get, every entrepreneur will tell you the same thing. Start small, then grow from there.

  • Know your Market – The venture capital industry has gotten so ridiculous that companies even receive funding to help figure out their market. Look, if you know your market well, then your venture should be profitable within a year or even a few months of launch.

  • Know your Customers – Your startup’s time to profitability depends on how much you understand your customers. Focus on your customers and know what they want and how they want it. Then, give it to them. Customers are the lifeblood of any business.

  • Get your hands Dirty – Take on as many roles as possible in your startup’s early years. This is very important because a good CEO knows every part of his business. You will also save lots of money, by doing many tasks on your own until the venture becomes profitable.

  • Prioritize Profitability – This means you should get to the core of your business operations as quickly as possible. Forget about perfecting your product first. Launch your minimum viable product as quickly as possible. Then see how things go from there.

  • Be Capital Efficient – When faced with a choice between one product or service over another and it all comes down to price, then choose the cheaper product. Start small and offer capital-efficient products. Then, only offer a costlier product or service when you can afford it.

  • Complement skills – No one knows it all. So, when you are considering a co-founder or team member, it is best to go for someone with a skill-set that complements yours.

  • Network – Try to reach out to similarly minded folks. Get out there, socialize, meet people, talk business, go to trade fairs, and other similar events. With luck, you can discover new business partners, customers, suppliers, you name it.

  • Automate – By turning to automation early on in your journey, you will save a lot of time, boost efficiency, and save plenty of money. This creates more free time to engage in the more important areas of your business. So, automate as much as you can.

Bootstrapping vs VC funding

Venture capital has its advantages. But the problem is that many founders have gotten it into their heads that they need external investment to start a company. The simple truth is that you can launch and grow a startup on your own.

So, if you have what it takes, then please, bootstrap your startup. But always keep an open mind and be ready to use venture capital when you have no other alternatives.

List of Popular Bootstrapped Companies

Given the recent hype of venture capital funding and startup evaluations, you might be surprised at the number of startups that got bootstrapped till maturity.

Here are just a few:

CompanyFamous for
GitHubSoftware development and version control platform
Dell ComputersMultinational tech company
ZohoSaaS platform for businesses with over 60 million customers
Apple Inc.Iconic company and world’s most valuable brand
MailchimpExcellent email marketing platform
CiscoWorld leader in networking equipment
MicrosoftLargest software company by revenue
BasecampSaaS project management platform

Conclusion

We have reached the end of this exploration of the merits and demerits of bootstrapping a startup. And you must have also gotten a glimpse of what lies ahead.

The truth, however, is that business is always a risky endeavor. And the stakes increase when you are funding it with your own money.

But when you consider all the startups that succeeded through bootstrapping, you will discover that success is possible when the business is right. So, ask yourself if your startup’s business or opportunity is right and you should know what to do.

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Nnamdi Okeke

Nnamdi Okeke is a computer enthusiast who loves to read a wide range of books. He has a preference for Linux over Windows/Mac and has been using Ubuntu since its early days. You can catch him on twitter via bongotrax

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