What is Business Bootstrapping and Is It Right for You?
Bootstrapping is simply building your business from scratch with nothing but your savings and the cash that comes in from initial sales. "Bootstrapping" was first coined in the early 1800’s, and comes from the common saying "pulling yourself up by your bootstraps". At first, the phrase was used to refer to impossible tasks. Later on, however, the phrase became an expression used to describe success without any external help.
Any entrepreneur that’s gotten a business started on a tight budget is basically bootstrapping, or working with the resources they have to build the best business possible. However, bootstrapping doesn’t only refer to self-made startups. It can also be used to describe other stages of a business where entrepreneurs are forced to use their own resources to grow and keep their businesses running.
According to Investopedia, about 80% of new businesses are established using the owners' personal funds; with the average investment amount being around $10,000. Bootstrapping a new business typically involves using as minimal resources as possible and not seeking outside investment. Many large businesses today began through bootstrapping. Some have continued to rely on their own while others have eventually opted to get external help.
Methods of Bootstrapping
Businesses employ different techniques to limit the amount of external investment & debt needed from banks and other financiers; these are some of the top methods bootstrapping businesses typically turn to:
Direct Sales: Using money from orders to sustain the business.
Self-Financing: Using the owner's personal savings & income.
Subsidies: Tax breaks or government grants.
Personal Loans: Using personal debt such as credit cards, bank loans, and similar.
Elbow Grease: An individual's personal time & work contribution to the company.
Cutting Costs: Keeping expenses to a minimum.
Limit Inventory: Ensure quick stock turnaround while limiting overproduction.
Benefits of Bootstrapping
Full Ownership
As a sole proprietor, bootstrapping can ensure that you own 100% of your enterprise. Even with a single or multiple co-owners, your equity share will remain far bigger than if you would have sought external assistance through fundraising or selling a share of your equity. Even if you run a small business that makes modest sales, your equity share will have more value than if you had raised funds to achieve a million dollar valuation.
Retaining Your Business
If you are keen on owning your business for the rest of your life, or want to turn it into a family enterprise, then bootstrapping is the way to go. Outside investors are known to buy out founders once the business begins gaining traction and success. This normally happens within the first 10 years of running the business. You can avoid this by bootstrapping from the onset.
Building a Successful & Efficient Business Model
It's widely known today that many big valuation and fast-growing enterprises have been making losses, at least on paper that is. These businesses are playing at a whole different level. This model can be successful, but it can also be very risky. If you choose to bootstrap, you are forced to come up with a business model that works from the very beginning, and can bring profits and positive cash flows immediately. This is ideally what you should aim for. An effective business model can be a strong foundation for your business.
Management of Company Decisions
Immediately you secure outside financing, you take on outside pressure and obligation to meet other parties' interests. These may be divergent from your own. Their values and timelines may be different from yours. There are methods such as super-voting rights that can grant you additional control when seeking outside investment. However, if having total control over the direction and vision of your business is a top priority for you, you should definitely consider bootstrapping.
Disadvantages of Bootstrapping For Startups
Hard Work
Right out of the gate, by choosing to go at it alone you’ll have to work & hustle a lot harder than you would have if you looked for external investors or team members. With limited finances, talent, & many other resources that are crucial to running a successful business, you’ll need to fill in any gaps with your own hard work.
Risk of Failure
One of the main reasons startups fail is simple lack of funds. Shortages in cash flow can bring even the best businesses down. A good product or service simply is not enough to keep your business alive if you run out of money.
A shortage of finances for a prolonged period of time is a death sentence for a startup. It requires a lot of meticulous planning and budget to keep a business afloat. If all of this fails, you may be forced to seek external financial assistance which may be strenuous and difficult.
Limited Growth
Most of the time, when entrepreneurs go out to seek external investment they’re looking to grow their business quickly. For a good number of business owners that’s the only viable path to a profitable business. And in some instances failure to land enough outside investment can impact your business’ marketing or product availability, which can seriously stunt the growth of (or even irreparably damage) some businesses.
Keeping Organized
With a smaller team, sometimes even just 1, you will find yourself having to take on a lot tasks that you might have typically delegated to employees or staff such automating processes, accounting, or marketing. The extra time spent on things you’d otherwise have someone else do can seriously distract you from some basic responsibilities, such as keep your meeting schedule organized or cleaning your business. The more plates you have to spin, the more important it is that you kmake a plan and stay attentive so you can take care of any that are starting to tilt.
High-Quality Assistance
Raising capital for your business is just one of the many advantages of rising money for startups. Another huge benefit is getting crucial deal-makers, shareholders and board members onboard who might be able to help you scale your business faster than you could yourself. Being forced to rely on your existing network of contacts when you aren’t in a position to find angel investors is by far one of the big disadvantages of bootstrapping that many early entrepreneurs run into.
Conclusion
Bootstrapping has always been and will continue to be an attractive option for upcoming entrepreneurs. It offers plenty of benefits, but it also comes with a lot of risks, considerations and time sacrifices on your part. If you feel that bootstrapping is for you make sure your plan is rock solid, and that you’ve identified all of your business’ moving parts, since they’ll all be your responsibility.