What Is Bootstrapping?
Financial bootstrapping refers to the process of starting and growing a business using only personal savings and the initial revenue generated by the business. It’s a method of self-funding where entrepreneurs rely on their resources to start and expand their businesses. This approach eliminates the need for external funding or loans, allowing the entrepreneur to maintain full control over the business.
Why Is It Called Bootstrapping?
The term “bootstrapping” originates from the phrase “pulling oneself up by one’s bootstraps.” This phrase symbolizes self-sufficiency and the ability to improve one’s situation through one’s efforts. In the context of startups, bootstrapping refers to launching a business using personal resources and the revenue it generates, rather than relying on external funding.
Stages in Bootstrapping
Bootstrapping a startup generally involves three stages:
- Idea Stage: This is the initial phase where the entrepreneur comes up with a business idea. The entrepreneur invests personal savings to develop the idea into a viable business model.
- Establishment Stage: In this stage, the business is officially launched. The entrepreneur continues to fund the business operations using personal savings and the revenue generated by the business.
- Expansion Stage: At this stage, the business has established a steady revenue stream. The entrepreneur reinvests the profits back into the business to fuel growth and expansion.
How to Bootstrap a Startup
Bootstrapping a startup involves several steps:
- Start with a solid business plan: A well-thought-out business plan is crucial. It helps you understand your business model, target market, and strategies for growth.
- Keep costs low: Bootstrapping requires careful budgeting and cost management. This might involve operating from home, hiring freelancers instead of full-time employees, and minimizing operational costs.
- Reinvest profits: The profits generated by the business should be reinvested back into the business to fuel growth and expansion.
- Focus on customer acquisition: Acquiring customers and generating revenue from the start is crucial when bootstrapping.
- Maintain financial discipline: It’s important to keep a close eye on cash flow and maintain strict financial discipline.
Why do People Choose Bootstrapping?
Entrepreneurs choose bootstrapping for several reasons:
- Maintain control: Bootstrapping allows entrepreneurs to maintain full control over their business without the interference of investors.
- Avoid debt: Bootstrapping eliminates the need for loans, helping entrepreneurs avoid debt.
- Flexibility: Without external investors, bootstrapped businesses have more flexibility to pivot and make changes as needed.
Advantages and Disadvantages of Bootstrapping
- Full control over the business
- No debt or equity dilution
- More flexibility to pivot or make changes
Disadvantages:
- Limited resources
- Slower growth
- High financial risk for the entrepreneur
Examples of Bootstrapping
Several successful companies started as bootstrapped ventures.
- Shopify – The founders of Shopify initially embarked on creating an e-commerce site for snowboarding equipment. However, they found existing shopping cart solutions inadequate for their needs, leading them to develop their own. For six years, the business prospered solely on its own revenue, without the need for venture capital or an initial public offering (IPO). As of now, Shopify’s market valuation stands at an impressive $166 billion.
- Shutterstock – Jon Oringer, a professional software developer and hobbyist photographer, leveraged his dual expertise to create Shutterstock, a stock photo website. He populated the site initially with his personal collection of over 30,000 photographs. In 2012, Shutterstock went public through an initial public offering (IPO). Nearly a decade later, the company boasts a market valuation of $4.42 billion.
- SurveyMonkey – SurveyMonkey stands out in the digital landscape as it was established during the internet boom of the 1990s. Despite the subsequent crash that led to the downfall of many companies, SurveyMonkey persevered. Within 11 years, it had generated $100 million in revenue. As of today, the company’s market valuation is an impressive $3.67 billion.
- Lynda.com Lynda Weinman embarked on her career journey in the late 1990s as an educator, teaching aspiring web designers. However, she found the available resources insufficient for her teaching needs. Dissatisfied with the materials she found in bookstores, Lynda took the initiative to create her own custom visuals and training materials tailored to her students’ needs. Gradually, these materials evolved into video tutorials and how-to guides, resulting in a comprehensive content library and valuable technological assets. In 2015, she sold her life’s work, a testament to her innovative approach to education, to LinkedIn for a staggering $1.5 billion.
- Cards Against Humanity – The creators of Cards Against Humanity, with their innovative game concept, managed to raise slightly more than $15,000, which they transformed into $12 million in the first year alone. Their unique marketing campaigns drew considerable free media attention, further boosting the brand’s visibility. The company now produces a range of themed expansion packs for its game, generating annual revenue between $40-$50 million.
- Minecraft – Minecraft, a well-known name in the gaming world, was the brainchild of Markus Persson. With his experience in the gaming industry, Persson saw an opportunity for innovation. Fueled by his creative passion, he developed Minecraft alongside his regular job. His company, Mojang, officially launched the game in 2009. Before selling it to Microsoft in 2014 for $2.5 billion, Persson had already generated nearly $1 billion in profits.
Bootstrapping versus Funding
| Bootstrapping | Funding | |
|---|---|---|
| Control | Full control over the business | Control is shared with investors |
| Debt | No debt | Potential for debt if funding involves loans |
| Equity | No equity dilution | Equity is shared with investors |
| Resources | Limited to personal savings and business revenue | Access to larger amounts of capital |
| Growth | Potentially slower growth | Faster growth due to more resources |
| Risk | High financial risk for the entrepreneur | Risk is shared with investors |
In conclusion, bootstrapping is a viable option for entrepreneurs who want to maintain control over their business and are willing to take on the financial risk. However, it requires careful planning, strict budget control, and a strong focus on generating revenue from the start.
Alternatives for startup funding
- Funding from Friends and Family: A common approach for entrepreneurs is to seek financial support from their personal network of friends and family. This can take the form of an equity investment, a loan, or even a gift, providing a safety net for those bootstrapping their startup.
- Angel Investors: These are typically affluent individuals or networks who provide capital for early-stage startups, usually in exchange for ownership equity. They are often the first external investors in a startup beyond the founder’s friends and family.
- Venture Capital: Venture capitalists and private equity firms usually invest in businesses that are already established and show high growth potential. Rather than igniting a spark, they aim to fuel an already burning fire.
- Crowdfunding: Crowdfunding is a method of raising capital by soliciting small amounts of money from a large number of people. Unlike traditional investors, those who contribute to crowdfunding campaigns do not receive equity. Instead, they are typically rewarded with the product or other benefits in return for their contribution.
- Business Loans: Business loans are a form of debt financing that allows entrepreneurs to borrow capital that must be repaid with interest. While business loans enable entrepreneurs to maintain full control of their company without giving up equity, they can come with high interest rates. The suitability of this option depends on the specific circumstances of the business and the terms of the loan.
When to use bootstrapping?
Individuals often opt for bootstrapping due to several reasons:
1. They wish to retain full ownership and avoid equity dilution.
2. They may lack knowledge or experience in securing external funding.
3. They prefer to focus their time on developing the business rather than seeking investors.
4. Bootstrapping can enhance their bargaining power for future fundraising by demonstrating the business’s viability and growth potential.
