Starting a company and seeing your business idea come to life is very exciting but requires considerable financial investment. While many entrepreneurs turn to venture capital firms or angel investors to fund their startup companies, others decide to bootstrap their businesses altogether.
Some of the world’s greatest entrepreneurs, including Steve Jobs and Sam Walton, started their companies with nothing more than a little startup capital and a vision. Bootstrapping has numerous benefits but requires great dedication and strong financial controls to succeed.
Without access to external funds, business that decide to bootstrap their operations must rely on their own control measures to manage their cash flow, expenses and investments in growth, including tracking income and expenses, monitoring financial performance, forecasting future revenue and expenses, and managing debt and cash reserves.
By remaining disciplined, businesses that bootstrap can maximize their limited resources and make better decisions about how to best allocate their funds. It’s the best way for bootstrappers not to over extend themselves financially and weather unexpected financial challenges. This is essential for the success of any business, but it is particularly critical for businesses that bootstrap.
In this article, we’ll take a look at what a bootstrapped company is and what the most important considerations are for entrepreneurs that want to go down this route.
To learn more about other terms commonly used in venture capital, check out our complete VC Glossary.
Bootstrapping is a term used to describe self-funded businesses that grow using their own money and resources instead of external funding like outside investment or loans.
To operate, a bootstrapped startup may use personal savings, sales revenues, or reinvested profits. There are also several modern bootstrapping techniques companies can rely on, including crowdfunding and micro-lending.
Bootstrapping requires careful financial planning, resourcefulness, and a willingness to sacrifice profitability over rapid growth.
Many entrepreneurs prefer bootstrapping because the founders can retain full ownership of the company and do not have to share decision-making powers or profits with anyone outside the company. When a company takes on outside funding, they must give up a portion of ownership in exchange, which can dilute its control and decision-making power. Full equity ownership allows businesses to keep all profits generated within the company for reinvestment, growth, and expansion.
Since bootstrapped companies have no obligation to outside investors, they have more control over their business operations. They can make decisions that align with their long-term goals rather than just short-term profits. With full equity ownership, founders have the final say in all business decisions and can prioritize their long-term goals over short-term profitability.
By giving up equity, founders no longer have full control over their business and may not be able to make decisions about the direction of the company without approval from the investors.
If the idea of giving up control over the business you’ve worked so hard to build doesn’t appeal to you, bootstrapping is a better option.
A bootstrapped company doesn’t take on debt in the form of investment or equity financing to launch their business venture, which means they do not have to worry about making monthly payments or meeting investor expectations for returns. A bootstrapped company may rely on owner financing (e.g., personal savings and income), personal debt (such as a credit card), sweat equity, or subsidy finance from the government to fund the company.
The company will also form better spending habits over time, including ensuring that inventory turns around at a faster rate, keeping operating expenses low, and focusing on rapid sales and innovation.
Bootstrapping can impact the company’s growth in a negative way. Many businesses grow far more slowly because their funds are far more limited. Without the support of investors, the business takes longer to develop a new product or expand its operations. As a bootstrapping company, you’ll probably focus on developing your MVP (minimum viable product) and keeping operations afloat instead of investing in marketing or social media to generate interest. Having said that, it’s not always ideal for growing exponentially when you are bootstrapping: with a low budget, you may not be able to keep up with high demand.
Bootstrapping entrepreneurs are exposed to greater financial risks because of their limited cash flow. The company’s ability to weather storms like unexpected expenses, economic downturns, or market changes is reduced.
The limited cash supply means that bootstrappers often turn to alternative options, including factoring, asset re-financing, and relying on trade finance to survive tough times.
Without the backing of outside investors, companies that adopt this business model may be perceived as less credible or less serious than those that have raised significant amounts of capital. It may also be much harder to find connections required for building a business, including creating branding or prototypes.
Bootstrapping companies need to develop their own customer base and find collaborators without the guidance and funding of investors who may know the sector inside and out.
A business operating using only existing resources can be as successful as those who rely on outside investment, but it requires careful financial planning and due diligence. Here are a few tips for entrepreneurs that want to bootstrap their businesses:
It’s important to be extremely strategic about how and where to spend money. Focus only on essential expenses and find ways to cut costs wherever possible, e.g., by outsourcing or sharing resources. A bootstrapped company that relies on revenue may run into cash flow issues if they aren’t able to generate enough sales in a set period, which impacts its ability to pay staff and other obligations, including obtaining inventory.
A bootstrapped company has to run in a lean, efficient way at all times. Some of the ways bootstrapping companies can save money are by giving themselves minimum paychecks, working remotely from an office, building a website using templates instead of investing in web development, and investing in organic marketing over paid advertising. In some instances, the owner may personally deliver goods instead of relying on a formal delivery service, although this requires a trade off between time and capital.
Investors often fulfill a wider role than just offering to fund operations. They bring their advice, connections, and experience to the table. If you decide to bootstrap your business, build relationships with mentors, advisors, and other entrepreneurs that can provide the support and guidance you need. There are often networking business events and communities that entrepreneurs can join to find the support they need as a bootstrapping business.
Bootstrapped companies need to generate profits as quickly as possible to achieve the business growth they need.
Focus on developing a viable business model and generating revenue as early as possible to avoid running into cash flow problems or closing down altogether. Set realistic goals and keep profit margins high. Make sure that you have a firm grip on your expenses (including taxes and inventory costs) and that you keep a close eye on financial statements to ensure that your business is growing and turning a profit as it should.
Read more: 8 Best Financial Modeling Software Tools in 2023
Bootstrapping is a viable option if you would like to start a business without relying on outside funding or loans. It’s not for the faint of heart and can be very challenging, but if you want full control over your business, your debt, and your strategy, it’s a far better option than turning to equity financing.
Limited resources do not have to limit your growth or earning potential, but it requires discipline and close financial oversight. Make sure that you are cutting costs, establishing a support network, and focusing on profitability if you want your venture to succeed in the long run.
Remember, some of the biggest and best companies in the world were built by bootstrappers – but none of them claimed it was an easy road to success. If you are determined, you can reach the same heights.
Nearly 80% of all small businesses are bootstrapped, including several big names.
Before Github earned a $7.5 billion valuation from Microsoft, the platform’s founders bootstrapped the company and ran it while working regular day jobs. They kept their paychecks small to ensure that the project had funding and worked remotely for years. Today, millions of developers use Github to store code, and the founders have a personal net worth running into billions of dollars.
The shapewear brand Spanx was founded by Sara Blakely with just $5000 in her savings account. She invested all of her funding into prototyping and packaging before completing her patent. She remained the sole owner of the $ 1.2 billion company until 2021.
Another billion-dollar business that was completely bootstrapped is GoPro. The camera company was founded with just $10,000, which founder Nick Woodman raised by selling bead and shell belts out of his VW van. To save money, Woodman moved back home with his parents while developing the GoPro camera design.
Other companies that started off as bootstrapping businesses include Dell Computers, Meta (formerly Facebook), Apple, Clorox, Coca Cola and Hewlett-Packard.
You can sell your bootstrapped business, including through partnerships, cold outreach, startup marketplaces, and investment banks and brokers. Buyers may initially establish a relationship with your company by paying for your services and later consider acquiring your business as a financial investment.
Cold outreach is a viable option, especially as many venture funds are actively seeking to acquire startups with strong earnings.
Regularly promoting your startup on social media can increase your chances of attracting buyers. M&A marketplaces like Acquire.com offer a convenient way for founders to connect with potential buyers at any stage of their journey. Investment banks and brokers have traditionally been a common way for businesses to connect with interested buyers, as they often have access to extensive networks of high-net-worth individuals.
Bootstrapping is well-suited to companies in their early stages that do not require large influxes of capital or a huge amount of upfront capital, such as consultancies, creative agencies, or service businesses.
It’s also suitable for serial entrepreneurs, where founders raise money by selling one company to build the next business. If you are self-disciplined, have a great business idea that can be realized without large amounts of capital, and have a higher risk tolerance than average, bootstrapping may be perfect for you.
An operating agreement is a legal document used by companies to define their organizational structure, roles and duties of owners and other key parties involved in the business, and methods for handling all transactions that occur within the company.
Stock options in startups work as a form of equity payment that allows an employee to purchase a certain number of shares of company stock at a specified price.
An over-allotment option allows companies to issue extra shares of their stocks beyond those that they initially planned or announced when they go public (or offer other securities). It’s also known as a “greenshoe option”.
Participating preferred stock is a type of preferred stock that gives the holder the option to receive dividends equal to or greater than the customarily defined rate at which preferred dividends will be paid to preferred shareholders.
