What is Bootstrapping?
What is Bootstrapping?
Bootstrapping is the process of starting a business using minimal outside funding. Bootstrapping is a common term that is used by entrepreneurs who are going to finance their business themselves without raising equity capital or borrowing money in the form of a loan, often from a bank. Entrepreneurs can finance their business through bootstrapping by either using their personal savings or the business's operating cash flows.
Assessing whether bootstrapping is right for your business
There are many things to consider when determining whether bootstrapping is right for your business. If you decide to use your personal savings, you should determine whether your financial position is sufficient to launch the business and how much of a runway you will have. If you plan to use the business’s operating cash flows, the business model determines whether that is viable. For example, a business model where you can pre-sell items and get cash upfront could work for bootstrapping. However, most businesses have to pay for inventory in advance of selling the product or service, in which case bootstrapping would be very difficult.
Advantages and Disadvantages of Bootstrapping
Pros of Bootstrapping
- Retrain control: When you bootstrap your business, you retain complete control over the direction and decisions of the company. You do not have to answer to investors and other stakeholders, allowing you to make decisions based on your vision and values. You own 100% of the equity in the company and, thus, retain all the profits and potential upside upon a liquidity event.
- Maintain flexibility: Bootstrapping can allow you to maintain greater business flexibility. You can pivot or adjust your business without worrying about investor expectations or contractual obligations.
- Forced discipline: Bootstrapping forces you to be disciplined with spending and resource allocation. This can lead to better financial habits and a more sustainable business model in the long run.
- Lower financial risk: Bootstrapping comes with less financial risk than taking on outside capital. For example, a simple loan may mean putting your house or car up for collateral or paying additional fees and penalties if you miss payments.
- Increased focus: Bootstrapping allows you to focus on what moves the needle with your business, not answering investor Q&A and filling out paperwork.
Cons of Bootstrapping
- Shorter runway: With outside capital, you have more runway to build a profitable business. If your business fails to generate operating cash flow, then your business will only last as long as your savings.
- Lack of credibility: By taking on outside investors, such as angel investors or venture capitalists, you borrow their credibility, making it easier to recruit top talent, partner with notable companies, and attract corporate clients.
- Difficulty competing with funded businesses: Well-funded companies with more resources and team members may have an advantage in winning and retaining customers over bootstrapped businesses.
- Inability to meet demand: If demand exceeds your company's ability to procure inventory or raw materials to sell, you may leave revenue and profit on the table. This may impact how fast your company can grow.
Bootstrapping Tips
Here are some potential techniques you can use to bootstrap your business' finances:
- Preorder sales campaigns: Sell products or services in advance of providing the good or performing the work to generate operating cash flow to fund your business and measure customer demand.
- Defer payments on business set-up fees: Incorporation, legal, and more.
- Negotiate supplier terms: Consider negotiating with your suppliers for better payment terms. It's worth exploring if they are willing to extend beyond the standard 30-day period, often without additional charges. Extending your terms to 45 or 60 days could significantly improve your cash flow.
- Leverage your business credit card: Utilize credit card points and rewards for spending on things you would purchase anyway.
- Track your expenses: Review your expenses regularly to see if you are spending money on unnecessary things you may no longer need for your business.
