You have heard of the term bootstrapping in various startup-related circles, but what does it really mean? Bootstrapping is a way of funding a business without taking on any outside funding such as debt or equity. To learn more about debt and equity to finance your startup check out our article Debt vs Equity. Bootstrapping traditionally refers to someone using their own capital, or solely the profits generated by the business itself, to fund their business and its growth.
Some successful companies that have bootstrapped are:
The Various Stages of Bootstrapping
Bootstrapping can be divided into two stages: initial capital and customer capital. After this point companies may be able to maintain and grow their business solely using customer capital, or they may look to investors for support.
Initial Capital: This is money that is usually gathered from your savings with some financial support from family and friends. The initial capital is used to get your idea off the ground and test Problem-Solution fit. Initial capital is usually used towards things like:
Customer Capital: Once your primary business expenses are out of the way, and you actually have products or services to sell, the money you make from the profits of your sales to customers can help you further grow your business. Customer capital percentages vary based on the type of business you run. Example: A software as a service (SaaS) company has different expenses associated with the cost of goods sold (COGS) than an e-commerce company selling T-shirts. The SaaS company is much more scalable and, in most cases, has the potential for higher profit margins.
The Benefits of Bootstrapping
You keep control of your business. No obligation to stakeholders and no collateral required for a loan from the bank.
Demonstrates strength and determination of character. Resourcefulness and tenacity are characteristics that relate highly to success and potential for future support by investors.
Bootstrapping allows for iteration. By working at your own pace you are able to determine what works best for your business one step at a time. Iteration is the key to finding your Product-Solution fit.
No interest earned or repayment necessary. Aside from side deals with family and friends, like washing their car or doing their laundry for a month, there is no obligation for repayment. Of course, some individuals like to guarantee family and friends repayment in exchange for a stake in the company, this does not classify as bootstrapping.
The Downside of Bootstrapping
Investors increase the validity and credibility of a startup. They serve as a form of external validation. If a well-known investor believes that your company has potential, the chances that someone else sees the value in what you are doing increase. Not being involved with an investor may decrease the ability for your business to gain exposure.
Bootstrapping relates directly to your ability to subsidize your business. If you have little resources available and sink them all into your business idea, it may negatively impact your personal financial situation.
Bootstrapping may cause tension in companies with more than one founder. Issues could arise around equity in the company if not all co-founders support the business in the same way. Example: One co-founder could supply the business with $10,000 and spends 3 hours a week working there, while the other co-founder supplies the company with only $3,000 but works at the business full-time unpaid. The value that each co-founder brings to the business varies and must be taken into account when discussing equity and future growth. This can be avoided by properly splitting equity, try Mike Moyer’s formula for calculating startup equity or try his equity calculation software, Slicing Pie.
Bootstrapping is a great way to get your business started without unnecessary risk or accrual of debt, however, the success of bootstrapping is determined by your ability to leverage your own resources. If you are not making sufficient sales to feed your business objectives, it may be time to look to outside funding or reevaluate your business model. The best way to prove to yourself and investors that your business is worth devoting resources to is for you to demonstrate product-market fit, usually indicated by growing sales or increased membership.