What is bootstrapping? In the context of business, bootstrapping is the act of starting a business with no money — or, at least, very little money. It certainly means starting a business without the help of venture capital firms or even significant angel investment. It means plowing back into the business the money earned from customers.
While there are lots of old sayings about “pulling up by your bootstraps” — the general idea is that in the context of startups bootstrapping means to do something hard, on your own.
And what do Braintree, TechSmith, Envato, AnswerLab, Litmus, iData, BigCommerce, and Campaign Monitor have in common?
All are companies that, in one way or another, bootstrapped their startup. As many businesses are discovering today, outside investor funding is not a realistic option for most startups.
The way a bootstrapped company grows typically goes through stages:
- Stage 1: seed money. This stage starts with some personal savings, or perhaps “friends and family” funding to get going. Or it may start as a side business, where the founder continues to work a day job to keep body and soul together. But somehow, the founder manages to scrape up enough resources to get the business off the ground.
- Stage 2: customer-funded money. The second stage is about getting in money from customers. That customer funding is pumped back into the business. It is what keeps the business operating and, eventually, funds growth. Growth is often slow, because the business first has to meet its operating expenses to stay in business.
- A word about credit. Bootstrapping does not mean going out to get a big loan to start a business. Yes, along the way, some startups may take on loans or lines of credit. Others lean heavily on credit cards. A few may even get small grants. But those are typically short term fixes to fund specific growth activities, such as buying equipment or hiring more staff, or to even out cash flow dips. It’s not so much about using credit as the main source to start the business, but rather as a secondary source to keep it operating and grow it. The founder still has to pay the monthly payments or debt service, out of funds earned in the business.
Starting a business this way is a litmus test for entrepreneurs and a challenge for everyone involved in running the business.
So what does it really take to start a business this way?
Bootstrapping is Minimalism Applied to Business
The Merriam-Webster Dictionary defines minimalism as follows:
“ …a style or technique (as in music, literature, or design) that is characterized by extreme spareness and simplicity.”
When companies use this approach for their business culture, they are practicing bootstrapping. Bootstrapped businesses avoid investing except where absolutely necessary and work within their means, finding ingenious ways to get by with less.
Bootstrapped Companies Grow Organically
Bill Hamilton, founder of TechSmith, which makes popular software such as Jing, Camtasia, Morae, and Camtasia Studio, reports that his company grew from revenues of about $1.8 million in 1999 to earnings of about $34 million in 2009. In terms of staff and hiring, the company grew from just 19 to 210 employees.
Paul Farnell, founder of Litmus, is another bootstrapping entrepreneur who grew his company from self-funding to $1 million in revenue, growing at the rate of 10% each month.
You can find a list of such companies that bootstrapped, grew organically and are now posting $1 million plus in revenues in 37Signals’ Bootstrapped, Profitable and Proud series.
Bootstrapped Businesses Never Seem to Have Enough
Enough people, resources and cash, that is….
Cisco, eBay, Oracle, SAP, Microsoft, Business Objects and many other companies started from humble beginnings and used bootstrapping to grow. For those companies it paid off.
Starting a business with nothing may sound a bit romantic and cool. But behind the cool “look at what I’m accomplishing” factor there are the realities of limited human resources, tight budgets, little or no growth capital.
Bootstrapping is not necessarily an easy route to grow your company. When you bootstrap you’re going to have to face down huge challenges.
According to Kennet.com, bootstrapping has some downsides. Bootstrapped companies face huge barriers for growth. They tend to be strapped for cash — especially in the early days. Bootstrapped companies may become risk-averse and as a result miss growth opportunities. They may not be able to hire the innovative talent they need in order to grow.
Yet, bootstrapped companies surface all the time. There are enough success stories to make it a very viable option for starting your next business.
First Law of Bootstrapping: Focus on Profits
Bootstrapping requires a very different mindset from the management mindset in a venture-funded or angel-funded company. Bootstrapped companies must focus on profits to keep on going. They have no outside investment dollars to spend — no ready pile of money they can tap into. Bootstrapped companies can’t afford to waste money. They must make money, if they are to survive. The profits they make are what fund the business.
When you have outside funding, the mindset and behavior of those running the company will be very different. Outside investors are looking for high growth and an exit strategy. They want to make a return on their money as fast as they can. They will push growth at a loss in the early years, marching toward that payoff when they can cash out.
A bootstrapped entrepreneur, on the other hand, is typically in it for the long haul. Yes, a bootstrapped business may be acquired by another business. But usually bootstrapped businesses expect to be around for a long time, slowly and quietly growing as they go about their business.
And for that, a bootstrapper needs to develop paying customers. He or she has to be able to make payroll, pay the bills, and still fund the company’s growth — all from the money the company earns.
Bootstrapping Requires Guts, Passion and Skill
Bootstrapping requires skill. Founders who bootstrap must amass a wide variety of skills, defy tradition, network like crazy, innovate on a regular basis and find answers to problems daily.
Bootstrapping also requires fortitude, guts and passion. Founders who bootstrap put sweat equity into their businesses, risk everything they’ve got and learn to barter when they don’t have cash. They learn the art of hiring or outsourcing without much to give, and stretch what resources they have to get what they need. They hustle. They create. They make things happen.
Even so, they have only about a 50-50 chance of making it five years, as startup failure statistics show.
Startups that bootstrap learn to grow on their own. They can’t afford elaborate resources and don’t wait to get started.
Bootstrapping Brings Out the Best in Entrepreneurs
Bootstrapping is a tried-and-tested way to become a better business person, says serial entrepreneur, speaker, author and fitness enthusiast, Matt Clark.
Bootstrapped companies are resourceful, accountable and careful. Successful ones usually find at least one high-margin product or service to start out with. They build loyal customers, partnerships, and recurring streams into their business model. They gradually grow their marketing and sales, as they scale up when they have the funds.
Their founders learn lessons the hard way. As a result they often become better business people. Many bootstrappers become walking examples of the old adage, “That which does not kill me makes me stronger.”
Bootstrapping brings out the best in entrepreneurs and the best in those they work with, too. They are enthusiastic, passionate and relentless. They don’t give up on their dreams and they never stop learning. They also end up learning a lot more about themselves along the way and end up accomplishing a lot more than they might have originally thought possible.
Bootstrappers wake up earlier, spend longer days at work, know how to keep their wits about them even under pressure, know how to eliminate unnecessary distractions and are often very productive, reports Fox News. Bootstrappers are also natural savers, can go hungry until they become profitable and are naturally minimalistic in their outlook on life. They are also committed to the long-term.
That’s why teams that collaborate while bootstrapping stick together longer and the companies that bootstrap become inspirations for others.