What is Bootstrapping?

What is bootstrapping?

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 businesses grow organically

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.

what is the definition of bootstrapper success?

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.

Photos via Shutterstock: QuestionSeedlingMountain top.

23 Comments ▼

Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

23 Reactions

  1. I agree on the guts part. It is simply impossible to create a business out of thin air especially if you’re going to trod an unknown path. Although bootstrapping is hard, it is still the most profitable. It is all about finding money. You made some great suggestions here.

  2. Anita,

    A nice 101 on bootstrapping. I am a bootstrapper so I can relate very much to your explanation.

    One more thing a bootstrapper does: Not only profits, they focus on cash flow (indeed, unlike what many assume profits is not the same thing as cash flow.)

    The way I see it, bootstrappers are (or should be?) experts in cash flow management. They need to be able to control WHEN the cash flows and WHERE it goes – in or out. They understand that cash flow is king.

    • Hi Ivan,

      Cash flow is crucial, of course. I totally agree with you. That’s why so many businesses rely on their credit cards or a line of credit — so they have ready money to make payroll and pay bills, even if their customers are paying slowly, or seasonality causes disruptions in the flow of cash, or something else gets in the way.

      - Anita

  3. Anita. I’d like you to consider a different perspective. In my opinion Stage 1 is not seed money, but customers. This obsession with money is something that’s come with the web (IMO, to society’s detriment). Pre-web we didn’t focus on funding – rather we looked first for people with wants or needs that weren’t being satisfied and tried to find ways to profitably satisfy them. And “growth” was never a major consideration – we were simply looking to make a good living. If the want/need proved lasting, we certainly tried to grow with it, but as entrepreneurs it was the customers pushing us to to grow – not us pushing them. (That happened when professional managers came on the scene, via employment or buy-out or competitor.) To us, business was about fun – enjoying (and learning from) the constant challenges. Yes, we often worked long hours – but that was because we were doing what we loved – not because we were forced to or because we had to.

    And that businesses “have only about a 50-50 chance of making it five years”, while statistically accurate, is terribly misleading. In many of those businesses, the entrepreneurs (at least those who didn’t bury themselves in debt at the beginning) just started up again – in the same or different business – in the same or different location. And others stopped doing their business by choice, not because they had to. The particular want/need they were servicing was drying up – or it stopped being fun anymore (or they found something else more interesting) – or even some competitor doing a better job and they tired of going head-to-head with them.

    Bootstrapping does “require skills”. But they’re skills any damn fool can learn – and should start learning long before they even think about starting a business. Ivan is right-on that “cash flow is king”. There’s nothing difficult about basic accounting (including tracking cash flow) – and, courtesy of the web, it can be learned right from your desk. The same with writing competent copy – or competent design – or a programming (or scripting) language. The basics can (and should) be learned long before even thinking about starting a business.

    That so many believe business is about money rather than customers is, IMO, a modern day tragedy.

    • Thanks for your perspective, Ed. I am not sure we’re actually that far apart in sentiment. :)

      While I don’t think you need a lot of money to start a business, I do think some money is needed — even if it’s a couple hundred dollars to get started. I can’t imagine getting customers without at least spending a little bit of money. Is it possible to start to with NO money? Sure it’s theoretically possible.

      But even when people say they started a business with no money, that really is a way of saying, “I didn’t spend very much.”

      Example: let’s say you start canvassing the neighborhood for customers for your grass cutting business. But you still need a lawnmower and gasoline to run it, and that has to come from somewhere. Or you start a cleaning business. You still need a bucket, broom, mop and some cleaners — and you print up a flyer to hand out. There’s a bit of an investment in there somewhere.

      And until you start bringing enough money in the door to support yourself and your family, most people will be living off of savings or have a working spouse or have a day job. Most people don’t live self-sufficient lives off the grid, where they can get by with no money for the period of time that it takes to get a business big enough to make a living from it.

      My point was, you don’t need a lot of money. But customers come as a result of organized effort on the part of the entrepreneur — and that usually involves at least a few bucks to get off the ground. Then you quickly get to the customer stage, and the customers fund the business.

      And that’s where I think we are more in agreement, than not.

      - Anita

  4. You don’t need a lot of money to get started and bootstrappers make use of their passion, gut, relentless motivation and fortitude to see things get through and the business keeps going until they see success. You’ve made some good points here.

  5. Anita: I got curios about the origin of the expression, bootstrapping, after reading your post. Could crowd-funding be a part of bootstrapping your business?

    • Hi Martin,

      Crowdfunding is just another way of getting outside funding.

      Now, I could see possibly getting a small amount of seed funding that way.

      In a bootstrapped business, think about “seed’ money as like in a garden. You need a few seeds to start a garden. But the goal is to get the garden producing as quickly as possible. In other words, you need to get that garden “profitable.” Then from those profits (the production from your garden) you harvest enough to live off of, sell some at the market, and harvest seeds that you can plow back into the garden for the next planting.

      Bootstrapping is about thinking beyond that initial amount of “seed” money, and how quickly you can get to the customer funding.

      - Anita

      • Anita: What a lovely analogy with a garden and business. My own chile pepper collection is only for my own enjoyment at the moment, but I will keep your sound advice with me for rest of my life! :)

  6. I don’t agree with the bootstrapping positivity suggested here. It’s rarely experienced that way. Under-funded and under-resourced companies fail, when less quality companies can thrive. If we invested to see more companies succeed than fail (4 out of 5 = 80% SME failure rate), we would have a better business world. Bootstrapping is the old idea, more like hazing than anything else. When we support each other, we will do better. That is what mentoring is, that is what investing is. Instead of people spending so much time repeating the failures, less provide the expertise to help them succeed.

    • Thanks, Tina, for your insights.

      But entrepreneurs have been bootstrapping businesses for centuries. I’m totally onboard with mentoring and small businesses buying from one another.

      However, I don’t support an idea that says businesses can make it if they just get “help.” Not only does it suggest that entrepreneurs are powerless, but it encourages the wrong kind of behavior (such as operating a business at a loss and overspending). A business has to stand on its own two feet.

      My current business is bootstrapped, and we’ve made it 10 years, beating the survival odds. In my past I started a business that had $5 million investment. But my current bootstrapped business, while it grew more slowly, is a stronger business. (The investment-based business didn’t survive, by the way.) For me, the choice is clear: bootstrapping all the way.

      - Anita

  7. Hi Anita,
    It takes longer. I’ve spend money on my podcasting equipment a couple of hosts and used culled information off the Internet. I have probably spent $400. When I started I knew nothing about Internet Marketing. My first site was a test bed, actually the second was too now that I think about it. It is gaining strength and a very little bit of notoriety through my marketing endeavors.

    I am fortunate that I don’t have to make any money right now. It is time however, to focus on marketing and monetize the site.

    Thank you for the article and Anita.

    I guess you can say I’ve been doing extreme bootstrapping. I learn every bit of this business the hard way.

    Again thank you for the article and the site you run here. It has been one of my sources of great information the entire time.

    Sincerely,
    Lance Carlson

  8. When possible bootstrapping is the best way to go about starting and growing your business. I would caution that do not get too worried about asking for money from external resources if that helps you grow fast. You don’t want to hold back growth for lack of cash by focusing too much on bootstrapping. In many cases, start-ups have limited window of opportunity and you may miss it if you don’t grow fast and take leadership position.

  9. Dear Anita,
    I am extremely happy for your free consultancy your are providing to the public. This concept is new to me as I have heard it a week ago, but to my surprise, I have been starting many business and all of them have failed, now I understand why, I was thinking that it is all about much money, but it how you manage what is at hand, having this change of thinking, I am going to start afresh because I was already gave up and thought that the business is not my thing. Once again thank you.
    Will you agree to be my mentor?
    I am a Tanzanian woman doing my Master degree in Entrepreneurship.

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