What is bootstrapping in the context of business? In this piece we define what it means to bootstrap a company, with examples and the steps for how an entrepreneur fund for such a company. We point out advantages and disadvantages.
What is Bootstrapping? A Bootstrap Definition
Bootstrapping means to get into or out of a situation using your own resources. A bootstrapped business is a company without outside investment funds.
Entrepreneurs refer to bootstrapping as the act of starting a business with no outside money — or, at least, very little investment. Bootstrapping means launching a business without the help of venture capital firms or even significant angel investment. Bootstrapped companies are not the kind that draw media attention from huge funding rounds.
The founding entrepreneur, known as the bootstrapper, is the one sole investor in the beginning. The founder’s only investment capital might be personal savings – and of course the time he or she spends working for free to get the business up and running. Bootstrapping requires plowing the money earned from customers back into the business . In other words, the bootstrapping entrepreneur relies on cash flow to grow their business in the place of outside capital.
You’ve heard the old saying about “pulling up by your bootstraps”. When it comes to startups, the bootstrap definition means to do something on your own.
How Do You Bootstrap a Company?
You bootstrap a company by starting with a small amount of your own funds. As the business gets going, you re-invest revenue earned from customers back into the business to finance daily operations, development and expansion plans.
It takes three steps to bootstrap a company:
1. Find Seed Money
Start with personal savings, or perhaps some “friends and family” funding to get going. This is called seed money or a startup stake. A related technique at this stage is to start out with a side business, where the founder continues to work a day job to keep body and soul together. The founder then uses day-job earnings to fund the side business. In short, the founder manages to scrape up enough resources to get the business off the ground. The business is launched on a shoestring budget.
2. Launch a Minimum Viable Product or Service, Fast
Release a minimum viable product as soon as possible. For a software company, online business or any business requiring advance product development, launch as soon as you have a viable offering. Fast is better than perfect. The faster you get going, the faster you get to the next step.
3. Use Customer Funds to Grow
Get money from customers quickly, and use it to fund operations and expand. That customer funding is pumped back into the business. Therefore, it is essential to close sales early and fast. Sales revenue keeps the business operating and, eventually, finances growth.
Growth is often slow, because the company first has to meet its operating expenses to stay in business. But committed entrepreneurs find ways to increase sales, which in turn gives them more capital to invest in their business.
For additional tips on how to bootstrap a company, read: 10 Tips for Bootstrapping a Startup.
What Bootstrap Funding is NOT
Bootstrapping does not mean giving up a chunk of equity in exchange for bringing on investors.
Bootstrapping does not mean going out to get a big loan to start a business, either. Yes, some startups may take on loans or lines of credit along the way. Others lean heavily on credit cards. A few may even get microloans or small local grants.
But credit is typically a short term fix to fund specific growth activities such as buying equipment, or to smooth out cash flow dips. In a bootstrapped business, credit often comes later, not immediately upon starting up.
Getting credit at some point is a proven technique for companies to spread out the demands on their cash, through monthly payments. The trick to this technique is to seek credit only when revenue streams are finally reliable enough to ensure you can make the loan payments. Remember, the founder still has to pay the monthly payments or debt service out of funds earned in the business.
In other words, DO use credit wisely in targeted ways such as to even out seasonality or expand. DON’T saddle yourself with a big honking loan as the main source of funds to start the business.
Bootstrapping is Minimalism Applied to Business
Starting a bootstrapped business is a litmus test for an entrepreneur and a challenge for everyone involved in running the business. So what does it really take to start a business this way?
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. Such businesses avoid spending except where absolutely necessary and work within their means, finding ingenious ways to get by with less.
What are Some Examples of Bootstrapping?
There are some famous examples of bootstrapping. Think of all the stories you see on social media of a famous billionaire launching a business in a garage. That is a boot-strapped story. Let’s look at a few examples:
- Spanx – The Spanx bootstrapped story starts with a brilliant idea. Unable to find the right undergarment for a party, Spanx founder Sarah Blakely took scissors and cut the feet off a pair of pantyhose. The rest, as they say, is history. Blakely used $5000 from savings to develop the products using her mom and friends to test her prototypes. With no money for a fancy office, she ran the business out of her apartment. She also controlled costs by being a sales and marketing department of one.
- Apple – The Apple bootstrapping story is just as inspiring. Entrepreneurs Steve Jobs and Steve Wozniak founded this powerhouse company in 1976. But the original headquarters where Wozniak hand built the Apple I wasn’t on some Silicon Valley tech campus. It was in a bed room at the suburban home of Jobs’ parents. Eventually the company moved to the garage when they needed more space.
- Dell – Entrepreneur Michael Dell founded the iconic brand that now bears his name from his dorm room at the University of Texas at Austin. There, Dell built and sold computers made from stock components. He eventually dropped out of school as the business grew. In 2019 Michael Dell was ranked 18 on the Forbes 400 list of billionaires.
HP, Cisco, eBay, Oracle and Microsoft are other popular examples of companies that started from humble beginnings and grew. Other names are not quite as big, but still impressive. Braintree, TechSmith, Envato, Litmus, iData, BigCommerce, and Campaign Monitor were all started with “boots strapping”.
You can find a list of companies that started with little or no outside investment, grew organically and posted $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….
Starting a business with nothing may sound romantic. But behind the cool “look at what I’m accomplishing” factor you must face the realities of limited human resources, tight budgets, and little or no growth capital.
Bootstrapping is not necessarily an easy route to grow your company. Because of the need to keep down the cost, bootstrapped companies face huge barriers to growth. Consider these downsides:
- Bootstrapped companies tend to be strapped for cash. They always need new sales.
- These companies may not be able to hire the innovative talent they need in order to grow.
- Bootstrapping results in these companies taking more time to scale than VC-funded companies.
- The founders may become risk-averse and as a result miss growth opportunities.
Yet, there are enough success stories to make bootstrapping a 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 to buy whatever they want. They must make money if they are to survive. Profits are the one way to keep funding the business.
When you have outside funding, your mindset and behavior will be very different. Outside investors are looking for high growth and an exit strategy. They want to make a return on their capital as fast as they can. They may 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. Usually the founding entrepreneur expects to be around for a long time, slowly and quietly growing.
And for that, a bootstrapper needs to deliver value and 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
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. Bootstrapping entrepreneurs have to do the following:
- Risk everything they’ve got.
- Put sweat equity into their businesses.
- Learn to barter when they don’t have cash.
- Refine the art of hiring or outsourcing while stretching their tight financial resources.
- Make things happen!
Every entrepreneur knows the startup statistics: about half of business fail by year five. A smart entrepreneur focuses on forward progress and never looks back.
Bootstrapping Brings Out the Best in Entrepreneurs
Bootstrapping is a tested way to become a better business person, says serial entrepreneur Matt Clark. The founders end up learning about themselves along the way — and accomplishing more than they originally thought possible.
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 revenue streams into their business model. They gradually grow their marketing and sales, and scale up when they have the funds.
Their founders learn lessons the hard way, often becoming 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. Successful bootstrapping entrepreneurs are enthusiastic, passionate and relentless. They don’t give up on their dreams.
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 minimalist 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.
Best Businesses to Bootstrap
Finally, people often ask, what are the best businesses to bootstrap? You can bootstrap any business that doesn’t require a large startup stake. The types of businesses that are the best to bootstrap can be started with little money. See: businesses to start with less than $100 or any one you start with $1000. Franchises, on the other hand, can require hefty up front fees. Therefore, franchises are not the best bootstrapping candidates.
Photos via Shutterstock: Question, Seedling, Mountain top.
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.
Being a bootstrapper is rewarding. The sense of confidence and accomplishment that comes from knowing you did it on your own, is hard to explain.
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.
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. 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.
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.
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?
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: 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! 🙂
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.
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.
Hi Lance, I love that phrase: “extreme bootstrapping.”
I am going to remember that. I appreciate the feedback, too.
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.
You make a great point. As long as you have a viable business model, getting funding to grow can be the best move you make.
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.
This is a great article. As we speak i am out of a job and i am working to establish a consultancy and training company in IT. I can relate to your article. Thanks