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.