All businesses need funding to get them off the ground but the method you use to get financing will vary. Bootstrapping describes one-way entrepreneurs can fund their startups.
What is bootstrapping?
Essentially bootstrapping occurs when an entrepreneur uses their own personal savings or their operating revenues for the initial funding of their business. Unlike an investment from a venture capital firm or bank, this process of self-funding enables an entrepreneur to retain control of their business but it can increase the financial strain.
It can also refer to a process business owners use when attempting to cut costs, personally finance operations or look for other creative financing solutions. Approximately 80% of businesses rely on bootstrapping as a financial source for their startup.
Understanding how bootstrapping works
The bootstrap method tends to become the business model of choice when an entrepreneur starts a small business with little to no funding. This is very different to a company that looks to angel investors or venture capitalists for its startup cash flow.
The advantage of the bootstrap method, unlike a loan or venture capital, is that the entrepreneur can retain control over major decisions. The disadvantage is it carries with it a personal financial risk and if a business fails the owner can end up in debt.
The different bootstrapping methods
Not all startups will rely on the same bootstrap method. It depends on individual circumstances, available resources, estimates of the costs involved and the ability to obtain external finance. These are the most likely ones an entrepreneur will use:
Personal investment: In their initial stages, most startups need up-front capital which often comes from personal investment. A founder will make an initial investment from their own resources and may be required to inject capital at various stages during the startup process.
Personal debt: Another common bootstrap method occurs when an entrepreneur takes on debt, typically through a loan. The founder will do this because the company is either not eligible for a loan or because the terms are not favourable. While it’s a common way of securing funding it leaves the founder personally liable for the debt.
Cutting costs: Running a lean operation is the third common bootstrap method. In this instance, a small business might limit what they spend. For example, delivering goods locally themselves to avoid courier charges or cutting back on physical printing and relying on email marketing instead.
Taking pre-orders: By taking orders and cash up front, they get the financing they need to create/produce the product in advance rather than trying to sell existing inventory and can also keep a tighter grip on cash flow by only producing what they need.
The pros and cons of bootstrapping
It is a proven business model which enables an owner to retain control of their business and keep tight control of cash flow. It also creates a lower barrier to entry and can mean a small business enjoys higher profitability in the short term because the owner is conscious of costs and therefore avoids unnecessary expenses.
However, unforeseen expenses can arise and businesses can fail. Bootstrapping is no guarantee of success. Startups that rely on this method can find they simply don’t have enough capital to realise their goals or that some measures they take to keep costs down and avoid debt create a negative brand image which impacts sales. Unexpected expenses can arise which can impact cash flow and there are no other finance sources to plug the gap.
What is an example of bootstrapping?
An example of modern-day bootstrapping would be a company that uses social media marketing to build interest in a product and attract pre-orders before they actually manufacture it – they receive the revenue up front which then funds the production costs.
Why is bootstrapping useful?
It enables an entrepreneur to build a business from scratch without the need for investors and sharing equity.