If you’re starting a new business, you may be considering if self-financing your startup is a viable option for you. Bootstrapping, or self-funding a venture is one of the most popular methods for raising capital — especially among entrepreneurs who prefer to keep their business operations in their own hands. But there are pros and cons to bootstrapping that you will want to understand. In this blog post, we’ll explore what bootstrapping means, the pros and cons of self-funding a startup, and some tips for making it work. Read more about startup sales strategy.
Read this post to learn what a bootstrapped company is, bootstrapping’s pros and cons, and how to decide if bootstrapping is right for you.
What Does “Bootstrapping” Actually Mean?
It’s the process of using your own money and resources to fund a startup instead of seeking outside investment from venture capitalists or angel investors. Avoiding external funding means that the company is completely responsible for its own finances. Operating expenses are initially funded by sweat equity and personal financed and business growth is achieved by acquiring customers to generate sales revenue to reinvest.
What are the Bootstrapping Pros and Cons?
Pros of Bootstrapping
A huge attraction of bootstrapping is that the founder continues to maintain control over their business. You don’t have to answer to investors, so you can focus entirely on building the product or service without worrying about meeting someone else’s expectations.
Bootstrapping also allows you to start small by building a profitable business instead of racing against time when you accept money from investors that needs to be spent for fast growth. When you bootstrap, acquiring new business is paramount from the beginning. This helps to ensure that your customers will always be the focus of what you do.
Having limited capital can force you to get creative. Many entrepreneurs learn important lessons in resourcefulness and budgeting when bootstrapping their businesses. By taking on this challenge from within the company’s own resources, entrepreneurs gain valuable insights into what works for their startup.
Cons of Bootstrapping
An entrepreneur faces many challenges in all stages of building a business, and using their own funds or getting into personal credit card debt to manage cash flow is too much risk for many business owners.
Besides the personal financial risk of using your personal capital, one of the biggest drawbacks of bootstrap financing is that it limits your growth potential. When you’re relying on personal savings or sales to build your business, there may not be enough existing resources in your early stages to invest in marketing, hiring new staff, or launching new products You may find yourself hitting a wall where you don’t have the funds or expertise to continue growing your business.
Examples of Bootstrapped Companies
There have been many successful bootstrapped companies over the years.
Here are three examples:
The most famous bootstrap story is probably that of Dell Computer, which was founded in 1984 by Michael Dell. He founded his start-up by liquidating a portion of his college savings and using it to build custom PCs from scratch and sold them directly to customers. Over the years Dell grew to become one of the world’s largest computer companies.
Basecamp Another example is Basecamp, a project management software company founded in 1999 by Jason Fried and David Heinemeier Hansson (DHH). They bootstrapped their business with $3,000 in savings and no outside investment for several years before eventually taking on venture capital funding. Incidentally, these guys authored one of my favorite books for startups called Rework.
MailChimp MailChimp is a recent bootstrap success story. The company was founded in 2001 by CEO Ben Chestnut and CTO Dan Kurzius. Initially, the two funded the business with their own personal funds and bootstrapped their way to a successful email marketing platform with over 14 million users that they sold for a reported $4.2 billion in 2020.
Bootstrapping vs. Venture Capital
At the end of the day, it’s important to remember that bootstrapping and venture capital are two completely different paths to starting a business.
Venture capitalists can provide more resources – money, access to networks, and mentorship – which help companies grow quickly but at the cost of giving up control over their own decisions. Bootstrapping, on the other hand, can cause companies to grow more slowly but in the end, you have full control over your business. It’s also important to note that it’s possible to start out by being a self-funded business and then raise capital later, to fuel your company’s growth. Click here to read How to Raise Venture Capital for your Startup
How to decide if bootstrapping is right for you.
Bootstrapping can be a great way to get started in business, but it may not be the right choice for everyone. It’s up to each entrepreneur to decide what the best option is for their company based on their risk tolerance and goals for growth. There is no one-size-fits-all when it comes to entrepreneurship, and that includes when deciding between bootstrapping or venture capital.
You’ll also want to understand what your vision is: do you want to be accountable to a venture capitalist and their agenda, or do you want to be the sole decision-maker of your own business? Do you want to grow quickly and you need a huge cash injection to get there, or are you happy to patiently grow your business over time? These are important questions to ask yourself before you decide which route is best for you.
No matter what path you choose, it’s important that you do your research and understand the pros and cons of each option before making a decision. Bootstrapping can be an excellent choice if done correctly, but it’s not without its own set of challenges. Ultimately, the key to succeeding in business is using the resources that you have at your disposal and making smart decisions along the way.
Whether you decide to bootstrap or pursue venture capital funding, the most important thing is to find what works best for you and your business. If you’re considering self-funding, conduct an honest assessment of your resources and goals to determine if bootstrapped financing is right for you.
How to Start a Successful Startup, the Bootstrapping way
If you decide to bootstrap your startup, there are some tips and strategies that can help you succeed.
First, set realistic expectations for what you can accomplish with your available resources. It’s important to focus on the basics – such as building a strong customer base, refining product features and improving operations – rather than striving for rapid growth.
In addition, it’s essential to make sure you have a solid financial plan in place and that you’re tracking key metrics such as cost of customer acquisition, lifetime customer value, and customer churn rate. These will help you understand how your business is performing and what areas need improvement.
Finally, don’t forget the importance of marketing and sales. You may not have a big budget for advertising or marketing, but there are still ways to get the word out about your product or service. You’ll want to get to the customer funded stage as quickly as possible so that you’re not relying only on your personal savings.
In the early years of self funded businesses, founders usually are the company’s first ‘salesperson.’ This means hustling and actively seeking out customers who will be willing to invest in their product or idea. The process of bootstrapping requires founders to use their existing resources and network to market themselves, find their first few customers, and build their business.
Alternatives to Bootstrapping Funding for Startups
Having read the pros and cons in bootstrapping, you may want to explore other options. there are other options available. These include crowdfunding platforms such as Kickstarter, angel investors, and government grants. Each of these sources has its own set of pros and cons, so it’s important to do your research before deciding which avenue is best for you.
Venture Capital Funding
Venture Capital Funding is one of the most common ways to fund a startup. VCs are typically high net worth individuals or investment firms that provide the capital for a startup in exchange for an equity stake. In addition to providing capital, venture capitalists bring valuable resources and connections to the table – such as their expertise, network of contacts and experience – which can be invaluable for new businesses.
Read more about Venture Capital Advantages and Disadvantages
Angel investors are wealthy individuals who provide capital to startups in exchange for equity. Unlike venture capitalists, angel investors usually invest smaller amounts of money and prefer to invest early in the startup’s life cycle. They are a very common source of Pre-seed Funding. Angel investors often have a network of contacts that can help startups grow, so they can be a valuable source of funding as well as advice.
Read more about Angel Investors: The Advantages and Disadvantages.
Read about how angel investors work.
Crowdfunding platforms such as Kickstarter and Indiegogo allow entrepreneurs to raise money from a large pool of potential backers. Crowdfunding, and especially equity crowdfunding, is a great way to get small amounts of funding from many people, which can add up quickly. However, keep in mind that the funds raised through crowdfunding may not be enough to cover all of your startup’s needs.
For more about equity crowdfunding, read out article Equity Crowdfunding: Everything You Need to Know.
For tech startups, government grants can be a good source of funding. Many governments offer grants to innovative companies in order to boost the economy and encourage innovation. The application process for these grants can be lengthy and complex, so it’s important to do your research before applying.
The SBIR and STTR programs are two examples of U.S. government grants are provide seed funding to technology startups.
Small Business Loans
Small business loans can be a good source of funding for startups that don’t have access to venture capital or other forms of financing. These loans can come from banks, credit unions, or the Small Business Administration. The terms and conditions of small business loans vary, so it’s important to do your research before applying.
Small Business Administration (SBA) Loans
The Small Business Administration (SBA) provides loans to small businesses, including startups. These loans are backed by the government and have lower interest rates than other types of financing. However, the application process for SBA loans can be time-consuming and complex, so it’s important to do your research before applying.
For more on SBA loans, read our article on SBA Loans: the Pros and Cons.
Startup Business Lines of Credit (BLOCs)
Startup Business Lines of Credit (BLOCs) are short-term loans that provide flexible financing for startups. These loans often have more flexible repayment terms than other types of financing. However, the application process can be complex and time-consuming, so it’s important to do your research before applying.
For more on Startup Business Lines of Credit, read our article on Startup Business Lines of Credit: Flexible Financing for Your Business.
Credit cards are another possible source of short-term financing for startups, but carry high interest charges, so it’s important to pay off the balance in full each month to avoid high interest charges and penalties.
TLDR (Bootstrapping Pros and Cons):
Though not for everyone, many entrepreneurs find bootstrapping their own businesses to be a rewarding experience. When done right, bootstrapping can help you achieve your dreams and build a successful business that you have total control over. The road can be hard and long, but the feeling of accomplishment of building something from scratch with your own resources is often worth the challenge. Bootstrapping requires founders to work hard, be creative and leverage whatever resources they have available to them. This means working out ways of getting the most out of existing tools, finding partnerships that offer discounts or free services, and really pushing themselves outside of their comfort zone in order to make the idea a reality. Now that you understand the bootstrapping pros and cons, you can make the decision if this is right for you.
Learn more about the 15 Pre-Seed Venture Capital Firms Who Invest in Early Stage Startups.
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