If you're thinking about starting up your own business, there are several types of funding you can take as you pursue growth. One way to grow your startup is through bootstrapping. But what is it? And how do you do it?
What is bootstrapping?
Bootstrapping is the process of starting your business and building it using your own money, managing day-to-day life from the operating cashflow. You leave out outside investors or stakeholders, which means that you don't have to live up to someone else's expectations, nor give away any part of your business in exchange for money.
Bootstrapping money can come from a number of places:
- Monthly income from a day job
- A personal loan
- Credit cards
- Family and friends
The benefits of bootstrapping
There are a number of benefits to bootstrapping your startup:
As soon as you seek external funding — with the possible exception of rewards-based crowdfunding — you relinquish some of your control or ability to work freely. Since you accept outside financing, most likely you will give up equity or become bound by debt repayments. Bootstrapping on the other hand allows you to make the decisions.
Learn as you go
Bootstrapping allows you to learn the ropes as you go. Without anyone to answer to, you can work at your own pace, gradually learning more about your market and growing your business.
No repayment terms or conditions
When using your own savings or income, your funding won't be subject to the same rigorous repayment conditions as external funding.
Self-funding is flexible and does not have to represent a fait accompli for your firm in the same way as other financing models. You can bootstrap your business up to a certain point and then seek outside money or expertise at a later point if you think it's necessary.
The risks of bootstrapping
There are also a number of risks to bootstrapping your startup:
No outside help
While outside investment means being accountable to someone outside your business, it does bring with it valuable help and support — sometimes not only financially. If you're a complete novice to either your market, or launching a startup full stop — or both! — then the potential experience and expertise offered by the likes of angel investors could prove reassuring, even if it means giving up a degree of control.
Bootstrapping is hard work
Bootstrapping will mean hard work. If you rely on your own savings, most likely you won't have the means to hire a team straight away, or your recruitment budget will be minimal and you'll have a hard time hiring the amount of people you need to get going. Expect to wear multiple hats, even when you start your business with a cofounder and support of family members.
The reason a lot of startups set out to secure external funding is so that they can acquire enough money to scale and grow faster than they could with just savings. So choosing to bootstrap your company could see you grow at a slower pace than if you had help from venture capital or angel investment.
Risk of failure
As investor Robin Klein says, "the reason businesses fail is because they run out of cash". At the end of the day, regardless of what type of funding you go with, you need to make money and generate a cashflow. Even with a business that people love and support, if you don't make money you won't survive.
👉 Read more about bootstrapping: Bootstrapping vs VC 8 Bootstrapped companies to watch Why is bootstrapping the go-to model for CEE startups? Europe's fastest growing bootstrapped startups 5 bootstrapped startups pursuing sustainable growth
So what does it take?
To bootstrap your startup you need money, confidence and a lot of hard work.
If you plan on saying no to external investments, you need enough money to launch your business and sustain operations until the business starts generating money on its own. Otherwise your startup journey will be short-lived. In the initial stages of the business, you may stay in your day job and use work evenings and weekends to build your startup. This is what Latvian startup Gamechanger Audio did, as two of the members of the founding team had full-time jobs when they first set up.
Bootstrapping also means putting in the work. The buck stops with you or a potential cofounder (or several). Funding a startup on your own means means that you'll be wearing a multitude of different hats, from HR to marketing, to product development to finance and business development.
However, at the end of the day, you may not have much of a choice.
Bootstrapping might prove impossible to avoid — at least to begin with
Necessity is the mother of invention. With the pros and cons in mind of bootstrapping, if you don't know how to go about seeking an angel investor, or the bank refuses to give you a business loan, you might find that you have little choice but to use your own money.
The good news is you won't be alone. Rather, you'll be following in the footsteps of some hugely successful predecessors. And frankly, it would be easier to list the successful companies that don’t have a similar story to tell. The likes of eBay, Facebook and GitHub all bootstrapped to various degrees before seeking outside funding. We've listed a few other cases below to showcase how bootstrapping has worked for other businesses:
- Steve Jobs and Steve Wozniak built Apple by carrying out most of the company's early operations from Jobs’ childhood home
- GoPro founder Nick Woodman started out by selling Balinese bead and shell belts from his camper van and a loan from his father
- Finnish startup Framery conquered the world’s tech workplaces and grew 100 times in five years after initially bootstrapping
Plus, if you ask Andy Ayim, a director at a London accelerator, he is of the opinion that most startups don't need outside funding.
I’ve decided to bootstrap my startup. What's next?
Preparation is key. If you're planning on bootstrapping, make sure you have a plan in place. It's easy to run straight ahead with a pile of money and start spending, but by doing your due diligence of the market and your idea, you'll be better equipped to manage the building of your business. As you get momentum it can also help ease the hiring of the people you need to grow further.
Do your research
Doing your research is important in order to identify the prime growth opportunities for your startup and get to get know your market.
- Why do you exist? What's your purpose for being?
- Who will your product/service help?
- How will it help them?
- What type of marketing are your potential customers most likely to respond to?
- Who are your competitors and what to they offer?
Manage your money
- Limit your overheads as much as possible
- Evaluate whether you can work from home rather than hiring an expensive office
- Spend money wisely
Know when to loosen the purse strings
You have a great idea but limited finances. That doesn’t mean that you should hold back on spending all the time. There will be times when investing money into certain tools, services or people will be necessary, and help you grow your business.
Build customer loyalty early
Building customer loyalty is important, but what type of loyalty you can and should build depends on the type of startup you are launching.
In general, a good early relationship with your customers is all-important if you choose to bootstrap and funds are tight. A happy customer can become an evangelist for your brand, providing free and authentic promotion via reviews, testimonials and word of mouth.
You should therefore ensure that adequate resources are allocated for you to provide the highest standard of customer service from the beginning.
You don't have to bootstrap alone
Although bootstrapping involves you — and possibly cofounders — self-funding your startup, it doesn't mean you shouldn’t ask others for assistance.
On the contrary:
- Speak to successful startup owners
- Speak to unsuccessful startup owners
- Speak to an accountant
All of these people can provide invaluable advice on both what works, and what pitfalls you should be aware of.
So, should you bootstrap?
Clearly, using your own money is not without risk. It is a sad but simple fact that not all startups succeed.
Before you consider bootstrapping, assess the possible consequences of failure and that you are okay to lose what you invest should you business not take off. But don't let the negatives deter you if you have an idea and you believe in it. There are numerous benefits to bootstrapping too, and you'll have to weight up the pros and cons to decide whether bootstrapping is for you or not.