So, bootstrapping a startup means building a company from the ground up or from scratch with the limited resources present.
Bootstrapping, by definition, is getting into or out of a situation using only the existing resources. While on the other hand, a Startup is a company or a project undertaken by an entrepreneur to seek, develop, and validate a scalable business model.
So, bootstrapping a startup means building a company from the ground up or from scratch with the limited resources present.
In the world of entrepreneurs, it refers to the launching of the enterprise without external funding. For founders, it means launching without the presence of venture capital, angel investors, or any other type of investment capital.
And although it is a lot easier to start a business with the assurance of an investment from venture capital or angel investors, and most founders really want that. The truth is, it is not easy to secure that funding to build a startup, that’s why most startups are bootstrapped.
They say, building a startup is like a lottery, someone wins, and someone loses. Bootstrapping makes it a lot tougher, and it surely wasn’t just about luck. Entrepreneurs who are self-made and bootstrapped their way to success are very rare. To be able to succeed, aside from talent and great ideas; it takes a lot of dedication, hard work, confidence, self-discipline, and competitiveness. Bootstrappers having little to almost no starting capital, had to rely solely on sweat equity, customer funding personal debt or personal savings, it generally means doing something on your own.
Here are the methods used in bootstrapping that helps to minimize the amount of outside debt and equity financing needed from investors:
- The Owner or Personal Financing
This is the use of the entrepreneurs’ income and/or savings.
- Personal Debt
This is usually the owner’s credit card debt.
- Sweat Equity
This is the contribution in the form of effort.
- Operating Costs
This is keeping the costs as low as possible
- Subsidy Financing
These are the cash payment or tax reduction benefits given usually by the government.
- Selling
This is the cash coming from the sales that are used also to run the business, like a cycle.
The 3Funding Stages of Bootstrapping
These are the funding stages that a bootstrap company goes through:
- Beginning stage
This stage starts with the owner’s personal savings, borrowed or investment money from friends and relatives, from a side business, or if the founder continues to work on their main job at the same time.
- Customer-Funded stage
This is the stage wherein the money from the customers or clients is used to keep the business operating, and for the funds to grow.
- Credit stage
This is stage involves the entrepreneur focusing on funding specific activities such as equipment upgrades, staff hiring, etc. This is the stage where the company takes loans or maybe finds venture capital for a possible expansion.
Why Do Beginners Choose Bootstrapping?
Here are some of the reasons why most of the beginning entrepreneurs choose bootstrapping as a business model:
- Lack of experience specifically in formulating a business plan, as well as in entrepreneurship.
- Lack of means in terms of manpower, resources and funds.
- Lack of skills in product promotion and getting suppliers.
- Lack of knowledge in marketing and financing.
- Lack of connection with possible investors.
Pros and Cons of Bootstrapping
The Pros of Bootstrapping Startup
- Ownership of your business
Bootstrapping means you can be the sole owner of your business, even if you have a co-founder, you share fair equity, no diluting of ownership. You can also get to keep it as a lifetime business, if it succeeds, you can decide if you will or will not have a shareowner.
- Less complication with investors
The entrepreneur gets to risk only his own money or just a smaller amount of personal credit from friends and/or relatives. No investor means if the business is successful, he gets to save all of the earnings; and if the business fails, he wouldn’t have to worry about being forced to pay huge amounts of loans and borrowed funds that usually kill you with interest.
- Full control and authority
You have full control and authority over the decisions and direction of your company, you won’t have exterior pressure and/or responsibility to satisfy or get the opinions of other people, specifically the investors.
- Sense of accomplishment
Most entrepreneurs have this dream of being able to look back one day at these ventures and say, “I built that!” or“ I accomplish that!” which gives a sense of accomplishment or significance.
- Creative thinking
Lack of initial capital or funding makes entrepreneurs look for different ways or strategies to solve problems and to create something new. The high risk of bootstrapping forced entrepreneurs to build something which really works, if they want to be noticed, stay in the game, and succeed in getting to the target market.
- Well-founded business
Bootstrapping, if successful, create a financial foundation for your business. It is a huge attraction for future investments because investors tend to be more confident in financing businesses that already proved their worth, and already established or demonstrate successful business planning.
- Providing value
The hard-earned success of bootstrapping provides value to people. As we all know, business is about providing aparticular value or worth to your customer/client through a product or a service.
The Cons of Bootstrapping Startup
- Limited Capital and Investment
Bringing your ideas to life can be extremely hard, given the specifics of bootstrapping which is surviving using limited resources, capital, and a lack of investments.
- Lower Chances of Survival and Higher Risk
Running out of money is definitely one of the top reasons why a business fails, imagine trying to survive and continue operating with a small amount of money. Bootstrapping gives the entrepreneur lower chances of survival and a higher financial risk.
- Problems
Building a startup with the limited resources will possibly give you a lot of stressful situations and unexpected problems along the way that you have to survive to succeed.
- Growth
Slower business growth, you have to work hard enough.
- Work
You have to hustle and work harder. Spend more hours working, manage more roles and be able to multitask.
- Staying Organized
You have a smaller team and limited resources, so you have to work harder and stay as organized as possible to avoid big problems.
Pros and Cons of Bootstrapping
- Create a business plan
Planning is necessary and most important it will help in organizing things to avoid wasted time and effort as well as unnecessary expenses. It also makes sure you stay on the right track.
- Seek help from an advisor or a mentor
Advisors can help in your business. Seeking their help and advice is very useful since it is founded through their personal and professional experience.
- Utilize resources and outsource wisely
Make sure that you use your limited resources properly, you should be able you wear a lot of hats and manage different roles, outsource or hire only what is needed in the meantime.
- Reduce costs or expenses as much as you can
A well-thought business plan helps you in budgeting, so if you will follow it, you should reduce costs as much as possible or cut expenses unnecessary. Sales should always be higher than expenses, especially because you are depending on the tight budget.
- Focused on things that matter
Again, this is the reason why you need a business plan, you should know what are the things that matter so you could focus on them. This is to avoid unnecessary expenses, wasted time and effort, bad judgments and decisions, and getting away from what was planned.
- Invest in your passion or own brand
Most importantly, invest in something you love. How do you expect to sell a brand, service, or product that you, yourself, in the first place, won’t need or want to buy? You should be your first loyal custome
