A question many entrepreneurs face when embarking on a business launch is whether to bootstrap their organisation or to seek external funding and support. Does one carry less risk than the other? Which will serve you better in reputation and growth potential? Which will allow maximum control over decision making? Before making any decision, make sure you know what does it really mean to bootstrap your business. And, why is it so relevant to consider as a small or medium sized business.
What does it mean to bootstrap your business?
Bootstrapping a business essentially means you start and grow a business using very limited resources. The terminology comes from the phrase ‘to pull yourself up by your bootstraps’ meaning to start from little and to grow from meagre beginnings. No outside funding, no investors. Simply working with the existing capital or resources you already have at your disposal.
Relying on existing assets means you’ll be making use of personal savings, a personal computer, knowledge, expertise, and sweat equity. Provided everything is coming from an internal source, not through investment of capital or resources, your company will be bootstrapped.
Don’t confuse starting on a low resourced basis with launching any start up. Not all start ups are bootstrapped. If an entrepreneur seeks a loan, fundraising, investment or partnership, it’s a start up. If on the other hand the company uses only existing internal resources, it’s being bootstrapped.
How can bootstrapping work for your business?
There are several perceived advantages of bootstrapping, some more immediate and some long term.
Control and decision making
Setting up using only your own resources means that you’ll have full ownership of your business. There are no partners or shareholders who own percentages of your business and by extension a piece of the profit. In addition, without shareholders, investors or partners, decision making should be clean and clear. No other opinions or priorities to take on board. You won’t be answerable to anyone other than yourself.
Short term profitability
Starting small necessarily means keeping your overheads low. This can pave the way for making a profit. Entrepreneurs who bootstrap often get into the habit of being more financially aware. They look into cutting costs where they can and are more aware of overheads in a way that helps create profits no matter how small.
Low barriers to entry
Launching a business using your own experience, funds and sweat equity makes it a whole lot easier to get started than if you have to fundraise and resource investor support to get your business off the ground. Bootstrapping can lower the barriers to entry in this way. It can allow entrepreneurs to launch where they are now, rather than plan and fund for months before the company gets started.
Experience
Bootstrapping a business doesn’t only mean you rely on your own financial and related resources. It means you rely on your own experience and expertise where possible. Doing everything and knowing every part of your business will necessarily encourage a learning curve in any entrepreneur. There is therefore a huge amount of experience gained through bootstrapping any organisation.
Financial
When you’re working with only your own funding you may find you’re more careful with your finances. The process of bootstrapping encourages more careful oversight on funds, on resources, the use of sweat equity and exchanges of expertise with peers and colleagues. It helps to encourage creativity when it comes to resourcing. Creativity when it comes to marketing. And, caution when it comes to potentially unnecessary spend. These habits can stand you in good stead as the business grows.
The downside of bootstrapping
As with any decision, it’s not all positive on the path to bootstrapping your business so bear in mind a few potential downsides.
Credibility
With stripped back resources, you may have less budget to invest in your branding and image. This can effect how your potential customers see you. Over time, the credibility of your business might be impacted unless you can level up your brand management and marketing opportunities.
Financial Strain
The quid pro quo of having complete financial and administrative freedom is that all of the financial risk and pressure is on you. With no one to share any of the responsibility, if the business fails, it’s something you alone will deal with.
Slower growth
By operating your business with limited resources, you may find you are limited in how quickly you can grow. Perhaps your product supply has to be kept to a very tight margin given your limited cash flow. This will naturally limit your potential profit. Only when you can gather increased profit can you increase production. It can be a hard balance to strike without looking for outside resources to help you scale up.
Does bootstrapping sound like it could work for you?
Taking into account both the potential wins and possible disadvantages, if bootstrapping still sounds relevant to you, keep in mind the following tips to get started:
Assess your options early
Some businesses lend themselves to bootstrapping. Others do not and it’s key to figure this out as early as possible. If you know you’ll need a lot of up front cash flow (to fund R&D or to produce more technical products) or if you expect a slow turnover of products (higher value products that take longer to sell), then bootstrapping might not be for you.
Create a business plan
Every business will benefit from the creation of a robust and well thought through business plan and a bootstrapped business needs it even more. Include a financial budget with detailed expected cash inflows and outflows. Be honest and hedge on the lower end of growth and projected profit to give yourself a realistic idea of what is ahead.
Be clear about your resources
Break down where your resources are coming from. What financial savings do you have? Which technical resources do you have and need? Do you plan to invest sweat equity yourself, or do you have others that will invest for you? What knowledge and experience trades you can expect to rely on with peers or industry contacts? Be clear on what you have and what obvious gaps you should look to fill.
Bootstrapping that works
If you need a little inspiration, you don’t have to look far to find highly successful companies that were started through bootstrapping. Spanx was launched by Sara Blakely using only $5,000 of her own savings and now values at $1 billion with Sara remaining the sole owner. The owner of GoPro borrowed $35,000 from his mother and used her sewing machined to craft some vital components. Facebook, now worth $87 million was famously launched from Mark Zuckerburg’s dorm room using existing computer software.
Given the barriers to entry for small businesses, it might be smart to consider whether bootstrapping could work for your business. Starting small, learning every side of your business and growing from there without including debt and the pressure of outside opinion could be a liberating way to pursue the business launch you have in mind.