So what is bootstrapping?
Bootstrapping is basically the process of starting a new business without any external funding. A bootstrap start-up will rely on the internal revenue only. In other words the company spends what it makes.
In reality most early stage start-ups will need a little bit of funding so a typical bootstrap start-up may rely on the founder’s overdraft, credit cards or savings. Alternatively the business might be started while the founder is still working part time, or is doing some freelance work to cover the bills. The people involved in the company will typically work for little or no wages in the early days. A key element of bootstrapping is the idea that you can use ‘sweat capital’ rather than ‘investor capital’ to grow the business. In other words, you work hard.
What are the advantages of bootstrapping?
- You don’t have to spend time hunting out investment
- You control the company and are not answerable to investors
- With no funding you learn to manage the company’s money efficiently very quickly
- It forces you to be creative. If, for instance you can’t afford a shop without borrowing money then trade from market stalls, eBay or door to door until you can.
- As all money is coming from customers they become your number 1 priority not investors. Product development and marketing have to become efficient quickly or you will fail
- If you survive bootstrapping you will have a strong, lean, efficient, customer focussed company
What are the disadvantages of bootstrapping?
- It is not always practical for businesses that need a large investment such as manufacturers or importers
- It can take much longer to grow a company without investment
- You will likely not be earning any money for quite a while
- You can easily end up in a lot of debt
So does bootstrapping work?
Well for some people yes. Lists of companies that started in someone’s garage and bootstrapped their way to success normally include Microsoft, Apple, Amazon, HP and Disney. All are big businesses that started in a garage or tiny shed with a handful of enthusiastic people. In reality many of these businesses did bootstrap through their early stages but when investors and venture capitalists came calling they took their money. The bootstrapping stage for them was about establishing that they could produce a basic product and that people were willing to buy it. Once they had established their basic business model they then took on funding to allow them to grow.
By doing things this way your company can establish a customer base and some cash flow before you go asking for a loan or investment. This makes your business a much more attractive investment and improves the chances of getting some money.