By Fernando Berrocal
When you have a business concept, one of the first things you'll need is funding. For many entrepreneurs, “bootstrapping” is a difficult but rewarding method of funding.
What is bootstrapping?
The practice of self-funding a business is known as bootstrapping. Bootstrapped companies start from the ground up, relying solely on their resources (no venture funding or large loans).
The phrase "to pull oneself up by one's bootstraps" inspired the term "bootstrapping". When you choose this option, you'll be able to keep your business viable by relying on your savings (perhaps help from friends and/or family members) and the sales you make once it's up and running. Your expansion will be fueled by your time and money, which can be both difficult and rewarding.
How do I know if I should bootstrap my business?
Bootstrapping isn't the best option for every new business. When weighing the benefits and drawbacks of various forms of funding, consider the pros and cons of bootstrapping to see if this self-funded approach may help you reach your objectives.
The pros are that you will get benefits mainly by applying a “Do It Yourself” (DIY) strategy when you choose to finance yourself. About these advantages, we have the following:
- Complete Ownership: Bootstrapping is one of several excellent non-dilutive financing methods. Until you change your mind, you and your co-founders will be the only owners of your business. As a result, your team will get 100% of the profits.
- Better Control: You'll have more control over the path your company goes if you don't have to keep investors pleased. This level of control will allow you to concentrate more on laying a solid foundation and perfecting operations via trials, rather than worrying about errors, which might lead to more long-term development.
- Limited Debt: Cash-strapped companies might use a credit card to establish company credit or make one-time purchases. However, they never rely on outside funding to get things done. The majority of your debt will be paid off soon, so you won't have to worry about owing on a massive loan if things don't go as planned.
The cons of bootstrapping are that even though this is a great method to start a business without going into debt, it can also be a difficult one. These are the disadvantages involved:
- Financial Risk: The most obvious risk is investing your money. When your business suffers a setback, whether it's due to a lack of sales or an unforeseen expenditure, it will have a direct influence on you. Despite having less debt to worry about, self-funded companies are more likely to experience cash flow stagnation or run out of money entirely.
- Less Credibility: It might be difficult to get the contacts you need to build your brand, prototypes, and more without the support of experienced investors. Without funding, guidance, or introductions from someone who understands the startup scene, you'll have to establish your client base and discover partners on your own.
- Slower Growth: Bootstrapped companies are frequently unable to attain exponential growth. You'll most likely concentrate on creating a "Minimal Viable Product" (MVP) or simply keeping your business afloat. As a result, you may not be able to afford to spend thousands of dollars on search engines such as Google, social media like LinkedIn, and other marketing channels to create interest.
Bootstrapping is an element of many business founders' success experiences, despite its downsides. As many as 80 percent of small businesses are self-funded, including some brands that are now household names.
Here are two real-life instances of businesses that have succeeded without relying on outside funding:
- Spanx: Sara Blakely, the founder of Spanx, is a well-known bootstrapper who launched her company with $5,000 in her savings account. She created her prototype, producing her packaging, and even filing her patent herself. Thanks to her efforts, Blakely is now the sole owner of Spanx, which has contributed to her $1 billion net fortune.
- GitHub: This was a bootstrapped startup before its new owner, Microsoft, valued it at $7.5 billion. The developers of the software development platform bootstrapped their company for four years before bringing in their first outside investment. The founders were still working full-time jobs while launching the company, working remotely and paying themselves modest wages to keep the project afloat. GitHub is now used by millions of developers to store code in almost every programming language. The founders are now believed to be worth billions of dollars.
The bootstrapping process can be challenging, it's impossible to deny it. Since capital is typically a game-changer, functioning on a limited budget requires extra effort. Luckily, you won't be the first person to bootstrap a business. There are plenty of tried-and-true strategies you may use to get the most out of your savings. Here are some examples:
- Know where you can save money: Many businesses choose the lean strategy while bootstrapping. They concentrate on building an MVP using this technique. This helps you generate cash while also providing you with important information about your consumers and how to enhance your products. You'll need to come up with creative ways to save money while you focus your funds on creating this MVP and providing yourself the minimal paychecks you'll need to keep working on the project. You might also employ strategies such as these:
- Instead of working from an office, you could work from home.
- Offering employees sweat equity to keep paychecks affordable.
- Investing more time in organic marketing and outreach rather than sponsored advertisements.
- Connect the dots: When you're bootstrapping, your support network may make a big impact. Great relationships might be your finest resource when you don't have large investors backing you up. Begin networking to identify prospective clients, collaborators, mentors, and anyone who can assist you in spreading the word about your company.
- Don't go overboard: It can be tempting to put everything into an idea you're passionate about; however, play it smart. it's easy to throw all you've got into a project you're enthusiastic about; but, be cautious. Building a business is risky enough, and bootstrapping can make it even worse. You should always have a backup plan and be prepared to walk away if required.
Do you have an idea for a tech company, but don’t have any tech experience? MassLight can help. We build software for early-stage startups solely in exchange for equity. Learn more about our build for equity program or contact us directly.