For some companies, bootstrapping is the first choice when it comes to expanding or innovating. Using funds from the firm's internal operations allows owners to retain their firm's equity while reinvesting profits into more profitable ventures. But you may be wondering, what is bootstrapping?
In this article, we’ll help you better understand what the term bootstrapping means, as well as its benefits and challenges. Keep reading to discover tips and must-take steps that will lead your business to bootstrap success at any stage.
What is bootstrapping?
Bootstrapping is a word that originated in the early 19th century. It became a lasting symbol of success. The concept of being able to pick yourself up by your bootstraps is a metaphor for overcoming the limitations of life. In business, it means overcoming the limitations of traditional financing.
Bootstrapped companies are traditionally defined as those that get off the ground without external funding. Google and Facebook are two of the biggest examples of this.
The word bootstrapping in business also refers to the process of developing complex software programs in various stages. But for this article, we define bootstrapping as building a startup company with little or no outside support. Instead of starting with a blank check, a bootstrapper uses their own personal savings or loans for initial funding.
Bootstrapping is a strategy that involves taking on significant financial risk, which is one of the many threats to startup success. It can be very challenging to get started. The entrepreneur is more likely to have total control over all aspects of the business, which includes but is not limited to sales, marketing, and operations.
The biggest appeal to bootstrapping is its ability to establish a safety net for future investments.
Entrepreneurs can experiment with their brands and products without the pressure of investors or venture capital.
On the other hand, there is a lack of credibility to bootstrapping despite its known success stories. This can prevent a business from obtaining the support of respected investors later on.
When it comes to funding a startup, the entrepreneur’s mindset must be different than that of a venture-funded company. For instance, while the former expect to be around for a while, the latter believe they will have high business growth and therefore need outside funding to fund their exit strategy.
Entrepreneurs who choose to bootstrap must have a wide variety of skills and experience to succeed. Creating and maintaining a culture of excellence should also be part of their core values.
What are the benefits of bootstrapping?
For some people, it's a decision about how much they should retain to maximize their gains. Others believe that they should keep all of their capital to maximize their returns. And, there are also some other people who are simply looking for a way to get started without taking on external financing.
By paying back these debts, you can start to grow your business and avoid incurring any costly late fees or interest. And after you reach this stage, you can start looking towards future expansion (theoretically) sooner than if you had gone with a bank loan.
There’s also the ownership aspect. Some bootstrappers have a desire to retain all of the company's equity and receive all of its profits.
Plus, bootstrapping has a much lower barrier to entry compared to the alternative. So it’s an attractive option for new entrepreneurs or people who want to get their idea off the ground as soon as possible.
Another advantage is that bootstrapping is not just for startups. It’s a strategy that can be executed later on in the life of your business too. This is true even if you've already held an equity financing round. While some major shareholders might object to the use of company profits for new ventures (unless they receive a dividend payout), bootstrapping can still provide the same benefits as long as everyone is on board.
Companies that benefit the most from bootstrapping include:
- Early-stage companies that do not require large amounts of capital
- Serial entrepreneur companies, which are typically started by former employees turned entrepreneurs
What are the challenges of bootstrapping?
Bootstrapping your company requires that you have a strong belief that your business can gain significant value quickly. It also means having an unwillingness as a business owner to give up decision-making powers to outside investors, no matter how tempting it may be down the road. For these reasons, having the right mentality is one of the biggest challenges of bootstrapping.
In fact, being a bootstrapper puts you at greater risk than you might think. If your venture doesn't go well, potentially losing the friends and family members who invested can be devastating.
When your company needs an extra boost to expand or meet a one-off cost, it might be time to consider alternatives to bootstrapping. There are many types of finance available for businesses, and it's not just one type of loan. Knowing all of this might make keeping your nerve even more challenging, but it’s important to fully understand what you’re getting into before moving forward.
How to bootstrap your startup
There are quite a few bootstrapping methods to come up with your own business funding. However, here are some foundational steps every business should take.
Step 1: Know what stage you’re in
You're either a beginner who is doing it on your own while also working another job, or you’re at the stage where crowdfunding and a personal connection with your audience provide most of your financial backing. If you're neither of those, then you're likely at the growth stage, and you can focus on credit or expanding your offerings.
Step 2: Create a roadmap
It is best to break a big idea into several parts and then execute it piece by piece. Doing this will allow the startup to execute smoothly. This should include gathering your essential tools, your investor pitch deck, and your team if you're choosing not to go it alone.
You then need to outline both the practical steps that will get you from point A to point B and your philosophies or mindset behind your approach. The latter will help differentiate you from the dozens of other pitches your potential investors are considering. Establishing a successful long-term strategy is a key element to building a successful startup.
Step 3: Consider proactive solutions
Bootstrapping assumes a high level of risk, which is why you need to plan ahead and create contingency plans now before something goes wrong. Ask yourselves what problems do you know of that other bootstrap companies have experienced? What about other bootstrap companies in your industry? What will your team do if these come up at any point during your own bootstrap phase?
Step 4: Consider building a team
Even adding one member can help your bootstrapped business grow faster and more efficiently. For example, having a great co-founder can help you get more funding, spread the work out, and avoid tunnel vision. If you don’t have anyone in mind, try using a startup networking site to meet new people.
Remember that our first employees are the ones who will help make your business successful. Make sure that your team is motivated and committed to your goals so you can maintain a high level of standards and business continuity.
Step 5: Use a lean model
Before you start working on a product, you need to make sure that it is a viable product that can be used by early customers. This is also the time to learn about your product and its customers. This model works seamlessly with the nature of a bootstrapped startup because it requires minimal financing and is typically faster than a traditional startup approach.
Step 6: Get real about finances
If you're bootstrapping a startup especially, then you’ll need to discuss your financial situation with your co-founders. Don't go overboard with expenses—there are plenty of ways to cut costs that startups have done successfully.
For example, if you're not afraid to try new things, then you might want to consider taking on a side job or even buying used office equipment instead of brand new gear. You could also start a home-based business by avoiding renting an office. This is also easier today due to the rise of online communication.
Consider applying for grants sooner than later. And keep up the practice before, during, and after launch.
Tips for getting bootstrap funding
- Work with an angel investor. Angel investors are individuals who are able to provide advice on how to start a business or get your products on the market. If you're a new startup entrepreneur, having the expertise and experience of other startup professionals could be very beneficial.
- Remember, it’s not about you. It's about doing the right thing for your business and your shareholders. That should be the number one motivator you share with partners.
- Always think big picture. If you can keep up with your cash flow and clear any debts that you owe, you will be able to keep your company running smoothly for the long term. Getting this vision in writing will go a long way towards impressing potential investors.
- Start small. Even if your business requires a lot of capital, even some small form of investment can help you get started.
- Follow your expertise. Getting started with a new venture can be challenging if you have little or no experience in the industry or have no idea how to market it effectively. This is why it is important to create a company that’s already established in a certain industry or a specific area.
- Prioritize creativity. If your product or service is easy to replicate, a larger company with more resources can steal it and scale it much faster. Potential investors will be able to see that from miles away.
- Do market research. Before you start investing in your small business idea, it is important to validate that your target market will pay for it.
Bootstrap and startup tools you can't go without
The top must-have tools for bootstrap and startup companies are project management software, website creation platforms, and SEO tools.
Project management software
Wrike is a collaboration tool that works seamlessly across all types of businesses. It has bootstrap-friendly features such as visual project map tools that make it easy for collaborators to see exactly what you have planned and how you intend to execute on it.
This allows you to manage the wide variety of bootstrap-related projects you’ll have going on all at the same time. As an added bonus, your team can easily sync and collaborate across all your devices in real-time, so everyone stays on the same page even when working with third parties such as freelancers. Plus, it’s secure and will keep your data safe.
Website creation platforms
Even running an offline, local business can be challenging without a strong web presence. However, you don’t need to spend thousands of dollars on an expensive web design agency. It’s possible to build a website from scratch using an intuitive website builder such as WordPress or Wix. But either way, having your own domain and website is a must for proving the legitimacy of your business.
When you can’t afford paid search ads and collaborations, you have to rely on organic efforts to reach the right audience. That’s where SEO comes in. Although it takes an investment of time, a solid SEO strategy and the right combination of tools can land you above your competitors for high-earning search terms on Google. Every bootstrapped entrepreneur should use:
- A keyword suggestions tool for finding competitive targets
- A domain analysis tool to see where your strengths and weaknesses lie
- A website crawler for uncovering technical SEO ideas
Getting started with cash flow is an important step in any business. Bootstrapping can help you avoid running out of money and control your debts at any point during your company’s lifetime. Use the right tips and tools like Wrike to get your bootstrap strategy started today. Begin your free trial.