Bootstrapping is a business strategy which involves beginning a new venture without external funding. In a bootstrapped business, cashflow is reinvested to fund growth and operations, which lowers risk
Bootstrapping is a business strategy which involves beginning a new venture without external funding. In a bootstrapped business, cashflow is reinvested to fund growth and operations, which lowers risk and preserves founder autonomy. The drawback is that bootstrapped businesses grow more slowly and are often limited in scope. Whereas other startups will meet their early capital needs with outside funding from banks or investors, bootstrapping founders set aside a small portion of their own money to get their business started. From there, they hope to meet all their future expenses with the cashflow they can generate.
When can a business be bootstrapped?
Bootstrapping a business is appropriate when the costs of operation are low and the return on investment is high and relatively immediate. Businesses with high barriers to entry, such as expensive equipment or large staff requirements, or businesses with long waiting times to create revenues, such as novel pharmaceutical companies, are nearly impossible to bootstrap unless the founders are incredibly wealthy.
In most cases, bootstrapped business founders are also the main labourer responsible for putting the business together and creating the product or service, allowing the business to avoid paying for consultants or contractors to set up the business and deliver its offering. These types of founders are either experts in their area or experts in business, allowing them to set up and deliver at the lowest possible cost.
What is the goal of bootstrapping?
In some cases, businesses never plan to take external funding and hope to use bootstrapping to establish cashflow which funds all future business development. More often than not though, bootstrapping is used to establish definitively that a business is viable and thereby put it in a far stronger position when seeking investors, bank loans or buyers.
For this reason, most bootstrapped businesses use lean startup methodologies such as delivering minimum viable products and iterating through the build, measure, learn cycle to improve it. This allows the business to produce hard evidence for the usability of their product and the profits to be gained by selling it, while generating cashflow through the offering of less refined versions of the final product.
What are the key considerations when considering bootstrapping as a startup strategy?
First and foremost, establishing an airtight and comprehensive budget is essential for any business looking to bootstrap in its early stages. Consulting with an accountant or business coach is wise to ensure that unexpected or hidden costs are allowed for in the budgeting process. Beyond this, both monthly and long-term forecasts will be necessary for predicting and reality checking all potential revenue streams to cover business development and operational expenses.
It is much easier to bootstrap a business when the founders are not taking a salary or large personal drawings. Therefore, bootstrapping requires careful planning of both the founder’s business and personal finances to ensure success. Businesses taking this approach must also be very careful about their expenses and business investments, as taking on larger overheads than necessary or wrapping up funding in unproductive assets will slow the startups growth.