What is Bootstrapping?
Bootstrapping is the process of building a business from scratch without attracting investment or with minimal external capital. It is a way to finance small businesses by purchasing and using resources at the owner’s expense, without sharing equity or borrowing huge sums of money from banks.
A business that uses bootstrapping is characterized by a high dependence on internal sources of financing, credit cards, mortgages, and loans. In other words, bootstrapping is characterized by limited sources of financing.
For the successful growth of an enterprise, a competent development strategy is necessary, in which all possible risks will be accounted for. In addition, available funds need to be allocated to the most vital segments of the business model.
- Bootstrapping is building a business without the help of outside capital.
- The main reasons for taking bootstrapping as a business model are a lack of experience in formulating business plans, as well as a lack of skills for product promotion and relationships with suppliers.
- Keep in mind the following recommendations: reinvest net profit to scale the business, a business idea (product/service) should solve someone’s problem, and attract a mentor or any person who is successful in that business and who will give good advice.
Stages of Bootstrapping
There are a few stages that a bootstrapped company goes through:
1. Beginner stage
The beginner stage starts with some saved money or borrowed/invested money coming from friends. For example, the founder continues to work on their main job and, at the same time, starts a business.
2. Customer-funded stage
When money from customers/clients is used to keep the business operating and to fund its growth.
3. Credit stage
The credit stage involves the entrepreneur focusing on funding specific activities, such as hiring staff, upgrading equipment, etc. At the credit stage, the business takes out loans or tries to find venture capital for expansion.
Why do People Choose Bootstrapping?
Bootstrapping is typically the choice of beginning entrepreneurs. It allows them to create a company without experience and attract an investor or investors.
The choice reasons for taking bootstrapping as a business model are different. Entrepreneurs begin to engage in bootstrapping if they:
- Lack experience in formulating business plans and in entrepreneurship
- Lack skills for product promotion and contacts with suppliers
- Do not know how to raise financing
- Do not want to share income with investors
- Do not want to spend time searching for an investor
Advantages of Bootstrapping
- The entrepreneur gets a wealth of experience while risking his own money only. It means that if the business fails, he will not be forced to pay off loans or other borrowed funds. If the project is successful, the business owner will save capital and will be able to attract investors. So, the business will grow up to a new level.
- The “bootstrapper” reserves the right to all developments, as well as ideas that were used during the development of the business.
- The lack of initial funding makes entrepreneurs look for unusual ways to solve problems, create new offers on the market, and show creative thinking.
- Independence from investor opinions. An entrepreneur can make all the decisions independently, so he is able to create something unique, realize a dream, test strength, and be independent of the investors’ instructions.
- Attracting external funding is challenging and can be a very stressful and time-consuming task. Bootstrapping allows an entrepreneur to fully focus on the key aspects of the business, such as sales, product development, etc.
- Creating the financial foundations of business by an entrepreneur is a huge attraction for future investments. Investors, such as private individuals, special funds, or venture capital firms, are much more confident in financing businesses that are already secured and have demonstrated the promises and commitment of the owners.
- Providing value to people. Business is all about delivering a particular value through a product or service.
Disadvantages of Bootstrapping
- Business growth can be difficult if demand exceeds the company’s ability to offer or produce services or products.
- The entrepreneur takes on almost all financial risks instead of sharing them with investors who invest in supporting the company’s growth.
- Limited capital and lack of investment: In the context of the specifics of bootstrapping, the attraction of large investments and fully implementing one’s ideas can be extremely hard.
- Stress problems: The ability to handle stressful situations is regularly checked when unexpected problems arise.
Below are some proven methods that will help an entrepreneur in the early stages of the bootstrapped startup:
- Reinvest net profit.
- Create a business plan. Planning is necessary, and it will help the owner organize things and understand the vectors of movement.
- A business idea (product/service) should solve someone’s problem. Otherwise, there is neither a product nor a target audience.
- Attract a mentor or any person who is successful in that business and who will give useful advice.
- Use the most of networking opportunities and communicate with a network of personal contacts. In a developed personal network (or a network of friends and relatives), there may be journalists who will write about you or graphic designers who will make a logo or a minimalistic but trendy website out of friendship.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant CFI resources below: