Bootstrapping – what is it and how does it affect business?

Bootstrapping is the art of running and growing a business using only your own funds and resources. In an era of startups and quick access to capital, it is a unique way to build a business from the ground up.

From this article you will learn:

• What is bootstrapping?
• What are the relationships between bootstrapping and other forms of funding?
• What are the stages of bootstrapping?
• What strategies are used in bootstrapping?
• What are the limitations of bootstrapping?
• What can be gained from bootstrapping?
• Which companies have used bootstrapping?

Bootstrapping – definition

Bootstrapping in a business context (there is also bootstrapping in IT and statistics) refers to the process of starting and running a business primarily with one’s own funds, without the use of external funding or capital investment. Entrepreneurs who use this form of financing typically rely on personal savings, internal cash flow and minimise expenses to grow their business. This often means reinvesting the income from the business rather than paying it out as profits. Entrepreneurs using bootstrapping are able to retain full control of their business without worrying about pressure from investors or having to repay debts.

Bootstrapping is financing and growing a business without relying on external sources of investment relying solely on one’s own resources and generated income.

Definition of bootstrapping.

The term bootstrapping comes from the English expression ‘to pull oneself up by one’s bootstraps’ (literally ‘to lift oneself up by one’s bootstraps’). It originally symbolised an impossible activity, but over time came to be used in the context of an individual’s ability to improve their situation without external help.

Bootstrapping versus other forms of funding

Bootstrapping and other forms of financing offer entrepreneurs different methods of raising capital to grow their business. Bank loans are a common alternative to an individual’s own money – they involve obtaining funds from a financial institution in return for a commitment to repay them over a specified period of time with interest. They give companies access to larger amounts of capital than bootstrapping, but carry debt repayment risks and interest costs.

Venture capital funding is a process in which specialised investment firms provide capital to young, fast-growing companies in exchange for shares in those companies. While this allows companies to spread their wings quickly through access to a large amount of capital, it carries with it the loss of some control over the business and often requires investors to be involved in the decision-making process.

Business angels are individual investors who offer capital to start-ups in exchange for an equity stake. They often provide not only funding but also knowledge and expertise, but can also expect to participate in decisions about the direction of the business.

As the company grows, entrepreneurs can use different forms of funding, starting with bootstrapping and then moving on to external sources of capital. The choice depends on the specifics of the business, the stage of development of the business and the long-term goals of the owner.

Stages of bootstrapping

Bootstrapping is the process by which an entrepreneur finances and develops his or her business without external funding. This process can be divided into several stages:

Ideation and start of the business

At the initial stage, the entrepreneur has a mainly undeveloped business idea, which is the seed of the future company. To give it shape, he or she commits his or her own savings, uses available resources and other sources of income. The start-up usually operates on a limited scale, experimenting and testing the market. During this time, market research becomes essential to help understand customer needs. Also, the release of product prototypes or MVPs and the first steps in marketing can help to know the reactions of potential customers.

First revenues

The moment a company starts to generate its first revenues, however modest, is an important milestone in its business. Initial profits are often strategically reinvested, allowing the company to purchase necessary resources, fund marketing activities or expand its offering. It is during this period, in order to save and control, that the entrepreneur usually makes decisions on her own, based on her own intuition and knowledge. However, if he or she decides on collaborators, they are usually individuals.

Organic growth

When the business reaches a stage of stable income, the company enters a new phase of growth. This opens the door to expanding the business – hiring more specialists, expanding the product range or exploring new market segments. Any of these decisions can be profitable and strengthen the company’s position in the market. Importantly, there is no need to seek external funding at this stage, as growth is made possible by funds generated by the company itself.

Stabilisation

When a company achieves stability, its market position is solid and its offering and customer base well established. Stable and predictable revenues allow the company to focus not only on current operations, but also on process improvement. The entrepreneur can also consider broadening business horizons by diversifying the offer, new products, services or market segments.

Expansion

Once a company has an established position in its market segment, new avenues of development open up – geographical expansion, new markets or diversification of the offer through the introduction of innovative products or services. Although the development so far has been mainly financed by own resources, in this phase the entrepreneur may consider using external sources of funding. Although bootstrapping is still an important part of the strategy, external investments or loans can accelerate the pace of growth.

Bootstrapping strategies

Bootstrapping strategies refer to the various ways in which an entrepreneur can fund and grow his or her business without the need for external sources of capital. Here are some popular strategies:

• The most basic form of bootstrapping is to use one’s own savings. This can be risky, but it gives you full control of the business.
• Before launching a product, you can offer it for pre-sale, raising funds for its production.
• Instead of creating a product and looking for a customer for it, you can first find a customer and create a personalised product for them.
• Barter, the exchange of products or services with other companies instead of making monetary transactions, can be an effective way to reduce costs.
• Instead of employing full-time staff, you can rely on outsourcing and use external suppliers or freelancers, which allows flexibility and cost control.
• Instead of buying new, expensive equipment, you can look for used machinery or equipment that is in good condition. You can also consider leasing, which allows you to use the latest technology without incurring large one-off costs.
• An effective bootstrapping strategy is to create an MVP, which is a minimal but fulfilling basic version of your product to get feedback quickly and avoid costly mistakes.
• There are many free online resources and tools that can help you manage and promote your business.
• It can be effective to focus on rapid profitability rather than long-term growth, which means minimising costs and maximising revenue from the start.
• Networking, or building strong business relationships and partnerships, can open the door to new opportunities that do not require a large investment.
• In the initial phase of the business, the entrepreneur often performs many functions in the company on his or her own – from customer service to marketing to accounting. This saves on salaries and allows you to understand the needs of the business from different perspectives.
• Using local resources such as business incubators, business support centres or local not-for-profit organisations that offer support in the form of training, office space or consultancy can help in the initial phase of the business.
• Negotiating longer payment terms with suppliers or shorter terms from customers can improve liquidity.
• Instead of paying out profits, the entrepreneur can reinvest them in business growth, such as buying new equipment, training employees or market research.
• Although not ideal, in some situations the use of credit limits or credit cards can help to finance current needs.
• Rather than experimenting with new business models, you can build on those that have already proven themselves in the industry.
• Introducing automation in different areas of the business, such as marketing or customer service, can help reduce costs.
• Working from home or using coworking spaces instead of renting a traditional office.
• Building strong customer relationships that lead to repeat purchases, recommendations and less need to invest in new customer acquisition.

All of the strategies mentioned minimise the need for external funding while allowing the company to grow and expand. However, it is important to exercise caution and ensure the financial stability of the company.

Limitations of bootstrapping

Bootstrapping, despite being a popular way to fund startups, has some limitations. Relying solely on one’s own funds can significantly slow down a company’s growth rate. Without external funding, entrepreneurs may not have sufficient resources to invest in research and development, marketing or expansion into new markets. In addition, a lack of access to additional capital can force difficult financial decisions, such as reducing headcount or abandoning certain business initiatives.

Bootstrapping can also increase the pressure on an entrepreneur who has to deal with financial and operational challenges on their own without the support of investors or advisors, which can lead to professional burnout and feelings of loneliness. Lack of external funding can also limit access to networks and resources offered by investors.

Bootstrapping can also direct the entrepreneur’s focus solely on short-term profitability instead of long-term growth and innovation. Because of this, the company may fall behind competitors using external funding and investing in riskier but potentially more profitable projects.

Advantages of bootstrapping

The first and most obvious advantage of bootstrapping is independence. Without external investors, the entrepreneur has full control over his or her business, so can make decisions without having to agree with others. It is also worth noting that bootstrapping often makes entrepreneurs more cautious – with limited funds, they are more aware of the value of every penny spent, which can lead to more efficient management and better planning.

The lack of external investors also allows the entrepreneur to focus their attention on their customers, which can lead to a better understanding of the needs of the market and quicker adaptation to changing consumer expectations. Bootstrapping also often develops the ability to deal with difficult situations and find creative solutions to problems. Limited financial resources can become a driver of innovation, prompting the search for innovative solutions and approaches that would not be considered under more comfortable financial conditions.

Examples of bootstrapping

Many well-known companies started their businesses using bootstrapping to later become global giants. Here are some examples:

• Apple – today one of the largest technology companies in the world, Steve Jobs and Steve Wozniak started Apple in Jobs’ parents’ garage, selling computers they built themselves.
• Dell – Michael Dell started out selling computers directly from a room on a university campus. He avoided middlemen and customised computers to meet individual customer needs, which allowed him to build a technology empire.
• Spanx – founder Sara Blakely invested her savings in a new type of modelling underwear. Without external funding, she grew the company into a global phenomenon.
• MailChimp – founded by Ben Chestnut and Dan Kurzius, the email marketing platform grew slowly and was funded solely from revenue. Today it is one of the most popular tools in its category.
• Shutterstock – Jon Oringer, a photographer and programmer, created Shutterstock using his own photos as the initial resource for this online photo agency. By bootstrapping, he was able to grow the company according to his own vision.
• GitHub – the popular source code management platform was funded by revenue before it was purchased by Microsoft for $7.5 billion in 2018.

What all these companies have in common is that they started out as small, self-funded projects that over time became powerful businesses. Their stories show that with determination, passion and hard work, bootstrapping can lead to huge business success.