Bootstrapping in startups refers to the process of starting and growing a company using limited external funding, relying instead on internal resources such as personal savings, revenue generated by the business, and careful management of expenses. The objective is to minimise the need for external financing, thus avoiding the dilution of equity and control.
For example, consider a company that sells handmade soap. Instead of seeking external funding, the founder uses their personal savings to purchase raw materials, rent a small workspace, and build a website to sell their soap. As sales grow, they reinvest a portion of their earnings back into the business to purchase additional raw materials, hire employees, and expand their product line. Over time, the business becomes self-sustaining, generating enough revenue to cover expenses and continue to grow without relying on outside financing.
What are the advantages of bootstrapping?
Bootstrapping is a common strategy used by many entrepreneurs when starting a new business. This approach involves using personal savings, revenue generated by the business, and careful management of expenses to start and grow the company without relying on external financing. Bootstrapping has many advantages that make it a desirable option for entrepreneurs.
Maintaining control: When a business raises external funding, the owners often have to give up a portion of their equity and control. Bootstrapping allows entrepreneurs to keep control of their businesses and make decisions based on their own vision and goals. This can be especially important for those who have a strong attachment to their company and want to ensure its success.
Minimising risk: External funding comes with a certain level of risk. For example, if a company takes on too much debt or raises too much equity, it can become over-leveraged, putting it at risk of bankruptcy. Bootstrapping helps to minimise this risk by reducing the amount of external funding needed and allowing the business to grow gradually and sustainably.
Improving profitability: When a business relies on external funding, it may feel pressure to scale quickly and reach certain milestones, even if it's not profitable yet. Bootstrapping, on the other hand, allows the business to focus on profitability from the start, making it easier to reach sustainability and grow over time.
Building a strong foundation: Bootstrapping forces entrepreneurs to be resourceful and creative, finding ways to generate revenue, reduce expenses, and grow the business without relying on external funding. This helps to build a strong foundation for the company and set it up for long-term success.
Fostering innovation: Without the pressure to meet certain milestones or deliver results for investors, bootstrapped businesses are free to take risks and try new things. This can lead to innovation and creative solutions that wouldn't be possible with external funding.
Should a founder bootstrap or raise external funding?
Whether a founder should bootstrap or raise external funding depends on several factors and is a decision that should be made on a case-by-case basis.
Business model: Some businesses require significant upfront investments, such as in technology or manufacturing, that may be difficult to finance through bootstrapping alone. In such cases, external funding may be necessary.
Growth potential: If a founder has a business idea with high growth potential and is seeking to scale quickly, external funding may be the best option. On the other hand, if the business is more focused on sustainable growth, bootstrapping may be the way to go.
Personal finances: A founder's personal financial situation will play a role in the decision to bootstrap or raise external funding. If the founder has significant savings or a steady source of income, they may choose to bootstrap.
Risk tolerance: Bootstrapping can be a slow and uncertain process, and some entrepreneurs may not have the patience or risk tolerance for it. In such cases, external funding may be the preferred option.
Ultimately, the decision to bootstrap or raise external funding should be based on the specific needs and goals of the business and the founder's personal circumstances. Some businesses may choose to do a combination of both, starting with bootstrapping and later seeking external funding as they grow and mature.