Businesses that are funded purely from the finance available to the founder, typically personal savings, are referred to as bootstrapped. Any profits earned in the early stages are then invested back into the business to grow it more.
Bootstrapping is a really common strategy in the early stages of many businesses. It allows the founder(s) to build a customer base, revenues and profits at their own pace. Once you can demonstrate a track record of success it becomes easier to get additional investment and funding from other sources if it’s required.
That’s all well and good, but bootstrapping relies on the ability of the business to operate based on the cash it can generate by itself. Of course, that requires the founders to keep tight control of cash flow, budgeting, buying stock and equipment, and allocating shares in the business.
Let’s looks at each of these critical factors.
1. Managing Cash Flow
Bootstrapping is best suited to businesses that have short business cycles (the time needed between creating a product and actually selling it) because that creates less pressure on cash flow issue. If you have a long business cycle, you’re going to need enough cash in hand to cover your operations for a longer period of time.
2. Budgeting
The key to effective bootstrapping is making good decisions. Every item of expenditure needs to be thought about carefully. You’ll have far more freedom to make decisions than businesses who have raised funding from other investors, but you still need to define any potential purchases into “must buy” and “would like to buy” so that you minimise unnecessary expenses.
3. Acquiring Assets
Business assets will fall into a number of categories, but the overriding consideration is minimising their cost. Assets you may need to consider acquiring could include skilled employees or service providers who can fill any gaps in tour own knowledge, relationships with suppliers and clients alike, both of whom who can add value to your strategy. And of course you may need tools or equipment along with raw materials or components if you’re manufacturing a product.
4. Allocating Shares
Whilst a truly bootstrapped business is unlikely to have multiple share-holders or owners, there are occasions where you can use shares or equity as a way of reducing the cash that’s paid out to the owners. For example, some investors may be prepared to accept a smaller profit share in the early days in return for accelerating the growth of the company. Often this can be achieved by using a performance-based profit-sharing scheme.
Advantages and Disadvantages of Bootstrapping
Bootstrapping doesn’t work for all business types, so make sure that you consider the pros and cons of whether it’s a suitable model for your own business.
Advantages
Financial Control
You’ll be in greater control of all of the business finances because it’s your money that’s being used. This enables you to decide exactly where you allocate the available funds to areas that you feel are the most crucial.
Creative Freedom
Since you won’t be answerable to responsible to external investors, you can use the money however you see fit. You’ll be in a position to decide what’s most important to you and your business.
Reinvest Profits
Instead of using any profits generated to pay back investors, you can reinvest the money back into the business, whether that’s on further product development, marketing campaigns, or other areas of the business.
Disadvantages
Personal Risk
Because you haven’t taken funding from anywhere else, you’re going to be personally responsible for the results of the business. That’s fine if the business is doing well but if the business fails you may be burdened with loan and credit card debt.
Lack of Connections
When investors invest in a business, they often provide access to their network of useful contacts. Without this network, it can make it harder to find potential business opportunities or partnerships.
Slower Growth
Typically, more money allows you to invest in product development, in marketing and ultimately grow more quickly. So if you don’t have readily available sums of cash, then growing your business may be more difficult.
Bootstrapping isn’t a strategy that works for everyone, but if your business doesn’t require significant cash reserves to get off the ground, it can be a really effective way of starting a business. But remember that however you fund it, you’ll still need to be able to market and sell whatever your product or service is.
If this is something that worries you, then maybe we can help.
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