Bootstrapping For Start-ups: Pros and Cons

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Introduction

Bootstrapping is building a company from the ground up with nothing but personal savings, and the cash coming in from the first sales. Bootstrapping is a technique used by entrepreneur to overcome obstacles, achieve goals, and make improvements through organic, self-sustainable means with no assistance from outside. It basically means to found or start a business using personal assets (such as savings, sweat equity, low operating costs, and fast cash sales turnaround) in the absence of any external financial input and maintaining operations without the need for financial support from the outside.

Bootstrapping is undertaken by entrepreneurs in ventures where they know they do not have sufficient resources from the outset and that these must be acquired, e.g., finance, knowledge, and business relationships. A bootstrap is an attempt to acquire any of these with costs involved, financial and non-financial, minus the costs of acquiring funding or investments to support these resources.

Stages of Bootstrapping

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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.

Advantages of Bootstrapping in Business

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Advantages of Bootstrapping

1. 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.
2. The “bootstrapper” reserves the right to all developments, as well as ideas that were used during the development of the business.
3. The lack of initial funding makes entrepreneurs look for unusual ways to solve problems, create new offers on the market, and show creative thinking.
4. 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.
5. Attracting external funding is challenging and can be an incredibly 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.
6. 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.
7. Providing value to people. Business is all about delivering a particular value through a product or service.

Disadvantages of Bootstrapping

1. Business growth can be difficult if demand exceeds the company’s ability to offer or produce services or products.
2. The entrepreneur takes on almost all financial risks instead of sharing them with investors who invest in supporting the company’s growth.
3. 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.
4. Stress problems. The ability to handle stressful situations is regularly checked when unexpected problems arise.

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Bootstrapping Strategy

Below are some proven methods that will help you as an entrepreneur in the early stages of the bootstrapped start-up:

1. Reinvest net profit.
2. Create a business plan. Planning is necessary, and it will help the owner organize things and understand the direction of the organization.
3. A business idea (product/service) should solve someone’s problem. Otherwise, there is neither a product nor a target audience.
4. Attract a mentor or any person who is successful in that business and who will give useful advice.
5. 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 influencers who will write about you or graphic designers who will make a nice design for your products.

Conclusion

Bootstrapping continues to be an attractive option for start-up entrepreneurs. It can bring a lot of benefits. Just be aware of the increased risks, and what you will need to have in place in advance if you change your mind and decide to bring in outside money.