Bootstrapping is a situation in which an entrepreneur starts a company with little capital, relying on money other than outside investments. The term also refers to an individual who attempts to found and build a company from personal finances or the operating revenues of the new company. Therefore, a bootstrapping is an extraordinary term for building a company without external funding, such as venture capital or loans. Some specialists say that startups should bootstrap their business. Let’s take a closer look at this approach.
Why Entrepreneurs Choose Bootstrapping?
Some business owners do not choose to bootstrap because they like this option as a means of financing their business. If they try other sources, and it seems nothing is forthcoming, they may try to bootstrap. Sourcing for funds from Venture Capitalists is not as easy a task as some people claim. Before you can secure capital from Venture Capitalists, you have to prepare to meet their terms and conditions. Likewise, in all actuality, some startups are too small in size to warrant investments from venture capitalists. For those reasons, bootstrapping becomes a common (sometimes only) way of financing among small business owners.
Pros and Cons of Bootstrapping
For many entrepreneurs, it’s not always obvious which funding model will bring they closer to their desired objectives. In the beginning, they ask themselves plenty of questions. Should I go with a VC, an angel investor, an accelerator, crowdfunding or all of the above? Should I simply fund the company by myself? Undoubtedly, starting a business takes both money and time. Each strategy has its pros and cons. Here are the top four benefits and challenges of bootstrapping.
If you like to have everything under control, bootstrapping seems to be perfect for you. With this funding model, you are the only one who keeps watching over financial issues. This state of matters results in not only independence but also greater responsibility. For instance, if you gain the funds from a venture capitalist, he or she will get a substantial part of the operation. In connection with this, he or she will be able to influence decisions about your business. Since you are the only person financing the business, you have full control over the company. It means that you can make your decision regarding the business without any recourse to any external investor. Also, you can decide on what to do with the profits you make from the firm.
Bootstrapping gives you freedom. When you are cooperating with venture capitalists, for instance, they tend to dictate terms to you. They have their vision, from ranging to the structure of the business to the appointment of the key staff of the business. These external funders try to protect their interests, which is understandable. For this reason, you may need to seek their approval for any major decision you would like to make. Moreover, that kind of collaboration will require adequate feedback and reporting. With bootstrapping, however, you are accountable to only yourself. In return, you get the liberty to create a structure you consider the best for your business.
Have you ever tried to raise funds? If your answer is affirmative, you know exactly how much time it consumes. First of all, you have to find someone who would be interested in investing in your project. When you finally have found the right individual, you must prepare a flawless presentation that will convince your potential business partner. When you bootstrap, you don’t have to devote your time to preparing slide presentation. Instead of wasting your energy on satisfying investors, you can focus on your development. It is a crucial issue in leading business.
Bootstrapping relates to the idea that you will treat something you own with more care than if it ultimately belongs to someone else. With this kind of business model, you can’t allow for profligacy in company spending. You need to prepare a workable business plan and evaluate every financial decision. Think twice before you make any purchase. Owning 100 percent of your business cannot allow you to rest on your laurels. On the other hand, it allows you to spend money wisely and seek the best alternatives to develop your company.
When you bootstrap, don’t expect that your company will grow aggressively fast. Unfortunately, if you want to reap the benefits, you need money. When you don’t have enough capital, a lot of opportunities may pass away. The most significant here are investments. This also refers to human resources investment. For instance, if you don’t have funds to employ people, you may end up being the only one doing the job. No matter how hardworking you are, you won’t launch a successful business without professional help. However, you can quickly face this type of challenge by hiring freelancers.
Bootstrapping presents not only substantial risk of loss but also a great personal risk. Entrepreneurs who have decided on this economic model know the best what the principle “eat alone, die alone” means. If you invest all your resources in a business, and the business fails, you will be the one to bear all the risks. Remember that you may even need to sell your properties in case the assets of your business are not enough to pay off the liabilities of the company. Before you choose to bootstrap, first consider this idea with your close family and, secondly, talk with people who implemented this business model.
Undoubtedly, the competition is a tough nut to crack, especially for the founder who chooses to bootstrap. It’s also essential to determine what kind of competition you have? If you have a remarkably original idea, or you can invent and obtain an outstanding patent, you don’t have to worry. Yet, if you try to succeed in some well-liked business branch, you have to pay more attention to your competitors. For instance, they may be able to allocate more funds for advertisements than you. As a result, they may push you out of the market. Probably, this is a worst-case scenario, but you have to keep an eye on your rivals and control their actions. Nothing is more important than fair play.
Lack of an External Support
Running the business on your own is not a piece of cake. Lack of money, lack of support and lack of experience can have very unpleasant consequences for you as a founder. Surely venture capitalists and angels investors can provide you with a cash injection. In fact, they can give you something more profitable. They can put your startup in the room with the right people, bolstering valuable partnerships, opening up significant markets and giving you increased visibility. They can share with you practical experience and spread knowledge about running a business. Additionally, they can help you to navigate the turbulent waters on the path of entrepreneurship. When you bootstrap, you are denying yourself of these added benefits.
The decision to bootstrap has to be well thought out. Some research shows that most of the people who try self-funding fail. The ones who succeed, however, reap rich rewards. Bootstrapping a business is an enriching experience. Your success is depending on your situation, finances, connections, and experience. Regardless, it can be a rewarding way to launch a startup or a company.