What is bootstrapping?

While we've all heard the phrase "pull yourself up by your bootstraps", bootstrapping is a term that has special meaning within the startup community. If you attend startup or tech related events, you may have heard people mention "bootstrapped startups". But, what is bootstrapping?

Bootstrapping occurs when an entrepreneur creates a small scale business at very little cost instead of relying on early investors. Bootstrapped companies are usually created using the entrepreneur's own money. The majority of startups are creating using the boostrapping model. You have probably already heard of some of the most successful bootstrapped companies, including Microsoft, Dell, Oracle, eBay, and Cisco Systems. While this article focuses on the startup context of bootstrapping, you should know that the term bootstrapping is used in other contexts such as statistics and software development.

How Bootstrapping Works

In order to bootstrap, you must commit to growing and developing your business using customer revenue. Founders and early employees usually live without a salary for extended period of time to make your startup work. To reduce the amount of time employees have to go without a paycheck, bootstrapped companies rely on consulting and contracting gigs to bring in revenue. This money funds initial growth and expansion until a startup becomes self-sufficient.

Since you are relying on revenue as opposed to VC funding, the survival of your business depends on your ability to satisfy your customer. Your business, then, has to be built around creating products that meet the needs and wants of the customer. Early customers don't just provide revenue, they are also often beta testers who are encouraged to provide feedback as the business grows.

The Advantages of Bootstrapping

Since bootstrapped companies don't have money to throw at problems, decisions about how to allocate resources are usually made based on customer data rather than speculation. Since bootstrappers do not have a lot of money to work with, there is more of an incentive to eliminate potentially disruptive problems before they become more widespread.

Having to solve problems without external funding means that bootstrappers have to become resourceful and develop a versatile skill set. Since you don't have a lot of money to hire new employees, you have to learn new skills such as web design or basic accounting in order to grow your business.

Relying on cash flow instead of investors gives founders greater control of their businesses. This is why some business owners choose bootstrapping over VC funding. If you've ever seen the show Shark Tank, you know that investors expect to own a significant portion of the company in exchange for their investment. Bootstrapping allows the founders to maintain control over all business decisions. The founders also get to keep all of the profits.

The Disadvantages of Bootstrapping

While bootstrapping allows for greater control, it also involves much more risk. Just like all the profits are yours, so are the losses and failures. This means that you could potentially lose all the hard-earned money you invested into the creation of your startup.

Bootstrapping may not provide enough revenue for a company to be successful. While there are several examples of bootstrapped companies that have been successful, there are also several that have failed. Pets.com, one of the most famous dot-com busts of 2000, was unable to make a profit despite financial backing from Amazon.

In addition to going without a pay check, you also have to work very long hours just to keep your business going. This does not include the hours you may have to spend working at another business until your startup becomes profitable.

Since bootstrapped companies don't have the money to hire people, you become the go-to problem solver. While you can ask friends and relatives for advice, there is no dedicated team to help you brainstorm solutions. The inability to collaborate with other team members may limit what your company can achieve.

Bootstrapping isn't for everyone or for every business. Some entrepreneurs don't have the time or money to work two jobs or go without a pay check. Because bootstrapping is not a sure bet, you need to have enough business savvy to accurately assess the amount of risk involved. In addition, there are certain startups that will not benefit from bootstrapping. Some businesses don't have the luxury of waiting three or four years to make a profit; others are built around capital intensive concepts that need funding from the beginning. If you have the time and the skills needed to succeed, however, you could end up with a great company and great profit.