What is bootstrapping and why it is good for your business? (2021)
Bootstrapping is building your business from scratch using your savings and the funds generated through the initial sales of your product or service.
What is bootstrapping?
If we go with the very basic definition of bootstrapping, it usually refers to a self-starting process that is supposed to continue or grow without external input. In a business environment, bootstrapping basically means running and growing a business from the ground up basing the growth on internal factors with little or no help from external influences.
Although bootstrapping is a difficult way of running a business but even the most successful companies of the time (Facebook, Apple, Oracle etc.) were run using bootstrapping in their earlier days. In fact, there are multiple studies which show that over 80% of all startup operations are funded by the cash from the founders. The main methods of bootstrapping include owner financing, personal debt, sweat equity (a party's contribution to the company in the form of effort instead of payments) and sales.
There are multiple studies which show that over 80% of all startup operations are funded by the cash from the founders.
Every business is generally keeping tabs on how much funds it has, and how much it needs in the short run to continue its operations. Initially, most businesses or startups are considerably challenged to balance these two (funds in hand versus funds needed). As a result, the goal is to score a big round of venture capital funding and then to focus on the operational side of growing the business. Unfortunately, that is rarely how things pan out. What generally happens is that Series A funding becomes Series B which becomes Series C and so on with the management focusing on next rounds of funding instead of the vision they had while starting out their journey.
Every business is generally keeping tabs on how much funds it has, and how much it needs in the short run to continue its operations.
I am not claiming that one should always stick to bootstrapping. I have read case studies of dozens of successful and profitable businesses that were launched with the help of VC funding. In fact, there are a few clear disadvantages of a business run solely through bootstrapping. For example, limited resources in a business can hinder growth, constraint advancements and even reduce the quality of the final product.
Keeping all that in mind, I will give you some of the surprising benefits of building your business by bootstrapping instead of an outside funding.
1. You call the shots
Well this is obviously a no brainer. But it is an extremely important one if you are running a business. If you continue working on your business by bootstrapping funds and not go for external funds, then you will have all the controls of your startup. That control encompasses everything including operational and financial policies, final product or service and the direction you want to take your business in. On the other hand, when you go with VC funding, it is generally in lieu of a stake in business which means you losing some of the control over the decisions. This will bring in funds but will make your company less flexible as your decisions will be questioned based on risk appetite of the investor.
Another issue is that the level of association with your product or service of the founder and the passion that he has for that product may not be the same for people investing in your business. This can be a big problem when it comes to the final product or service where the two ideologies may not be aligned, resulting in a half-baked product.
In my view, the best time to raise capital is when you don’t actually need it. I was reading about SquareSpace the other day and realized that the reason for such an enormously successful funding campaign was because they went for the funding when they were already performing well financially. They did it just to grow and not run the existing operations. That is a clear-cut advantage to me. It is also simple to understand why, if you are desperate to get funds then more often then not your options would be “take it or leave it” kind of deals mainly because the other party is coming from a stronger position as compared to you.
2. Customers should be your funders
This should always be the primary source of a business’s funding. This scenario is good for business and good for customers too. When a business does not have excess funds and everything is dependent upon the product’s success, then the company is forced to listen to customers. This forces the businesses to build a product that is not only desirable but which is also something they are going to spend their money on. The aim for the founder should be to build a sustainable business and for that focusing on customers is the right way to go.
Building on the statements above, the customers’ feedback forces businesses to pivot to a better product or strategy. This helps you to find the product/market through customer feedback at a much faster rate than possible through buying external help for surveys.
3. Spending investor’s money is easy
Yes, I know that VC funding has its covenants and the business must meet the requirements of the VC. However, any mildly successful business would have raised additional funds for growth and there is no set formula for growth. This leads to a mindset of throwing the kitchen sink at it just to see what sticks resulting in spending millions of Dollars without getting any benefit out of them. Another issue with this approach is that once a business has investment backing it, it tends to buy its way out of all problems and challenges instead of trying to find solutions organically. Plus, handling the business alone with limited funds forces you to use your valuable funds in an efficient manner helping the initial team to think like the founders and creating strong competitive advantage in the long run.
4. Building an MVP is not expensive as it used to be
A minimum viable product (MVP) is a version of a product with just enough features to be usable by early customers who can then provide feedback for future product development. Sometimes, all you need is a small seed round of financing to build your MVP that early adopters will pay for, helping to fuel the future. The economics of starting a new business is vastly different today as compared to what it was even a decade ago. With enhanced connectivity, remote working for technical resources, technological advancements etc., chances of getting to the MVP without going for external help has increased drastically. The important step here is obviously to work on the product with a specific demand and a large enough market to tap into.
In short, bootstrapping is actually an effective model for businesses just starting out as it provides simplicity and flexibility during their early growth phases.