Bootstrapping is a popular term in the startup and tech industry. The saying “to pull oneself up by one’s bootstraps” was used during the 19th century to mean doing an impossible task. Bootstrap as a metaphor, meaning to better oneself by one’s own unaided efforts, was in use in 1922.
What Is Bootstrapping?
Bootstrapping is when an entrepreneur starts a company with little capital, relying on personal finances and friends and family, rather than outside investments. A startup is said to be bootstrapping when it relies on the operating revenue for it’s growth.
Future business owners use bootstrapping as way of launching their product or service, they often use the following methods:
- Using their own personal savings.
- Cashing out 401k retirement funds.
- Gradually increasing the business’ accounts payable through delaying payments or even renting equipment instead of buying them.
- Managing their working capital in a way that minimizes their company’s accounts receivable.
There are advantages and disadvantages to bootstrapping.
No loss of ownership in the form of equity ownership to investors.
No external influence in the form of board of directors deciding against what founder wants.
No fear of takeover, in the sense that no one can buy the equity shares from investors and kick founder out.
No money (unless founder can afford it) to accelerate the initial phase and hire quickly the needed employees and launch the product service.
No money for fast growth, which usually require big sums to have big expansion and effect.
Stages for bootstrapping a business venture:
- Birth-stage: The first stage to bootstrapping. Entrepreneur uses personal savings or borrowed and/or invested money from friends and family to launch the business. The owner might be still working in original job to cover initial expenses of the new venture.
- Funding from sales to consumers-stage: Money from customers keeps the business afloat. Once expenses of business operations are met, the rate growth starts increasing.
- Outsourcing-stage: Company focuses on the specific operating activities. Tries to increasing output or even employing new staff. At this point in time, the company may seek loans or even lean on other methods of additional financial funding methods.
Here’s a quote worth adding to this post: