Securing funding is often one of the biggest obstacles for new business owners. To solve this problem, some entrepreneurs opt to self-fund their business venture, a practice known as bootstrapping.
While funding your own company can be challenging, many now-successful startups have gone down this path. Here's everything you should know about this financing method, including the pros and cons of bootstrapping.
What is bootstrapping?
Bootstrapping refers to the process of starting a company with only personal savings, including borrowed or invested funds from family or friends, as well as income from initial sales. Self-funded businesses do not rely on traditional financing methods, such as the support of investors, crowdfunding or bank loans. Rather, as the name suggests, entrepreneurs must “pull themselves up by their bootstraps'' by using their own capital to launch.
[Read: Should I Bootstrap or Look for Investors?]
When investors support a business, they do so in exchange for a percentage of ownership.
Pros and cons of bootstrapping
After reading about bootstrapping, you may be wondering whether it’s the best route for your startup. To help in the decision-making process, here are some pros and cons of bootstrapping:
Pros of bootstrapping
- It allows entrepreneurs to retain full ownership of their business. When investors support a business, they do so in exchange for a percentage of ownership. Bootstrapping enables startup owners to retain their share of the equity.
- It forces business owners to create a model that really works. Most failed businesses struggle due to a poor business model. However, bootstrapping entrepreneurs are forced to develop processes that produce immediate, lasting cash flow, bypassing this outcome.
- It provides a sense of accomplishment. For some entrepreneurs, building something from the ground up without outside help is its own reward.
- It keeps control over direction in the owner’s hands. Taking on outside money also means taking on external pressure and responsibilities to satisfy those investors’ interests. While solutions to this exist within a traditional financing model, bootstrapping allows business owners to maintain full artistic direction and control over decisions.
Cons of bootstrapping
- It can be risky. Self-funded businesses can run out of funds more quickly and struggle to scale as their needs are met. This can limit a startup’s ability to reach its full potential.
- It limits support and opportunity. Traditional financing methods don’t just offer higher amounts of capital; they also unlock networking opportunities with top-level help, such as board members, shareholders and influencers. Bootstrapping a business limits that support and opportunity.
- It requires significant organization. Entrepreneurs who self-finance must be extremely meticulous about keeping their books in order, lest issues (or opportunities!) arise later on.
- It is hard work. With potentially limited resources and connections in the beginning, bootstrapping entrepreneurs have to work harder and take on more roles. For some, this additional work can be well worth the effort.
[Read: 5 Ways to Raise Money for Your Business Fast]
Examples of successfully bootstrapped businesses
Many thriving startups have bootstrapped their way to success, including:
- BiggerPockets. BiggerPockets, the largest online community for real estate investing, was launched without any venture capital money. Today, it boasts over one million members and a successful business podcast.
- Mailchimp. Now driving nearly $700 million in annual revenue, this email marketing platform started from a self-funded dream and is still 100% founder-owned.
- MyClean. The founders of MyClean, a New York-based on-demand cleaning service, convinced friends and family to loan them $267,000. With more than $9 million in annual revenue and an expansion into Chicago and Washington, D.C., the gamble certainly paid off.
- SparkFun Electronics. The online retailer for hard-to-find circuit boards and gadgets has grown rapidly over the years, with annual revenue over $30 million.
- Tough Mudder. Tough Mudder’s founders each put about $10,000 into their extreme obstacle course company. With over two million racers since its founding, Tough Mudder is now one of the giants of the obstacle racing industry.
[Read: 4 Experts Share Their Business Funding Strategies]
As long as entrepreneurs are aware of the associated risks, bootstrapping can be an incredibly effective financing method for startups looking to get a foothold in the market.
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