What Does Bootstrapping Mean?
Bootstrapping refers to the entrepreneurial practice of starting a business with little capital and no external investment. Instead, the company relies on the founder’s own finances and/or on its operating revenues. For example, the company may invite pre orders so it can use the money to build and distribute the product.
To be successful, bootstrapping businesses rely on:
- Personal equity
- Personal debt such as credit cards, personal loans and mortgages
- Personal equipment and space
- Cost cutting
- Lean operations
- Rapid inventory turnover
- Forging business relationships
- Fast growing internal cash generation
As opposed to relying on venture capital, bootstrapping allows the founder to maintain complete control over business decisions.
On the other hand, it can place the entrepreneur under great financial strain and endanger the business’s cash flows. While the company’s product and plan may be viable, the lack of sufficient capital could constrain it from becoming successful within a reasonable period.
To bootstrap a business:
- Assess if bootstrapping makes sense for the business. Companies requiring high upfront investments in capital may not succeed via a bootstrapping approach.
- If bootstrapping is viable, create a business plan and budget with expected inflows.
- Identify sources of the bootstrapping cash.
- Determine in what ways retained revenue will be used such as growth and founder reimbursement.
The goal of bootstrapping is to find temporary solutions to business needs as growth and time makes larger and more permanent solutions available. Adopting a bootstrapping strategy for too long exposes the company greater financial risks than are needed. The phases a successful bootstrapping company therefore goes through are:
- Founder-funded phase — Founder uses their own money or borrows from family/friends.
- Business revenue-funded phase — When customer purchases are used to fund growth.
- Credit phase — Founder seeks out loans or venture capital to fund expansion,