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What is bootstrapping in business?
What is bootstrapping in business contexts, and where does it come into play?
Bootstrapping is a way of financing a company. Essentially, the owner/founder uses only their own resources.
It’s a riskier way to begin a startup, but it has advantages. Some of the biggest companies in the world, like Microsoft, started their lives as bootstrapped startups.
Let’s explore what it means:
What is bootstrapping
Bootstrapping is when a business founder begins work with little to no help from outside parties. The firm is self-supporting and carries the risks and rewards associated with that.
For some, the idea of running a company using this model is horrifying. For others, it’s ideal. It depends on the business model and how much it takes to get it off the ground.
How do you bootstrap?
First, you need to focus on how your company will have the means to operate. This is usually a combination of:
- Your savings
- A loan you take out
- Your labour, given without pay.
- Low operating costs.
If a company starts its life through bootstrapping, does it need to keep that model?
Not at all. Bootstrapping is usually just the first stepping stone. At some point, the business will transition toward attracting outside investment. It’s a natural next step.
Bootstrapped businesses usually begin as a side project, i.e. the founder still has a separate day job.
When the business begins supporting itself with revenue, the owner can transform it into their new day job. After that, if it grows enough, the owner can look at expansion. This is where it may transition into a firm funded by venture capital.
The advantages and disadvantages of bootstrapping
Advantages:
- Bootstrapping gives the owner near total control over their business, meaning they don’t need to be flexible to please investors. Many treasure this ‘ultimate-freedom’ style approach.
- With most of the costs covered by the owner, they are incredibly conscious of how they spend money. In the short term, this could lead to profit.
Disadvantages:
- Investment means risk exposure, and if the owner’s money is propping up their business, they are highly exposed to potential failure.
- No investors mean you’re more likely to have cash-flow issues. You could miss out on opportunities because of this or struggle to keep the business afloat.
How do you make a success of bootstrapping?
You should always be an expert in the field you’re working in. You have an idea, you know how to execute it, and you have the money available to do so.
You should be an expert in budgeting and cost-saving and willing to put the time in where your labour may be required. If the business needs someone working in a garage till the early hours, that someone is you.
These qualities increase your chances of success in the short term and will also fill investors with confidence. This confidence is crucial when it comes to expanding the business, hiring more people, and forming a board.