It’s not possible to launch a startup without outside funding, right? Not quite.
While some founders use venture capital, angel investment, or crowdfunding to raise funds in the early stages of launching a company, bootstrapping a startup requiresa different approach to business development – one that is high risk and high reward.
What is a bootstrap startup?
Bootstrapping is when you launch a business with little money and no outside funding. Founders who choose this route might use their personal savings or their company’s operating profits to start their businesses. The term “bootstrapping” also refers to the procedure used to calculate the zero-coupon yield curve from market information. In a bootstrapping startup, startup founders often don’t rely on traditional financing methods like investors, crowdfunding or bank loans.
When bootstrapping a startup, founders usually goes through different stages at different points in their startup journey.
- Early Stage: In the early days, founders who are going the bootstrapping route often continue to work their day job while running the startup on the side. Their salary, along with personal savings, debt, or money from friends and family is often used to fund the startup.
- Sales Stage: Once a startup has gained traction and attracted enough paying customers or clients, funds generated through sales can be used to fund the startup’s growth and expansion. Revenue can be used for efforts like hiring staff, marketing, and more.
- Credit Stage: Once a startup is able to generate consistent revenue or can demonstrated financial credibility, a founder can take out a line of credit to further support growth efforts. Some founders also decide to seek outside funding like venture capital at this stage.
Pros and cons of bootstrapping
If you can pull it off, bootstrapping your startup can offer some distinct advantages:
- It’s inexpensive. If you’re bootstrapping a company, the barrier to entry is low. This method of launching a company doesn’t involve the stress or cost of fundraising or acquiring debt.
- You call the shots. Because there are no external investors, a bootstrapped startup’s founders have total control over the company’s decision-making processes, whereas, venture capitalists who invest in a startup typically require equity in the company. Bootstrapping entrepreneurs also get to keep business revenues if the startup is successful.
- The focus is on growth, not fundraising. Without the pressure of raising capital in the early stages of business development, founders can instead concentrate on growing the company. They also get to shape the business culture and ensure it reflects their vision.
- Future funding opportunities. Successful bootstrapping entrepreneurship is often viewed favorably by your company’s future investors.
However, the path of launching a bootstrap startup isn’t without endemic challenges:
- Financial strain. If you’re self-funding your company, it’s pretty likely that whatever you’re investing is less than what you would get from venture capitalists or angel investors. You could run into problems if you’re unable to cover your business expenses or unable to hire employees.
- Authority issues. Startup bootstrapping often relies on resources like sweat equity from early employees. Equity distributed among a group of people can make decision-making difficult. Or, if a startup has multiple founders who have invested different amounts of money or time, disagreements can occur.
- Higher risk of failure. Launching a startup is difficult. Bootstrapping is even riskier. Operating on limited resources requires long hours and could make it difficult to get the support you need to sustain your business.
How to bootstrap a startup
There are different methods of acquiring bootstrap funding. The best option will depend on your business idea and your finances. Founders of a bootstrap startup might rely on personal savings to start a company, or, if your business will create a product, you could take preorders for the product you intend to sell and use that cash flow to create and deliver the product.
In a conversation with Founders Network, Stacy Stubblefield, co-founder and Chief Innovation Officer of TeleSign, provided a perfect example of how to bootstrap. Stubblefield explained how she mass-emailed executives at large companies like Google and Amazon to build an initial roster of clients.
One of the startup’s first challenges was scaling the technology to meet the needs of TeleSign’s clients. In order to scale up the infrastructure of the business itself, she and her fellow co-founders wore many hats, including direct involvement with hiring and training.
During a hybrid event with Founders Network, Lloyed Lobo, co-founder and president of fintech platform Boast.AI, also provided insight into how to bootstrap a company. Lobo charged early adopters for the service he promised to provide in order to secure both funding and feedback from product users. He also recommends bootstrap startup founders create aggressive revenue goals from the start to successfully bootstrap a company. His bootstrapped startup Boast.AI went on to earn $10 million in revenue and $123 million in funding.
To learn more about how to bootstrap a startup, see if you qualify for membership to join Founders Network.