Bootstrapping 101: Pros & Cons of Bootstrapping Your Startup
Founding and growing a startup is difficult. On top of developing a great product or experience, founders need to hone all aspects of their business — financing, hiring, etc.
Founders are faced with countless funding decisions – none of which come easy. On the Visible Blog, we oftentimes talk about venture capital. However, there are other options that are better suited for some companies. One of which is bootstrapping.
Related Resource: Alternatives to Venture Capital
Learn more about bootstrapping and what it means for startup founders below.
Defining Bootstrapping in the Startup World
As defined by the team at Investopedia, “Bootstrapping describes a situation in which an entrepreneur starts a company with little capital, relying on money other than outside investments. An individual is said to be bootstrapping when they attempt to found and build a company from personal finances or the operating revenues of the new company.”
Related Resource: Bootstrapping a Beauty Brand with Aishetu Dozie, CEO of Bossy
On the VIsible Blog, we generally write about how founders can leverage outside financing (like venture capital and angel investors), to fund their business. Bootstrapping foregoes outside funding and requires a founder to leverage their personal savings, credit, time, and customer revenue.
The Pros and Cons of Bootstrapping
Bootstrapping can be extremely beneficial for founders. However, the benefits come with real risks. Learn more about the pros and cons of bootstrapping below.
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Pros of Bootstrapping
Bootstrapping is a huge bet for a founder to place on themself. By steering clear of outside funding, founders will need to leverage their own time and resources to build their business. However, a founder placing their own resources on the line does not come with the opportunities to benefit. Learn about the pros of bootstrapping below:
It Allows Owners to Retain Full Ownership of Their Company
One of the downsides of taking on venture funding is the loss of ownership and equity. One of the major upsides of choosing to bootstrap a business is the exact opposite. When choosing to bootstrap a business, founders retain full ownership of the business and will experience all of the upsides in the event of a successful exit or deal.
It Makes Owners Create a Model That Works
When bootstrapping a business there are no “safety nets.” While most founders do not need a forcing function to help them prove a model, bootstrapping heightens the stakes. Bootstrapped founders are risking their own resources so it is vital that they build a successful business.
Path to Profitability
A venture capitalist’s job is to create outsized returns for their limited partners. This means that VCs are in search of companies that can grow into huge companies to create returns. Chances are that outside investors will push for quick growth.
When bootstrapping, founders will likely have a strict budget and need to grow within their own means. While it can possibly limit the possibility of hypergrowth, it can be a great way to grow sustainability and build a long-term company.
Cons of Bootstrapping
Just like any funding option, there are cons of bootstrapping as well. Weighing the pros and cons is a great way to help a founder determine what funding option is right for their business. Learn more about the cons of bootstrapping a business below:
It Can Be Riskier
As we laid out above, one of the biggest perks of bootstrapping a business is maintaining ownership and equity. On the flip side, this means there is no one else to share risk with a founder.
When bootstrapping a business, a founder will put their own resources on the line. If something goes south, it not only impacts the business but has the ability to impact a bootstrapped founder’s personal finance as well.
Bootstrapping Only Offers Limited Support
Being a founder is difficult. There are very few individuals who understand what it takes to find and grow a business. Because of this, it is important for founders to learn from their peers, investors, and leaders in the space. This comes naturally with some funding options. For example, venture-backed companies can lean on investors for help and future capital. For bootstrapped founders, chances are they will have fewer natural networking opportunities with investors and other founders.
It Requires Many Strengths
When building a company, leaders need to have strengths across the board – they might be a technical founder or great marketer, etc. Many founders, they can lean on co-founders and their investors to help balance their weaknesses. For a solo founder or bootstrapped founder, they will need to rely on themselves across the board.
Stages a Bootstrapped Company Goes Through
Companies go through different stages and lifecycles. At their core, most startups follow a similar journey. For venture-backed and bootstrapped companies, this journey might look slightly different but is similar at their core. Learn about the basic stages a bootstrapped company goes through below:
1) Starting Stage
When starting a bootstrapped business, it likely looks no different than starting any other business. The founder or founding team likely has an idea or big problem they’d like to solve. From here, there are the formalities of setting up a business.
However, a bootstrapped founder will have the ability to pursue their new business on the side (or dedicate they full day-to-day). Because there are no outside stakeholders, the pace at which a bootstrapped founder launches is solely up to them.
2) Customer-Funded Stage
Once a bootstrapped founder has built a product and determined channels for distributing their product, they can begin to bring in revenue from customers. While bootstrapped founders can work at their own pace, bringing in customer revenue is vital as it is the likely source of financing and future growth.
3) Profitability & Growth
If a bootstrapped founder can build a product and find their first customers, the next step is profitability and growth. Because bootstrapped companies use their customer revenue to fuel their growth, it is incredibly important they are wise with their spending decisions as customers grow – they likely won’t have the cash cushion and safety net in the early days.
Find Out More Information on Bootstrapping
Bootstrapping can be a great way to fund and build a startup for many startup founders. At the end of the day, founders need to evaluate their funding options and determine what is right for their business. To learn more about bootstrapping and funding a business, subscribe to the Visible Weekly. We curate the best resources to help founders hire top talent, raise capital, and build great products. Sign up here.
