by Bootstrap is a situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to found and build a company from personal finances or from the operating revenues of the new company.
Compared to using venture capital, boot strapping can be beneficial, as the entrepreneur is able to maintain control over all decisions. On the downside, however, this form of financing may place unnecessary financial risk on the entrepreneur. Furthermore, boot strapping may not provide enough investment for the company to become successful at a reasonable rate.
The term boostrap itself originates from the phrase “pulling oneself up by one’s bootstraps,” and professionals who engage in bootstrapping are known as bootstrappers. These individuals typically rely on personal savings and the earliest instances of revenue to begin funding their own startup companies. This contrasts with other entrepreneurial actions, which may include contacting external investors and other business professionals to begin funding their operations. Studies show that more than 80% of new startup operations are funded through the founders’ personal finances. The recorded median in start-up capital is reported at approximately $10,000.
Stages of Bootstrapping
There are a few stages that a bootstrapped company goes through:
Beginner stage
The beginner stage starts with some saved money or borrowed/invested money coming from friends. For example, the founder continues to work on their main job and, at the same time, starts a business.
Customer-funded stage
When money from customers/clients is used to keep the business operating and to fund its growth.
Credit stage
The credit stage involves the entrepreneur focusing on funding specific activities, such as hiring staff, upgrading equipment, etc. At the credit stage, the business takes out loans or tries to find venture capital for expansion.
Bootstrapping Strategy
Below are some proven methods that will help an entrepreneur in the early stages of the bootstrapped startup:
- Reinvest net profit.
- Create a business plan. Planning is necessary, and it will help the owner organize things and understand the vectors of movement.
- A business idea (product/service) should solve someone’s problem. Otherwise, there is neither a product nor a target audience.
- Attract a mentor or any person who is successful in that business and who will give useful advice.
- Use the most of networking opportunities and communicate with a network of personal contacts. In a developed personal network (or a network of friends and relatives), there may be journalists who will write about you or graphic designers who will make a logo or a minimalistic but trendy website out of friendship.
Advantages of Bootstrapping
- The “bootstrapper” reserves the right to all developments, as well as ideas that were used during the development of the business.
- The entrepreneur gets a wealth of experience while risking his own money only. It means that if the business fails, he will not be forced to pay off loans or other borrowed funds. If the project is successful, the business owner will save capital and will be able to attract investors. So, the business will grow up to a new level.
- The lack of initial funding makes entrepreneurs look for unusual ways to solve problems, create new offers on the market, and show creative thinking.
- Independence from investor opinions. An entrepreneur can make all the decisions independently, so he is able to create something unique, realize a dream, test strength, and be independent of the investors’ instructions.
- Attracting external funding is challenging and can be a very stressful and time-consuming task. Bootstrapping allows an entrepreneur to fully focus on the key aspects of the business, such as sales, product development, etc.
- Creating the financial foundations of business by an entrepreneur is a huge attraction for future investments. Investors, such as private individuals, special funds, or venture capital firms, are much more confident in financing businesses that are already secured and have demonstrated the promises and commitment of the owners.
- Providing value to people. Business is all about delivering a particular value through a product or service.
Disadvantages of Bootstrapping
- Business growth can be difficult if demand exceeds the company’s ability to offer or produce services or products.
- The entrepreneur takes on almost all financial risks instead of sharing them with investors who invest in supporting the company’s growth.
- Limited capital and lack of investment: In the context of the specifics of bootstrapping, the attraction of large investments and fully implementing one’s ideas can be extremely hard.
- Stress problems: The ability to handle stressful situations is regularly checked when unexpected problems arise.
