Bootstrapping Hacks: Secrets From Successful Founders

Table of Contents
1. What Is Bootstrapping?
2. Methods of Bootstrapping
3. The Optimal Approach for Bootstrapping a Business
4. Develop a Business Plan
5. Establish a Revenue Retention Strategy
6. Pros & Cons of Bootstrapping
7. Advantages of Bootstrapping
8. Disadvantages of Bootstrapping
9. Examples of Successful Bootstrapped Companies

Lack of startup capital is a major roadblock for many aspiring entrepreneurs, often forcing them to put their ideas on hold or abandon them entirely. However, there’s a popular alternative that has helped countless businesses thrive without relying on external investors: bootstrapping.

Bootstrapping is a concept based on resourcefulness, creativity, and financial discipline, and it’s used by 80% of startups. But what exactly does it mean to bootstrap a business, and is it right for you? Keep reading to learn more and discover successful businesses that have used this strategy.

What Is Bootstrapping?

“Bootstrapping” comes from the classic phrase “to pull oneself up by one’s own bootstraps,” introduced in the 1800s.

Bootstrapping in business involves using your own resources (personal savings, your old computer gear, the shed out back, for example) to start and build a new business.

Instead of getting investors to contribute or racking up debt to grow your business, you’re just making the most of what you’ve got to get your business moving.

When you go this route, you’ll be relying on your personal funds — maybe with some help from your friends or relatives — as well as the sales you rake in once you kick off your business.

Your time and cash will be the driving force behind your business’s growth. This is what makes Bootstrapping one of the more stressful but rewarding and satisfying ways to start a new business.

Methods of Bootstrapping

To bootstrap a business, companies get creative with ways to slash the need for cash from banks and investors. Here’s how they do it:

• Owner Financing: They dip into their own pockets and savings.
• Personal Debt: Sometimes, they’ll even rack up personal credit card debt.
• Sweat Equity: A party puts in effort to build the company up.
• Operating Costs: They keep expenses as low as possible.
• Inventory Minimisation: They move stock as quickly as possible (fast inventory turnaround). This involves methods like Just-in-time or JIT.
• Subsidy Finance: They might get some cash from the government or score tax breaks.
• Selling: They rely on sales to keep the cash flowing and the business humming.

The Optimal Approach for Bootstrapping a Business

To succeed in a bootstrapped business, develop a great idea and execute it flawlessly, keep your eyes on the profits, hone your skills, and become a great business person.

Here’s the general script you need to follow:

Evaluate Bootstrapping Strategies at an Early Stage

Before you kick off your startup, consider whether bootstrapping is the right move for you. It might not stack up financially if your business needs a hefty upfront capital.

Some businesses also take their sweet time turning over stock, so your bootstrapped cash could be on hold for a bit.

You generally have two types of businesses that can bootstrap:

1. Early-stage businesses that don’t need loads of cash upfront, especially from outside sources. This gives them room to move and grow at their own pace.
2. Serial entrepreneur companies whose founders have enough cash from selling off a previous company to put into the new gig.

If your business falls into any of these categories, bootstrapping is the right strategy for you.

Now, here are a few of the strategies you need to explore and choose the right one before you start a bootstrapped business:

Invest Personal Equity

When a company first gets going, it usually needs some cash upfront. For that, you’ll need to throw in some of your own money as the first investment.

Depending on the industry and how the business runs, you might need to invest more cash at different stages early on.

Get Personal Loan

If you are short on cash, you might need to take out personal loans to bankroll the business. The business probably won’t score a loan (or get as sweet terms) since it doesn’t have a solid financial track record like you do.

Since this bootstrapping strategy racks up personal debt, you are on the hook personally, and your personal property could get seized if you go belly up and can’t pay back the loan.

Minimize Expenses

In the early days of your business, you should tighten the belt a bit. For instance, you could do the deliveries yourself instead of forking out for delivery services.

It’s not about what you do but how you do it. Usually, it’s a trade-off between cash and time. That means you’re willing to sacrifice your time when money is low.

Establish Business Partnerships

You might need to rope in third parties or other investors to help finance its operations. While this can be a long-term deal, you may opt for short-term agreements to tide the business over.

For example, a third party might grab some stock or loan out some money to score a quick return. Though this deal puts the third party at some risk, it’s less risky than a long-term investment without clear payback or terms for cashing out.

Restrict Business Operations

Often, a company bootstraps by temporarily limiting what it can do. For instance, you may only produce items when there’s a paid order. Or you might only sell products in a particular area because of shipping costs.

You can even stick to selling certain goods for a bit until you have enough money to churn out more profitable but costlier items. Be smart about the goals you set before entering other aspects of your business.

Develop a Business Plan

Considering everything we mentioned above, create a solid business plan if bootstrapping is the right fit for you.

This plan should have a budget outlining how much cash is coming in and going out over the next few years. As the company grows, you might have to consider different amounts of capital that must be bootstrapped at different stages.

Establish a Revenue Retention Strategy

Figure out how revenue will flow through your business. For instance, in the early days, all the operations might be bankrolled by bootstrapped cash until the company starts getting cash from customers.

Decide how that money will be used from the get-go (like growing the business or paying yourself back). The considerable risk here is pulling out cash too early, not giving the company a fair chance to develop, and exposing the business and yourself to loss.

Pros & Cons of Bootstrapping

Is bootstrapping your business the right choice to really maximize its long-term growth potential?

Here are some advantages and the financial risks of these self-funding strategies you need to evaluate before making that choice:

Pros of Bootstrapping

• Bootstrapping is cost-effective, making entry affordable.
• You’re in control of your business decisions.
• You have the freedom to shape your business as you wish.

Cons of Bootstrapping

• Cash flow issues might arise.
• Equity problems may surface with multiple founders.
• Failure is a real risk.
• Stress levels could rise significantly.

Let’s go into more detail about the pros and cons…

Advantages of Bootstrapping

• It’s cheap: The cost of capital is meagre compared to getting a loan or giving up your business shares. Also, using your own cash means you have to be super-efficient. You’re fully aware of the costs of running the show day in and day out, and you start running your business on a tight budget.
• You’re the boss: With no external investors, you keep your share and control of the company intact. You are calling the shots and responsible for every significant decision in running and expanding the company. This means the business follows your vision and values without outside influence, and when it’s a hit, you pocket all the profits.
• Focus on building the business: Not having to chase external funds means you can put all your energy into the core aspects of the business, like sales and product development. With limited cash, you get savvy with options like factoring, asset refinancing, and trade finance. Building your business’s financial foundation is a big draw for future investors. They’re more likely to back companies that already show promise and dedication from their owners.

Disadvantages of Bootstrapping

• Cash flow challenges: When you don’t have enough money and cash flow, you can run into strife if a company isn’t pulling in the cash it needs to manufacture products and expand.
• An entrepreneur’s lack of knowledge — especially in business savvy and getting leads — can lead to stagnation and disaster.
• Equity concerns with multiple founders: When there’s more than one founder, equity problems can occur. This could stir up some trouble and bring on some tax consequences if there’s an uneven spread of cash, experience, or time between founders. Keeping a record of the cash founders put into the business can sort this out.
• Risk of failure is significant: Bootstrapping involves more risk where you might cop some losses and failure. Some bootstrapped ventures flop due to a lack of revenue — profits aren’t enough to cover all the bills. Starting a business (in most cases) means working long hours just to keep the lights on; often, there’s no paycheck to show for it. All problems fall on your shoulders since hiring staff might not be on the cards. This means solutions are limited to your skills or friends and family who might lend a hand.
• Personal stress: You have to get good at handling stressful situations if you’re funding your company with money borrowed from mates and family or simply just your own cash that you’re putting on the line. If you’re someone who doesn't have a healthy way to handle stress, you’re likely going to face some challenges with this venture.

Examples of Successful Bootstrapped Companies

The idea that venture capital means you’ve made it and everything else means you’ve failed isn’t accurate at all.

Stop chasing after venture capital deals and learn from the startups that went from bootstrapping to smashing it without a cent from venture capitalists.

Here are some of the many successful bootstrapped companies:

MailChimp

MailChimp is a bootstrapping success story. Started back in 2001 by Ben Chestnut and Dan Kurzius, it’s gone from strength to strength, becoming a global powerhouse in email marketing with over 15 million customers.

Their secret sauce? Excellent customer service and constant innovation. They were one of the pioneers offering a free email marketing service, reeling in many customers. Always on the ball, they’ve kept adding new features like teaming up with Shopify. With its commitment to innovation, MailChimp is the top choice for email marketing for businesses, big or small.

Shopify

The founders of Shopify were gearing up to launch a snowboarding e-commerce site, but they hit a block when they couldn’t find a shopping cart solution that worked flawlessly for them.

So, they rolled up their sleeves and created one from scratch. They ran their business on their own earnings for six years before even thinking about dipping into venture capital or going public with an IPO. Shopify is now worth a solid $166 billion.

GoPro

GoPro, founded by Nick Woodman in 2002, is a bootstrapped company specialising in camera and action sports accessories.

GoPro hit the big time by tapping into a fresh market for tough, high-quality cameras that could handle being mounted on helmets, bikes, and more.

Their success results from their innovation, marketing smarts, and pricing strategy. GoPro was the first to create a small, lightweight camera that could tag along on gear, letting users capture footage like never before. Their marketing revolves around user-generated content, building a tight-knit community of fans who love sharing their GoPro vids online.

Wrapping Up: To Bootstrap or Not To Bootstrap?

If you choose to Bootstrap your business instead of going for venture capital, you’ll need to stay sharp and keep refining your processes, even without the luxury of a mountain of cash.

One key area to watch is the financial management of a growing company because unexpected cash-flow hiccups can spell doom for a startup. Cutting too many corners and sloppy practices could be a recipe for disaster.

When you’re building a business from scratch, it pays to expect the unexpected. You can totally pull it off, though, as proven by the loads of successful bootstrapped companies out there.