What is Bootstrapping?
Bootstrapping a business is when an entrepreneur uses their own money as start-up capital for their business. The term comes from the old saying ‘pull yourself up by your bootstraps’ and refers to getting something done yourself. This method of financing allows you to have 100% ownership of your business and not have to give away any equity or pay back any loans.
Some very successful businesses were bootstrapped such as Facebook, Dell, Apple, Microsoft and Coca-Cola. It means the business owner has to re-invest profit into the business and forces them to be resourceful.
Why do it?
Someone might fund their start-up this way because they don’t know how to raise financing, lack experience in promotion and business, or the most common reason is they don’t want to share control or income.
If the business fails you won’t have to pay off any loans or borrowed funds, and if it’s successful you will be able to hold onto the capital you make to attract investors down the line. This method allows the bootstrapper to focus solely on key aspects of the business such as sales and product development rather than on investors and opinions.
The biggest advantage of bootstrapping is full ownership and control over your business. You won’t have to listen to or abide by any investors, and you won’t have to repay any loans or interest on top of them which means all ideas are your own and all profit is your own. You can put all profits straight back into the business rather than paying dividends or loans.
Bootstrapping also teaches excellent problem-solving skills by forcing you to become resourceful and have a versatile skillset. If you’re bootstrapping, you will likely be a wearer of many hats. Overall, self-funding a business forces you into building a business model that really works – and fast.
Despite these advantages, there is a lot that could go wrong with bootstrapping. The main threat is a cash flow shortage from purchasing everything you needed to start-up without turning over any profits. It also means you will be taking on all of the financial risks and every problem will relay back to you, making it a high stress situation.
It can also be difficult to grow if it exceeds the company’s ability. This could be either because your physical space, cash flow or marketing efforts are stunting your reach or ability to produce your product. Your marketing ability and visibility will be limited in the beginning as you won’t be able to afford any lavish campaigns, which can stunt your growth.
You will need to work harder, longer and manage more roles when bootstrapping as your own money is on the line and there’s no other owners or investors to help you out.
Monitoring the costs
Since bootstrapping typically means starting with much less cash than if you enlisted investors, it requires very careful budgeting in order to maintain profit and cash flow. Cash flow should be monitored daily so you will always have what you need to pay bills. A way to improve cash flow is to insist on immediate payments – get your clients to pay up front so you can make purchases sooner rather than later.
Avoid impulse buying and unnecessary purchases by making a budget and sticking to it. Don’t buy anything you don’t absolutely need and even use free versions of software for the time being. When planning out the business, plan according to your budget rather than your wishes so you operate within your means.
Take advantage of affordable marketing options like social media. It’s free to create a Facebook or Instagram business account and can get your name out there and establish credibility. You can run ads on these platforms and Google as well that have options for targeting and budget. This can be a cost-effective way to promote your business.
A huge way to save money when bootstrapping is to work from home. This will save on rent and insurance that an office space would have cost and may force you to be creative in the delivery of your product.
It’s important to keep organised with bookkeeping and taxes so you know where you stand financially. Keeping good records of all receipts and transactions will help you out when doing your regular business taxes.
To make money quickly start a business that is market ready and can generate immediate returns. This might mean starting your business at a lower level that requires less start-up capital so you can make money immediately and work your way up to the larger goals.
Entrepreneurs can view this tight budget as their biggest constraint or use it as an incentive to do things more creatively. Less money can mean more motivation and hands-on decision making. It can be a drive to win rather than a curse and as they say, diamonds are made under pressure.
Tips for bootstrapping
If you have a big business idea, break it down into a series of ideas and start the business up on the best part. If you can break up a big business idea into stages that are all profitable, even better.
When starting up a business stick to what you know. Starting a business in unfamiliar terrain is a recipe for failure and lacking that industry specific insider knowledge can really harm the business.
It’s also important to protect your personal assets by forming the right business structure. Australian business structures are sole, partnership, company and trust. The right structure for you will depend on your individual situation so it’s important to speak to a business advisor.
Customer-focused marketing is very important in the start-up stage. Use innovative techniques that show your target market how your product will make a difference in their life. If your idea doesn’t solve someone’s problem then it isn’t very feasible as there is neither a product or a target audience.