Not all entrepreneurs need external funding to start a business. Some of the most successful companies today started with less than $1000 of capital out of their own pocket.
Bootstrapping, or self-financing, is one of the earliest forms of funding for entrepreneurs and business founders. When done right, it opens far bigger possibilities.
If you’re looking into bootstrapping your startup, then this article is for you. Let’s weigh in on the pros and cons of bootstrapping and help you decide if it’s right for your business.
Pros of bootstrapping your startup
More focus on building your business and product development
Your first major task as a startup is developing your flagship product or service. And without the distraction of fundraising which, honestly, eats up a lot of your time, you can build momentum up, focus on product development, and strengthen your core competencies.
Funding your own business eliminates external influences that can push your company in different directions. You can build a sustainable and profitable business without needing to please any investors, other than yourself.
No pressure of returning someone else’s money
Well, this is pretty self-explanatory. No borrowed money, no payments to make, one less thing to worry about. Let me explain more about this on #3.
No dilution of equity (relinquishing ownership)
External financing doesn’t come free. When external investors offer their money, you have to give something up to get it. They’ll often ask you to relinquish a portion of your ownership stake in your company and a share of your profits.
Creditors also require periodic interest payments. Although they won’t demand ownership in your business (which is rare), they have a partial claim on your assets until you repay your debts.
More attractive for potential investors
Successful bootstrapped companies are more attractive to potential investors because they have a proven track record of managing money responsibly. So it’s easier for self-financed startups to get capital from outside sources later on.
Cons of bootstrapping your startup
You’re on your own
What bootstrapping really means is pulling your own weight, with maybe the support of another buddy who’s also crazy enough to believe that you can turn an idea into billions of dollars.
When you bootstrap, you need to solve more problems with fewer resources. However, that necessity allows you to become resourceful and learn new skills you never even thought are capable in a short span of time.
It’s harder to gain credibility
As they say, sometimes it’s not what you know but who you know. So it’s also tough to gain credibility at first if you are short of connections who can introduce you to valuable partnerships.
Limited resources also mean little money for attracting top talent
Although this becomes an upside when you find first-rate employees who are as passionate as you are in your vision. More often than not, these are buddies and former colleagues who are willing to leave high-paying jobs to join you in building what they believe would be a life-changing cause.
It can limit growth potential
You are forced to do more with less with limited resources which can limit the company’s growth potential. Generating revenue in the initial stages is necessary to keep your business going. Not turning a profit early means coming up with alternatives and growth models which are not part of your original plan. And constantly tweaking your growth models can either work wonders or destroy everything you’ve built.
Tips for bootstrapping your startup
- You have to be realistic with your goals. Create a business plan that outlines what you want to get out of your startup in the short, mid, and long term.
- Be patient. It takes time to scale and build a sustainable business. Premature scaling is a mistake you don’t want to make.
- Do not start your business without any sufficient capital. Without enough money, you will be forced to look for external resources which defeats the purpose of you bootstrapping in the first place.
- Do not quit your job while you’re still laying the groundwork. You will need money to sustain yourself and the company. Or at the least, maintain a part-time job while the business is still in its infancy, eliminating the risk of using the business account to cover your personal expenses.
It usually takes a year or two to more carefully assess your profitability. You may want to forfeit your salary on the first year or at least take a minimal compensation when your efforts start paying off. It all depends on how much startup capital you needed to create products and services and how much money is drawn out from the company for compensation.
- Minimize operating expenses as much as possible. Best to forego renting out a physical office. Going virtual is the way to go these days. It’s convenient since almost everyone has access to a computer and Internet. And it’s much more affordable with no water and electricity bills to worry each month, and zero investment on staff’s equipment.
- Make smart hiring decisions. Prioritize. Hiring a marketing manager, for example, is important for growth. But you may want to do that when you already developed a product that’s worth pitching to prospective clients, then you can start ramping up your creative and branding campaigns.
- Track your business growth. Do some targeting and analytics. It pays to know how your business performs versus your goals and expectations.
- Track all the numbers, including but not limited to expenses, income, prospects, and conversions. Start with an Excel spreadsheet or any free app to help you assess your performance. The idea is knowing your numbers because you can make smart decisions from them.
Sources of bootstrapped funds
- Personal savings and/or checking accounts
- Credit card (not highly recommended because the interest rates are quite high)
- Earnings from selling some personal property. We say “some” because you should not put all eggs in one basket. You need to have some backup to help you get back on your feet if the business doesn’t take off.
- Redundancy payout
- Retirement accounts
- Stocks, bonds, or other investments
It hurts more to spend your own money than it hurts to spend others’. When bootstrapping, it pays to be financially disciplined and committed to what you have started. You need to find out and focus on what you do really well, then continually build upon your strengths to scale your business.
If you'd rather look at our sources of business finance, these guides and articles might help.
David Schneider is the Content Director at NinjaOutreach an all in one Influencer Outreach software for marketers. He blogs about business and you can also find him on twitter @ninjaoutreach