“It takes money to make money” – this is considered one of the oldest clichés within the business world – and, to a certain extent, it’s true! The majority of startup owners require funding to hit the ground running. But, if you do not have enough money saved up, can’t or don’t prefer to take out a loan, are hesitant to ask family and friends to chip in, and dislike the idea of racking up credit card debt on start-up costs, how in the world could you back up your business? The answer is to take “the guerilla-style” bootstrapping path.
Bootstrapping a startup business is a romanticized idea. Yet, no matter what kind of business you’re in or whether eventually you succeed or not: everyone respects those who put in the hustle. For those who can pull it off, it may bring even more stunning rewards, which, though, doesn’t mean there aren’t any pitfalls.
So, what are the merits and demerits of bootstrapping? Are there any giants that bootstrapped their way to success? And should you wish to make your future business as a bootstrapped startup, what do you need to do? Let’s read on to uncover one by one!
Bootstrapping: What Is It?
Before delving into the particulars, it’s more than essential to first cast a quick glimpse over the basic concepts of bootstrapping financing approach.
To trace back, the term “bootstrapping” comes from the phrase “pull yourself up by your bootstraps,” which is a self-help reference to footwear of an older era: Bootstrappers did things by themselves, without the help of outside sources. To put it in the business sense, bootstrapping refers to the act of launching a business without the help of venture capital firms or even significant angel investment. In other words, it means starting lean – without the help of outside capital and also continuing to fuel growth internally from cash flow produced by the business.
Since bootstrapped businesses are not the kind that draws media attention from huge funding rounds, the founding entrepreneur, known as the startup bootstrapper, is the one sole investor in the beginning. The founder’s only investment capital might be personal savings – and of course, the time he or she spends working for free to get the business up and running. Bootstrapping requires plowing the money earned from customers back into the business. In other words, the bootstrapping entrepreneur relies on cash flow to grow their business in the place of outside capital.
The Merits and Demerits of Bootstrapping
Should you firmly believe your business idea can be bootstrapped into prosperity, it might be worth the risk to forgo traditional funding methods. Nevertheless, bootstrapping is never a decision to make on a whim. Before arriving at the final decision, make 200% sure that you are aware of all of the gains and drawbacks such a financing approach can bring about.
The Merits of Bootstrapping
#1. Retain Complete Ownership
Coming up with high levels of capital inevitably translates into making concessions from an ownership standpoint. As a solo bootstrapping entrepreneur, you can continue to own completely 100% of your business. Even if you’re sharing equity with one or two co-founder(s), your share of the equity is still going to be far larger than it would be after getting Venture Capital or Angel investor capital in the equation.
After all, bootstrapping doesn’t make you dilute your ownership.
#2. Have Full Control Over Direction
If your business gets in the influx of capital from investors, they are likely to demand a stake in your company – then, you take on exterior pressure and responsibility to satisfy these people’s interests, which may be vastly different from your vision and values. As you have to act in the best interests of other stakeholders, you lose the true autonomy of your business from outside influences.
Whereas there exist other solutions, such as super-voting rights, that can allow you to retain more control when raising capital, bootstrapping is probably a better path to go if artistic direction and control over decisions is a top priority for you. Actually, when you’re the top boss, you are the one who takes the direction and no one else can bog you down!
#3. Allow Creative Funding
Not only can you get to be creative with the artistic direction of your business, but bootstrapping also gets you to be creative with investing.
For example, if you find it impossible to open a shop, for the time being, you can consider selling door to door, from market stalls, or on some online marketplaces like eBay. In fact, self-funding is when you will likely think outside of the box. Let’s see, you can probably become an investor of your own and raise capital that way. Should you be able to get a good grip on market psychology and overcome the learning curve, you can definitely start off trading on the stock market to generate some extra income. If you are good at risk management and have a knack for research and analysis, this is probably an approach you can try,
Furthermore, should your intention is to keep your idea as a lifetime business, and maybe even make it a multigenerational business, then such an approach is going to be your ideal option. Otherwise, outside investors are going to put you on a clock for achieving a sizable exit – normally within about 10 years.
#4. Be Motivated to Form A Business Model That Works
Nowadays, it’s no secret that a myriad of fastest-growing, big valuation startups and even some initial public offering or IPOs have been losing money – at least on paper. They are playing with various strategies – even though one can pay off, a lot can go wrong.
Once you’ve made up your mind to follow the path of bootstrapping, you leave with no alternative but to quickly develop a sustainable business model that’s foolproof. Make sure this model really works, can bring in positive cash flow and profits right away – and can also be built on and scaled from there.
#5. Enjoy a Sense of Accomplishment
Being the bootstrapping founder, you maintain sole responsibility for your business as the sole investor. Most entrepreneurs give it their all when they’re fully in charge of their own startup.
After all, your company is your baby, so there’s no need to wonder who is more apt to take care of it than you? Being 100% in control gives you a greater sense of significance and the ability to one day look at this venture and say “I built that!” is definitely more than just a rewarding experience.
The Demerits of Bootstrapping (and Also Some Proposed Courses of Action)
#1. Struggle to Address Cash Flow Issues
Running out of fund stands as one of the top reasons behind the business failure. Whereas you can come up with groundbreaking ideas and have an amazing and much-needed product or service, they can hardly make up for cash flow shortages. Frankly speaking, if you run into a crunch for just a month or two, you may never realize the potential of your startup.
it’s also noteworthy that the main reason that entrepreneurs go out to fundraise a huge amount of capital is to scale big and fast – for several, that is their strategy to survive and thrive. Thus, without outside capital, you’ll be limited on your visibility, the marketing strategies you can adopt as well as the tactics you can employ to serve your customers. All of that can stunt your growth potential.
So as to stay afloat, you should pay careful attention to budgeting. Should your budgeting work point out that outside capital is the way to go at one point, then let’s be prepared to have ready 15 to 20 slides with your story to convince investors quickly. For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel, the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Anyway, no matter how adamant you are about bootstrapping, it’s a “must-have” – not a nice-to-have – that you map out an in-depth backup plan in case your business requires emergency funds. It’s also critical to maintain a good credit score in the event that you need an emergency loan.
#2. Not Receive Top Level Help
On-hand cash is not the only – and not even be the most significant benefit of fundraising for startups. Enrolling others with a vested interest in your success can bring about top-level help. It can put board members, shareholders, influencers, and big deal makers with the keys to sizable sales channels in your corner, and going to bat for you.
When you choose to bootstrap, you’re all alone, thus, you rarely obtain any access to outside resources. And, the truth is, you’re not the best at everything. Thus, it’s highly recommended that you bring in a market expert who has a vested interest in your success.
#3. Be Forced to Stay Organized and Put in Hard Work
Since you work with a leaner team, and you are a gung-ho entrepreneur out to hustle to get traction, more often than not, it means basics get second priority. Like bookkeeping, taxes, and systemizing processes, those can really bite you back later when it comes to filing with the IRS, trying to scale, and if you decide you do need to or want to raise money.
Let’s take the example of Julie Clark – the founder of the Baby Einstein brand, a company she built from scratch without any outside capital, to being bought by Disney for $25M, and becoming a $300M a year phenomenon. She shared on the DealMakers Podcast that cutting a deal with Disney for $25 million was easier because their books were already very clean and organized. See that, let’s make sure these things are covered because they can make a big difference!
Besides the pressure of being neatly organized, as a bootstrapping entrepreneur, you’re going to hustle a lot harder, working more hours along with managing more roles as a bootstrapped startup. Moreover, there remains a shoestring budget that you could have to work on recruiting the best talent and retention efforts. At that time, your stock options might not mean much.
When discussing this topic with some of the most successful entrepreneurs who have chosen to keep bootstrapping on the DealMakers Podcast, they genuinely shared that their hiring success is all about getting great people who are really passionate about the vision and mission, and who wish to work somewhere they can have a visible impact.
Outstanding Businesses That Bootstrapped Their Way to Success
Taking “the guerilla-style” bootstrapping path may sound a little bit scary, though several of today’s successful companies thrived using such techniques. Despite eschewing funding from outside investors, some savvy entrepreneurs have empowered their own startup to not only survive but also grow well-known within the business landscape.
Sara Blakely, the founder of Spanx – an American intimate apparel company with pants and leggings in 65 countries, first came up with her now-famous women’s undergarment when she was getting dressed for a party. Unable to find a form-fitting piece to wear under her white slacks, she decided to cut off the feet of her control top pantyhose.
Then, at the age of 27, Blakely decided to launch her Atlanta-based business using all $5,000 of her personal savings. She even wrote a patent application and filed it herself to save on legal fees. To this date, she still owns 100 percent of Spanx, which had an estimated $400 million in 2016 sales, and hasn’t taken a penny from outside investors.
Quite similar to Spanx, the founding of GoPro emerged from an interesting story of its founder. Initially, Nick Woodman started Funbug in 1999 as a gaming and marketing platform that gave users the chance to win cash prizes. When this entertainment and promotions website went bust in 2001, he decided to clear his head by with a surfing trip to Australia and Indonesia. Inspiration struck when he noticed the cameras surfers that were wrapping around their wrists to photograph their adventures kept breaking loose.
Then, in 2020, using his personal savings and a $35,000 loan from his mother, Woodman launched GoPro, which was originally known as Woodman Labs. He bootstrapped this San Mateo, California-based business until 2012 – when tech manufacturer Foxconn invested $200 million. Two years later, GoPro went public at a $2.96 billion valuation, according to Bloomberg.
When it comes to Craigslist, its founder Craig Newmark started the eponymous classified advertisements website in 1995 as an email newsletter to keep friends updated on interesting events around San Francisco. As word spread, people started asking him to post jobs and list items for sale. By 1997, Craigslist hit staggeringly a million page views per month. Yet, Craig Newmark kept it as a side project and didn’t incorporate until two years later. He didn’t take any outside money until 2004 when eBay paid $32 million for a 28 percent stake in the company. Nevertheless, after a lengthy lawsuit in which Craigslist was accused of diluting eBay’s financial stake, Newmark bought back the shares.
Up to now, Craigslist proves to be a howling success. The AIM group estimates Craigslist brought in $1.034 billion in 2018, an increase of nearly 50 percent from 2016 revenue ($toughly 694 million) — the most recent year for which AIM conducted its research. “Craigslist is the No. 1 classified advertising site in the world, both by revenue and by traffic,” stated the founding principal of AIM Media Peter Zollman. “It’s stunning that a single site can generate $1 billion in revenue, with more than 99 percent of that coming from the United States.”
Founded by Tom Preston-Werner, Chris Wanstrath, and PJ Hyett in 2008, GitHub is a software development platform and also the world’s largest community where developers can share their work on projects with others. According to Preston-Werner, the founders only spent a few thousand dollars to set it up and the company became profitable “the day we opened and started charging for subscriptions.”
Talking about the early days of this world-renowned platform, San Francisco-based Github didn’t have offices; instead, the four full-time team members worked remotely and used coffee shops to meet a couple of times a week. Then, around four years later, the company first sought funding, landing a $100 investment from Andreeseen Horowitz. Since then GitHub has raised more than $250 million from other investors; a 2015 funding round valued the company at $2 billion.
#5. Tough Mudder
For those who are not in the know, is an endurance event series in which participants attempt 10–12-mile-long obstacle courses, which often play on common human fears, such as fire, water, electricity, and heights.
In 2010, its co-founders Will Dean and Guy Livingstone tapped into a rich market with the series of edgy athletic competitions. The idea the pair devised is a boot-camp-style footrace that features obstacles like barbed wire and butter-greased monkey bars. They spent $300 on a website, and another $8,000 – all the money from Dean’s bank account -on Facebook ads to promote it.
And somehow, their strategy paid off: Over 5,000 people ran the first Tough Mudder, and since then, more than 3 million people worldwide have taken part in its world-class obstacle course challenges which range from fun 5Ks all the way to the pinnacle of the OCR industry, 24-hour World’s Toughest Mudder… The Brooklyn, New York-based company generated more than $100 million in revenue through registration fees and sponsorship deals in 2015. Then, on Dec 23, 2019, Tough Mudder was officially announced to be acquired by Spartan Race.
Proven Bootstrapping Tactics and Tips from The Insider
Making a killing with bootstrapping efforts is truly a rewarding accomplishment, yet, it is by no means a straightforward one, especially if you’re working on a shoestring budget.
In order to empower your startup to get off the ground and eventually make it a remarkable bootstrapped success, it’s a “must” that you get crystal-clear insights along with some winning practices from the successful bootstrapping entrepreneurs.
Jerry Jao, co-founder and CEO of Los Angeles-based Retention Science, is one amongst them. His current start-up, which leverages big data to support e-commerce retailers retain customers, raised roughly $1.3 million last year in a VC- and angel-backed seed round. Yet, his two former companies – one that flopped and another that was cash-flow positive before he morphed it into Retention Science – did exist solely on Jao’s and his co-founder’s own dimes. Actually, the duo did manage to avoid drawing a salary from Retention Science for more than two years. They consider themselves “extreme bootstrappers.”
Self-described as a “goofy Asian guy with glasses”, who is “not a natural salesperson”, Jao shares that he taught himself to negotiate deals by reading books and seeking advice from others. Besides incorporating Retention Science employing BizFilings and managing all the company’s books and tax filings on his own, he has driven a 1998 Toyota Corolla that has a door that does not work and sometimes won’t start. Even so, he doesn’t complain about his clunker – even previously he lived for two years with his co-founder’s parents in Los Angeles, and for a lengthy period of five months, he didn’t have a car at all.
When it comes to how to tackle with a tight budget and bootstrap his business to a flying start, Jerry Jao lists down 10 handy yet super-powerful tips that every single entrepreneur should keep an eye on.
Tip #1: Defer legal fees
It’s a prerequisite to tactfully negotiate with your lawyers so that you don’t have to pay them until you raise seed or Series A funding. Jao shared that the law firm that counsels Retention Science generously offered it with discounted advice so that the company didn’t have to pay for during the first two years of getting off the ground.
Tip #2: Consider Employing QuickBooks
Beyond any doubt, an entrepreneur is snowed under hundreds of things-to-do, especially in the early phase of their business, which includes doing the accounting and bookkeeping tasks. Nevertheless, managing your books isn’t terribly onerous once you get your accounts set up and data input. What’s more, Jao said that looking at your monthly burn lets you foster a cost-saving attitude since you can see how fast your money runs out.
“Do not use a bookkeeper or hire an accountant,” he told. “It is absolutely a waste of money.”
Tip #3: Ask for a Discount on the Server Costs
Based on Jao’s experience, most of the major server hosting providers, namely Microsoft, SoftLayer, Rackspace, and Amazon Web Services, offer start-up promotions. In fact, the latter offers more than 60 products that include a free tier. Three different types of free offers – Always Free, 12 Months Free, and Free Trial – are available depending on the product used.
Tip #4: Tap Your Social Network, Especially the Well-Connected Friends for Their Company Discounts or Hand-Me-Downs
Do you luckily know anybody who works for Apple? Jao told that Apple employees could get up to $500 off the sticker price of a MacBook and 20-30 percent off iPads. “Post a message on Facebook and you might be shocked at the responses you get. Or look on Craigslist and buy from other start-ups,” he gently shared. “You don’t need brand new machines. You just need something that works and when you have a real business later, you can upgrade.”
No matter how simple and a little bit funny it seems to be, this idea can definitely work and once it works, it does wonders for your startup – at least, in terms of your expense.
Tip #5: Look for Co-Working or Shared Office Space
While renting a whole office space is undeniably pricey, working at home may be isolating and if you camp out at a coffee shop, you can end up spending too much money on food and drinks. To put everything into perspective, the best alternative of all seems to either look for another start-up that has extra space and make a deal to use it, or rent a spot in a coworking space.
In addition to being considerably cheaper than paying for your own office, there present golden opportunities for you to meet other founders and creative types who can end up being new partners, allies, and even clients.
Tip #6: Drive Instead of Fly
Obviously, this tip is not going to work, should your meeting be across the country, but if you need to do an in-person and you can drive there and back in a long day, just go for it.
“To save money on plane tickets, if I have an investor meeting at 9 a.m. in Silicon Valley, I’d leave at 3 a.m. from Los Angeles, then drive to the Starbucks on Sand Hill Road, change into my business clothes, and go to the meeting,” Jao said.
Tip #7: Ask for Event Discounts
In practice, several event organizers do understand that a plethora of entrepreneurs do not have a pile of money to spend on networking events or conferences and will provide special discounts that are often not advertised publicly.
Several business owners turn out to be embarrassed but after all, “it never hurts to ask,” he said.
Tip #8: Don’t Use A PR Firm
Whereas publicity is undoubtedly of great importance, it incurs an incredibly huge amount of money if you’re paying someone else to drum it up. “Since the founding of Retention Science, we’ve spent zero dollars on PR and marketing to date,” Jao shared. “It doesn’t matter what they tell you, as an early-stage company, you cannot justify a retainer of $8,000 to $10,000. Do your homework and reach out to reporters yourself.”
Instead of paying top dollar for PR firm, you could try out some DIY publicity techniques, such as going mobile and biding for ads online, to promote your business and its unique offerings.
Tip #9: At First, Use WordPress for Your Website
Although a professional-looking website or digital storefront is a prerequisite for your business online presence, hiring an agency or design shop to build out one can cost you “an arm and leg”.
Jao stated that he and his co-founder created the websites for all three of their companies by themselves and proposes leveraging the inexpensive talent you can find on platforms such as Freelancer.com once you’re ready to scale. From the very first beginning, though, WordPress will suffice, offering you thousands of free themes and plugins.
Tip #10: Forget About Job Boards and Recruiters
Rather than turning to job board or recruiting agencies for help, what Jao did is to hang flyers at Universities and Colleges known for harboring bright minds. “We found our first hire out of Caltech this way,” he shared.
The Bottom Line
Establishing a business from the ground up is undoubtedly a tough challenge faced by every single budding entrepreneur – more so is the dilemma of choosing self-funding as an option or drumming up outside investments for your business. In fact, the majority of startups do not have the luxury of getting investors right off the bat, and sometimes you must take the obvious path of bootstrapping to get your business up and running. Given some hurdles presented in this funding approach, bootstrapping can be more of a blessing than a curse to empower you to tap your inner potential and resourcefulness which will ultimately help to ignite your business’s growth.