Building your own company has many benefits. You can pursue a passion, be your own boss, and maybe even grow your startup into a multi-billion-dollar success story. But when you're just getting things off the ground, money can be tight, and you may be looking for creative ways to cover your costs.
Many entrepreneurs have turned to bootstrapping as a way to establish and grow their business without running up large amounts of debt, giving up partial ownership, or compromising on their vision for the company.
Read on to learn all about what bootstrapping is, how it can help you, and some methods for making the most of your business funding.
Bootstrapping 101: What does it mean?
In the business world, bootstrapping refers to the process of starting and operating a company with limited funds. Usually, this comes from a personal investment, funds from friends and family, and the revenue made from the business itself.
There are both benefits and drawbacks to bootstrapping, in addition to challenges and opportunities. For some businesses, bootstrapping may mean operating on the smallest budget possible until the business becomes profitable.
A company that provides services and doesn't require a storefront or any special equipment may be able to get started with almost no investment at all. In that case, personal assets may easily cover the costs.
On the other hand, some startups may have unavoidable costs like warehouse space, insurance, or employee salaries. For these enterprises, a business owner may rely on friends, family, crowdfunding supporters, or sometimes even personal loans.
Whatever the specifics of your company, there are options for covering the necessary costs using bootstrapping.
Origin of the term
The word bootstrapping comes from the phrase “to pull oneself up by one’s own bootstraps.” When it was first introduced in the 1800s, it was used to mock the idea of achieving success only by one’s own efforts, without relying on outside help, since you can’t actually lift yourself up by pulling on your bootstraps! But by the 1950s, the meaning had changed and now the common use means to improve your situation by yourself, with little to no help from anyone else.
The term bootstrapping has also become a common way to talk about startup ventures like small businesses.
Bootstrapping as a small business owner
Bootstrapping is a particularly popular way for startups and small businesses to fund their establishment and growth. Many entrepreneurs are wary of taking on debt, so the idea of financing their company using personal funds or help from friends and family is particularly appealing.
While bootstrapping can involve taking on some financial risk, thinking carefully about costs and expenses while avoiding a large debt load is often better in the long term.
In addition, bootstrapping keeps your company's equity entirely in your hands, meaning you maintain control over all the decisions about strategy, marketing, and future investments in research and product development.
Bootstrapping vs. venture capital
There are many ways to fund the founding and growth of a business. Rather than bootstrapping, some entrepreneurs choose to borrow most or all of the necessary funds. Others seek out venture capital, which is money from investors in exchange for partial ownership of the company.
While starting and growing a business without external funding can be challenging, using either corporate loans or venture capital has drawbacks that many owners don't like. The amount of loans or venture capital investments tend to be larger than those available via bootstrapping. However, paying back large loans or giving up some control over the company are compromises many owners aren't willing to make.
Instead, entrepreneurs who choose bootstrap methods focus on raising capital in ways that let them keep control of their business and incur minimal expenses so their funding needs are lower.
Bootstrapping in computer technology and machine learning
You may also hear the term bootstrapping in the context of computer programming. It refers to a method in which a computer translates human-readable inputs into computer code. The program to do that translation is written in the same human-readable input. Once the basic program is written, improvements can be made gradually by the program itself, thus pulling the language up by its bootstraps.
In the statistics field, bootstrapping helps estimate the accuracy of sample data including bootstrap confidence intervals, bias, and prediction error. The computer creates sample statistics to make educated guesses about the overall data. This allows for hypothesis testing for sample data.
The technology has a number of applications, including estimating the median of a population using samples. A bootstrap sample median allows a program to estimate how much the middle value might vary in a group of numbers by taking many different samples from that group. Just like the business term, the bootstrapping computer program uses only the data points available to it.
The computer applications of bootstrapping can be somewhat technical, but they rely on the same basic idea of using limited resources in order to achieve an end goal.
The benefits of bootstrapping
There are many ways bootstrapping can pay off. When building a plan for a new enterprise or retooling one for a business that already exists, it's helpful to get familiar with the bootstrapping process and benefits. The more you know what bootstrapping can do for your business, the more creative you can be in finding the bootstrapping methods that work well for you.
Allows for flexibility
When your operating costs are low, you leave yourself more options for dealing with expenses or opportunities. In addition, since someone who has self-funded their company owns 100% of the equity in their business, they can change business operations and strategy as they see fit.
For example, bootstrapped companies that are being run out of the owner's home or from a small, inexpensive retail space will find it easier to transition to an online-only business model if circumstances require it.
Keeps your business all yours
If you decide to bootstrap your business, you'll retain full ownership. Trading your company's equity for venture capital may be the right choice for some owners, but it means being willing to accept input on business decisions from others who have an ownership stake. The more control you have over the direction of your company, the more it can reflect your vision and your goals.
In addition, if you retain sole ownership of your company, it's not necessary to check in with anyone else when you want to introduce a new product, change your pricing structure, or run a new ad campaign.
Encourages good business strategy
Funding a startup with your own savings and the business's profits can also be a great strategy. When the future of the company relies on being profitable, there's an incentive to focus on the things that lead to higher revenue and lower costs. In addition, bootstrapping encourages innovation. Tight budgets often lead to creative solutions that help you stand out in a crowded market.
In addition, operating on a tight marketing and advertising budget means that you'll have to rely more on word of mouth from customers. So, you'll want to create a great customer experience and encourage customer engagement with your business and your social media accounts.
Making it a priority to have happy customers who want to share the word is always a good strategy and multiplies the effects of your marketing campaigns without any additional cost.
Gives you a competitive advantage
When you build your business through bootstrapping, you'll have an edge against the competition. Companies that are over-leveraged (have taken on more debt than they can handle) can find themselves backed into a corner.
Even if there's a great opportunity to expand a product line or get into a new market, if debt payments take up too much of a company's budget, the company is left without the freedom to spend on things that will help them grow their business.
On the other hand, if you've taken on fewer loans or outside funding, you won't be so beholden to debt repayments when great opportunities come along.
Fosters a sense of accomplishment
Knowing that you built your company through your own investment and hard work is a great feeling. There will be times in any enterprise when the work will become difficult and challenging. At those times, you'll know that your success is all yours and you will have the confidence that you can continue to build your business through hard work and dedication.
How to bootstrap your business
If you think bootstrapping might be for you, the next step is to learn about how you can use bootstrapping in a way that builds revenue and growth while reducing your financial risk.
There isn't just one best way to approach bootstrapping and the bootstrap procedure will be different for every founder. You'll want to consider each option carefully. Some might be a good fit when you're first getting off the ground, while others are likely to be more useful once your operation is further down the road.
Read on to discover some bootstrapping methods that may be right for you.
Raising funds
No matter how dedicated you are to bootstrapping your company, it's a rare entrepreneur who can found a company with no money at all. You'll need to find some funding sources to cover your basic expenses. Read on for some methods that most startups use to raise money.
Personal funds and savings
One of the most common ways to bootstrap a startup is to make a private investment. Using your own personal savings or income from another job can be a good way of making sure that you retain total control of your business and full ownership.
In addition, this method allows you to fund the enterprise without taking on debt that will need to be repaid. Many entrepreneurs run their business while working a job that provides them with a regular salary and benefits like health insurance. This can be a good way to make sure you have enough income for living expenses while building your new company.
Friends and family
Depending on your friends' and family's financial situation, they may be another great source of funds to get your startup enterprise off the ground. Whether they can contribute money as a gift or make a small investment that you'll repay them for later, those close to you want to see you succeed.
If it's not possible for someone to help financially, friends and family can be valuable in other ways— spreading the word about the company to people they know, acting as customers to test out your booking system, or participating in a focus group to give you new data about potential products.
Loans
While many bootstrappers prefer not to take on any debt at all, some are willing to consider personal loans as a way to increase the capital available to them without bringing in outside, giving up any equity, or taking on larger business loans.
Using a business credit card is another way to fund business expenses when the money isn't immediately available. It can also be a good method of keeping your business costs separate from personal spending, which comes in handy for accounting and tax purposes. Don't forget, however, that credit cards can have high interest rates and balances can grow quickly if not paid off regularly.
Depending on your financial situation, you may consider taking a reverse mortgage on your home. However, if the business doesn't generate enough revenue to pay back the mortgage, you may be at risk of losing the property.
There are also microlending platforms that offer small loans (sometimes with zero interest rates) to small and startup businesses.
Crowdfunding
Another bootstrap method that's become more common in the last few years is crowdfunding. Crowdfunding is a method of raising money to fund your business through many small donations. Crowdfunding is usually done via an online platform.
You post your business idea on the platform and ask for small amounts of money from many people including friends, family, and your larger network as well as strangers.
People who choose to pledge money can be rewarded in various ways, including a small share of the potential future profits, recognition on your social media or marketing materials, discounts on purchases, and being among the first customers to receive the product or service when it's available.
In addition, a crowdfunding campaign can help your business attract attention. Even if not everyone who visits your crowdfunding page pledges money, they're now aware of your product or service. Some crowdfunding campaigns are also featured in business publications and shared on social media, giving you additional publicity.
Make sure to read all of the information about any platform you choose before launching your campaign. For example, some platforms require that you meet your funding goal in order to receive any money. This is known as fixed funding and it can be frustrating to feel like your hard work has gone to waste if you don't meet your goal.
On the other hand, flexible funding allows you to keep any money you receive even if the goal isn't reached. The downside to flexible funding is that many platforms charge additional fees. In addition, if you are trying to raise funds for something that has a fixed cost—like manufacturing your product—your project can only move forward if you raise the full amount of funding.
Read on to learn about some popular crowdfunding platforms.
- Kickstarter: Kickstarter has been around since 2009 and was originally focused on funding creative projects but is also useful for raising money for startups. It features a user-friendly interface and offers to personally review every campaign to give you the best chance of success. Kickstarter only allows fixed funding campaigns, so keep that in mind if you choose this option.
- Indiegogo: Indiegogo can also be used for creative pursuits but has more options that might be useful for small businesses, like partnerships with design, manufacturing, and fulfillment service companies. Unlike Kickstarter, Indiegogo offers the option of running either a fixed campaign or a flexible campaign but does charge fees for the latter.
- GoFundMe: GoFundMe is particularly popular for raising funds for charitable causes but can also be used for small businesses and other ventures. Unlike Kickstarter, it does not have a requirement that a project raise 100% of its funding goal in order to receive the money and does not screen projects posted on the site.
Sales
In your bootstrapping effort, don't forget to count on the income your business will make through sales of its products or services. Any profits can be used to fund the growth of the business, reducing the need to commit your own funds or take on outside.
Once your business is up and running, you can start reinvesting profits back into growing the company. Relying on sales revenue is a great way to avoid going into too much debt or giving up equity, but it can be difficult to budget since the amount you'll earn is hard to predict with confidence.
You may consider doing some research on similar businesses in your local market or waiting to use sales revenue until you can make a more precise estimate of what your regular profits will be.
Controlling costs
There are always two sides when it comes to balancing your business's books. Finding creative ways to fund your enterprise is great, but keeping an eye on where the money is going will make bootstrapping easier. After all, the less you spend on inventory, expenses, marketing, and salaries, the less you'll have to raise from other sources. Here are some ways to control expenses for small and startup businesses.
Choose your business wisely
Certain industries lend themselves more naturally to bootstrap methods. Any business that you can operate from home means that you don't have to find and pay for office or warehouse space. In addition, service-based businesses often work well on a tight starting budget. Consider things like web design or freelance writing, which can be done remotely and on your schedule. Tutoring or providing in-home assistant services are also options with low startup costs.
Just make sure to check your local and state regulations about business licensing, insurance, and taxes. Depending on the industry and your location, you may need to obtain certification, purchase insurance coverage, or even hire a lawyer to help you complete the paperwork properly.
Test the waters
It can be tempting to jump right into product development and sales. While you don't want to wait too long to get your product or service on the market, taking the time to figure out what works best before investing funds in manufacturing or marketing will save you money in the long run.
You may consider using a focus group—a small group of people as similar to your target customers as possible. With a focus group, you have the opportunity to talk about your product or service, ask questions, and understand what they think. This can help you refine your product or business plan and get insight into your potential customer base before you invest money in further product development, advertising, or other costs associated with getting your business started.
In addition, before you spend a lot of money on a product, service, or marketing campaign, you can test it on a small number of customers. Whether you decide to use a focus group to discuss what they like and don't like about a product or do a survey of past customers, every additional data point gives you information you can use to spend funding on the costs with the most impact.
When conducting research, you can make sure you get the most accurate results by using random sampling, which involves randomly selecting individual people or data points from a larger group. This subset will allow you to understand things about the whole group.
For example, you may use random sampling to survey potential customers about their wants and needs. In addition, you can use random sampling to test new products, marketing campaigns, or pricing structures. The more information you have the more confident you can be that you're spending your budget wisely.
Partner up
Just because a bootstrapped business owner doesn't want to give up equity to a venture capitalist doesn't mean that maintaining full control over the business is the only option. Starting a business with a partner (or two) means that you have access to additional funding from sources like personal assets.
You'll need to agree on the roles of each partner and how business decisions will be made, but working with a partner also means that you can share the responsibility, bootstrapping costs, and hard work of building a successful company.
Refine your business plan
Once you have a preliminary business plan in place, go over it again and look for opportunities to cut costs or perhaps delay some expenses until the company hits some revenue benchmarks. It can be tempting to make your business plan as ambitious as possible, but getting creative with how you're going to fund your expenses and which costs are really necessary is a good bootstrapping method.
Consider the medium- and long-term strategy as well. Consequently, when you start to bring in a profit, you'll have a solid plan in place to grow in a smart way without incurring excessive costs. You'll also want to avoid extracting value from your company too soon, especially if you're relying primarily on your current business revenue to fund future growth.
Start small
Most startup and small business owners have big dreams of growing their company, quitting their day jobs, and becoming a billion-dollar industry leader. But even some of the biggest corporations started small on a shoestring budget.
At the beginning, focus on doing what you do really well and building a satisfied and loyal customer base. Once you've made your business profitable on a small scale, you can reinvest in the company and grow with confidence.
Make sure you keep an eye on your business operations. It's easy to let costs get out of hand, especially once your sales start to grow and you look for ways to expand your customer base. Keep in mind your company's core values and the reasons that bootstrapping is right for you in order to resist the urge to expand your expenses faster than your revenues.
Ship fast
This doesn't mean delivering your products using overnight delivery although it can! Rather, to ship in this case means to get your product or service in the hands of your customers. It can be tempting to delay your launch until everything is perfect. But it's too easy to spend a lot of time making small tweaks.
Your customers probably won't notice that your logo isn't the exact shade of blue you had imagined or that you're using plain packaging rather than the custom-designed boxes you ordered.
The sooner you start shipping your product (or delivering your service) the sooner the income from those sales will hit your accounts, and the sooner your satisfied customers will spread the word.
Don't let your expenses grow
Once your business starts making a profit, it can be tempting to let your expenses expand along with it. Some additional expenses may be necessary. If your sales volume grows past the point where you can handle fulfillment yourself, you may need to contract with a fulfillment company.
But business operations can often continue to be run on a shoestring budget so that revenues and profits can be reinvested in the business rather than spent in a way that will be difficult to rein in if necessary.
Just because you're using the same logo that you designed yourself when you first started the company doesn't mean that it needs an upgrade. And it's a great idea to treat your employees well and reward them for hard work, but before spending a lot of money on a fancy party or in-office perks, have a conversation about what would mean the most to them. Maybe time off to spend with family or extra schedule flexibility to avoid peak rush hours would make a bigger difference in employee satisfaction without compromising your budget.
Examples of successful bootstrapped companies
The idea of self-funding your business or operating on a tight budget may sound difficult. And you may worry that it means your business will remain small. However, many successful large companies started using the bootstrapping method and have since grown into well-known, profitable brands.
Read on for examples of how a bootstrapped startup can grow from a small single-person company to a multi-billion-dollar enterprise.
Mailchimp
Mailchimp is one company that has gone from startup to success through the use of bootstrapping. The company was founded in 2001 by Ben Chestnut and Dan Kurzius using no outside funding and was acquired by Intuit in 2021 for $12 billion in cash and stock, one of the largest ever acquisition amounts for a bootstrapped company.
GoPro
GoPro is known for its line of cameras that capture people in action—skiing, skateboarding, and skydiving, for example. It was valued at up to $3 billion when it went public in 2014, but GoPro was started as a small, bootstrapped company by founder Nick Woodman in 2002. He used and a family loan to build his business.
Spanx
The apparel brand Spanx was founded by Sara Blakely in 1998 with just $5,000 in personal savings. She ran the company from her apartment and focused on boosting sales quickly, reinvesting the profits back into the business. In 2021 the company was valued at $1.2 billion when private equity firm Blackstone acquired a majority share of the brand.
Starbucks
Before Starbucks became a brand known worldwide, it was a single coffee shop in Seattle's Pike Place Market started by 3 friends who loved coffee and tea. They each invested $1,350 and collectively took out a small bank loan, to open the first shop. The company now has more than 35,000 stores worldwide in 84 countries.
SparkFun
Founded in 2003, SparkFun sells electronic components, tools, and educational resources. Nathan Seidle started the company in his college apartment, including creating the website himself, and it has since grown into a large, successful company with hundreds of employees.
Advanced bootstrapping tips for the small business owner
Now that you've got the basics down, it's time to move on to some more advanced bootstrapping techniques. Creativity and flexibility are some of the key components of bootstrapping. In order to be successful, it's important to keep looking for new ways to raise and save money and make sure that as much of your funding as possible is being reinvested into your company.
Taking the time to brainstorm new ideas about how to raise funds and keep costs low is a great investment in your business. We can get you started with some here.
Build your network
Successful entrepreneurs know that it's nearly impossible to achieve business growth on your own. Building a network of vendors, clients, and even other entrepreneurs is a great way to boost your progress.
Consider joining an organization like your local chamber of commerce, which may offer networking events, business seminars, and sometimes even legal or financial advice for small businesses. Many communities also have business advisory councils and opportunities to interact with local government.
Consider bartering
Bartering is the process of exchanging goods or services without the use of money. Before the widespread use of standardized currency, it was the way all business was done. It's still a great bootstrap method for keeping your costs down today.
For example, if your business offers graphic design services, you may barter with a local electrician to design their advertising materials in exchange for their services. If you own a bakery, consider offering to make the cake for your landlord's wedding in exchange for a free month of rent for your business.
Get creative with your marketing strategy
Getting the word out about your business doesn't require a huge advertising budget. Placing ads in traditional print and electronic media can be expensive.
Instead, take advantage of free social media to create engaging and informative content. Interacting with other local businesses or encouraging satisfied customers to spread the word online is also a great way to build a customer base.
Does a lot of your business come from your local area? Sponsoring a Little League team or putting up a booth at a community festival builds name recognition and goodwill without breaking the bank.
Embrace remote work
Since the coronavirus pandemic, working from home or a remote location has become more common and feasible. If your company doesn't need employees on-site or has some flexibility in their work location, having employees work from home can save you a lot of money.
In 2022, UK-based consulting firm Abintra estimated that a single unused workstation can cost around £15,000 (US$18,500) annually. So having employees work remotely can be a huge money saver. You may consider covering the cost of their home office expenses, including equipment and services like internet access.
Know your organization's core values
As your business starts to grow, it can be tempting to expand your product line, add new services, and upgrade to a nicer office space. Sometimes those changes make sense. But before you make any big changes, make sure you think about your business's core values and ensure that any major decisions are in line with them.
If your company offers in-home care services, your core values are probably focused on providing high-quality care with a human touch. Having sleek, modern office space in a trendy business development may not serve those values. However, offering your employees top-tier health insurance and access to counseling services and gym memberships keeps them in the best shape mentally and physically to serve your clients.
On the other hand, if you run a business focused on cutting-edge marketing campaigns, you may want office space that reflects your company's core values of creativity, innovation, and leading-edge design.
As a bootstrapped company, choosing what to spend money on and making sure those expenses align with your values is just as important as knowing how to earn it.
Outsource
Not every business function needs to be done in-house. If you only need certain services occasionally, it may save you money to outsource those contracts. In-house employees who aren't needed full-time are a wasted resource, and the additional costs for insurance and other benefits can be expensive.
If you only occasionally need legal services to review a contract, using outside counsel may be a better option than having an attorney on staff. Similarly, if your graphic design needs are minimal, consider contracting with an outside agency or a freelancer (or barter for their service to apply two bootstrapping methods at once)!
In Conclusion
Starting and building a successful startup or growing a small business into a larger enterprise is a lot of work. You want to be able to focus your time and energy on your company's customers, products or services, and core values.
Taking on too much debt or giving up some equity takes away some of your control. With bootstrapping, however, you can rein in costs and keep your business in your hands for long-term success.l