Bootstrapping is a term we often hear in reference to creating a business, but it can also have more specific applications. For example, bootstrapping can allow existing small businesses to improve their innovation and technology.
Only around 3-6% of startups receive external investor funding. Most new businesses in tech and other sectors and industries are bootstrapping.
One example that’s relevant right now, in particular, is cybersecurity in the pandemic and remote work age that we’re currently still finding ourselves in.
Small and medium-sized businesses have to remain competitive in terms of their cybersecurity tools and protections. That may mean they’re bootstrapping this part of their business. In general, the following are some things to know about what bootstrapping is and its implications in tech and the broader business world.
Bootstrapping means that you’re using your own resources to get into a situation, or perhaps out of one. It’s not specific to founding a business, although this is what we often associate with the terminology. You’re a company without outside investment funding, or maybe you have a specific initiative or project that you’re bootstrapping.
If you’re a founding entrepreneur and you’re creating your business through bootstrapping, you might use your personal savings, for example. Then, you take the money you earn and put it back into the business. You’re relying on cash flow to grow your business, as opposed to outside capital.
The Pros and Cons
The significant upside of bootstrapping compared to using venture capital is that if you’re the entrepreneur, you can keep control of your entire business and all decision-making. The downside is the significant financial risk you take on. You may not have enough investment to grow the way you need to, either.
When you bootstrap, if you operate without liabilities, you don’t have to worry about paying off debt. You have a sense of freedom and the ability to work how you want. You can also take the long view of what your company could become without dealing with investors or a board of directors.
If you do bootstrap all or parts of your business, you’ll need new sales constantly, and you’re probably going to be short on cash a fair amount of the time. It’ll also take more time to scale, and you could miss opportunities for growth if you’re a founder because you’re going to be inherently more risk-averse.
If you’re aware of these challenges ahead of time, you do have opportunities to avoid or overcome them.
Focus on Profits
If you are bootstrapping, you have to adjust your mindset accordingly. You’re going to approach everything differently than if you were angel or venture-funded. You’re going to have to put an enormous amount of focus on profits. Otherwise, you won’t be able to keep going.
You can’t just buy whatever you want and spend freely. Profits are the only way to keep your business going.
When you have outside investments, on the other hand, you’re going to approach things much differently. Your investors will want high growth and a way to exit. They want returns as fast as they can get them, so you may move toward growth even at a loss in those first years.
When you’re a bootstrapping entrepreneur, by contrast, you’re going to be looking at the long-haul picture.
You plan to stick around for a long time, growing quietly and sustainably.
Stages of Bootstrapping
You may not realize there are distinct stages of the bootstrap approach.
First is the beginning stage. You may have no revenue or unsustainably low revenue. At this point, you could be working full-time with your project as a side job. You’re entirely relying on your personal savings and your own funding at this time in your project.
The next phase is customer-funded. Your revenue stream is coming to a point where your profits from customers can fund your operations. Your revenue may begin to exceed operational expenses. You can then invest in your growth at this phase of the project.
The credit stage is when you realize you can’t do it alone anymore, at least not if you want substantial growth. You may, at this phase, turn to loans or other forms of raising capital.
If you are a bootstrapper, you can become a stronger entrepreneur overall. You’ll become a problem-solver and hone your creative thinking skills. You’ll learn to be someone who is always thinking about advancing your competitive edge, and these are things that will benefit you over the long term.