Is Bootstrapping the Best Way to Fund Your Startup?

When an entrepreneur starts a new business without outside investment, experts call it bootstrapping. Bootstrapping is building a company from personal finances or from the operating revenues of the new company. The term bootstrapping is also used when someone uses borrowed money backed by their own personal assets, so they keep the entire risk and the entire ownership.

The Bootstrapper Takes the Risk

If you are self-funding your business, you will take all the risk. You lose your personal investments in the business if your business goes under but if you are successful then you take all of the reward.

When you take investment from angel investors or venture capitalists, you are reducing some of your personal risk because you are financing your business growth with someone else’s money. You also will be giving up some of your equity in your company too.

Giving up equity or some ownership of your company means that someone else shares the payout if your business scales successfully and is then acquired. Remember that angel investors and venture capitalists only look to invest in businesses that have built an exit strategy and get paid when you sell your high-valuation business.

This is why bootstrapping is so appealing because you retain the complete ownership and decision-making power within your business.

Most Startups Do Not Actually Receive Outside Funding

The vast majority of the businesses in the United States are bootstrapped. Experts agree that about 6 million new business start up in the United States in a year. About 70,000 of those get angel investment and less than 5,000 get venture capital. Banks lend SBA guaranteed loans to less than 100,000 startups a year and often require you to provide some form of collateral.

These low numbers support the idea that in reality most startups and small businesses do not get outside funding – the vast majority are bootstrapped.

Where Does the Money Come From?

There are various definitions of bootstrapping, but it does not always mean that you start your business with no money. The founder can use credit cards, or mortgages a home, or pledges some other assets as collateral to borrow the money.

How to Make Bootstrapping Work

The best way to make bootstrapping work is to lever up from early sales or even promises of early sales. Many consulting businesses start with a big engagement from a first client, which is essentially a promise to pay. The bootstrapper spends her or his own money. They spend less than when they are funded by investors.

The bootstrapper does take all the risk but he or she gets all the reward too. If you manage to build a company without outside investors, you may end up owning it all yourself. You do not have any investors to listen to and you can make your own decisions. You may or may not have a board of directors but if you do, it is not a threat to your employment. You are in control of your destiny.

Advantages and Disadvantages of Bootstrapping

Pros of bootstrapping include:

  • Ownership: you get to keep 100% of the equity of ownership in your business and do not take on any debt. It allows you to discover what you are truly capable of.
  • Good spending habits: your business will form better spending habits in the long run if you rely on the business’s own minimal resources.

Cons of bootstrapping include:

  • Requires budgeting and discipline: there is no guarantee that your hard work will pay off. There is a lot of risk involved when you start a new business.
  • Limited resources hamper growth: when demand exceeds your production capacity, your customers might seek other companies that can meet the demand.
  • You are liable if the business does not succeed or faces economic challenges: natural disasters can cause in a huge loss which will be your obligation.

The Bottom Line

Every business is unique and follows a different path. Bootstrapping might work for one company but not so well for another. Before you take on the task of funding your own business, you should discuss it with an expert. Bootstrapping a business is difficult but it is not impossible. It takes a lot of hard work and passion to make it work. If you decide to go with another funding route, then you should consider picking your investor wisely. An investor is with you for a long time and you need to make sure there is a good fit.