The pros and cons of bootstrapping

Posted by Tasnim Ahmed

When you have a business idea, you need funding. But from whom? Finding the right funding model is essential. Your ability to continually make profits will depend on the source and cost of capital, and on capital formation. 

The bootstrapping finance method uses the little that you do have as startup capital to avoid debt and maintain control. The money you earn is put right back into the business. Note that in the business world in particular, the term bootstrapping implies getting your startup going without the help of venture capital or an angel investment.

Bootstrapping the upfront costs of building a startup allows entrepreneurs to learn and grow before tapping into the capital market. But in using their own money or assets to kick off the business, entrepreneurs incur a huge financial risk, especially if the business fails. In other words, the success of the bootstrapped startup rests almost entirely on the founder.

But raising private capital can impair innovation. Venture capitalists and investors can have different goals and interests than the founder in how the business is run. Bootstrapping lets entrepreneurs be their own boss and determine their own direction for the business.

What is bootstrapping?

In business terms, bootstrapping is the process of launching a business venture without external funding. Sometimes also referred to as self-financing, it is one of the oldest forms of funding for entrepreneurs and requires stretching available resources to their full potential, thus reducing costs. When done right, bootstrapping can open bigger opportunities and offer rich personal and financial rewards. But how do you know if bootstrapping is the right call for your business? 

Pros:

  1. Ownership: Ownership is the biggest advantage of bootstrapping. You are the boss, and for most entrepreneurs, this is the first time they get to fully own a business. Self-financing gives you an edge on innovation and taking risks as you see fit. But if your startup is funded through angel investors or venture capitalists, they have the power to control the way you conduct business—and conflicting interests can create problems. 

  2. Focus: One of the greatest advantages of bootstrapping is that you don’t have to worry about pleasing investors or lenders during the process. Meanwhile, you are freed up to take more risks, find better ways to spend your money and experiment with different product ideas, and to bolster the core competencies of your business.

  3. Responsibility: You can take on more risk and put yourself on the line when you are the sole investor in your startup. That means no distractions, no excuses and greater accountability so long as you are working on your idea full time. You’re free to coordinate the work of the entire company with little to no outside help or supervision.

Challenges: 

  1. Financial risk: As an entrepreneur, you are putting your money at risk by starting a company from scratch, and you may lose money. The risk is not worth taking unless there are substantial potential rewards for putting in your time and effort.

  2. Lack of networking opportunities:

    Long-term viability requires that you find a way to grow your business, or at least get closer to it. Businesses that lack a strong network can easily slip into extinction. Network effects are supercharged when you're building a startup and garner direct benefits from investors and other stakeholders who promise to accelerate business growth. Bootstrapping could cause you to miss out on potential connections with industry experts, investors and partnership opportunities that could have opened new markets for your business.

  3. Slow Growth: When the costs associated with building and managing the company grow faster than revenue, the result is slow growth. When bootstrapping, the company might not be able to produce goods due to insufficient capital. You will need a certain amount of revenue set aside to expand R&D along with hiring and marketing. Achieving your business goals requires more time and planning. You can only invest in more resources when cash flow is sufficient.

8 best bootstrapping tips for startup founders:

  • Don’t rack up credit card debt 
  • Use your network to test the market
  • Watch your burn rate
  • Hire smart
  • Outsource tasks that you can
  • Analyze performance
  • Focus on your mission
  • Spend on ROI-producing efforts

 

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