In developing startups, funding from investors or various funding series is the common way to earn the capital needed to kickstart the business. However, there is an alternative called bootstrapping. In contrast to investor funding, bootstrapping relies on a startup’s internal resources. It may seem challenging to develop a startup by relying solely on the founder’s capital plus startup income, but there are several advantages to the bootstrapping method.
What is bootstrapping in a startup?
First of all, we need to understand the definition of bootstrapping. The term bootstrapping is used in two fields: startup and website development. Bootstrapping in the startup development context, which is discussed in this article, refers to a method that relies solely on the startup’s available strengths or resources. In essence, bootstrapping is the process of building a business without seeking capital from investors or external parties. This method is usually chosen by startup owners who do not wish to share equity or borrow large amounts of money from banks.
Where do the fund for bootstrapping comes from? Businesses with bootstrapping method depend on internal sources of financing such as personal income, savings, credit cards, mortgages, and loans. The amount of money came from bootstrapping is certainly much more limited compared to the amount received from investor’s funding.
Also read: Early Startup Funding Stages: Explained From Seed to IPO
The Purpose and Function of Bootstrapping
Startup’s bootstrapping illustration (source: Freepik).
After knowing what bootstrapping is, founders need to know what are the purpose. Here are some of the purposes and functions of bootstrapping:
1. Maintaining the ideals of startup founders
With capital that comes from their own pockets, startup founders won’t have to sacrifice their ideals for any other parties (such as investors).
2. Keeping a more flexible arrangement
Flexibility, in this case, means that startup founders have more liberty to change the direction of the business, which would be a lot more complicated to do if the startup is funded by investors. This flexibility is a great benefit for startups with a bootstrapping method.
3. Focusing on the product
Competition between bootstrapped startups with bigger, investor-funded startups is bound to happen. Bootstrapped startups tend to focus more on developing products to outperform competitors, while larger startups may no longer focus on product development but expand to a wider market.
Also read: Best Venture Capital in Southeast Asia
Bootstrapping Stages
For startup founders who want to rely on bootstrapping as a business development method, it is important to understand the following bootstrapping stages:
1. Beginner stage
In early stages, bootstrapping usually starts by using a certain amount of money from savings, loans, or investments from close friends/ relatives/ co-workers. In this stage, the startup founder can still carry out work as usual while starting a business.
2. Customer-funded stage
When the business is maturing, customers or clients begin to grow and stay. Funds from customers or clients can also be used to maintain business sustainability to continue operating and growing.
3. Credit stage
Finally, the credit stage is when business owners start taking loans for additional business capital. This usually happens when the startups begin to shift focus to business expansion. Business capital obtained from credit is also used for various purposes, from hiring more staff to improving the quality of production equipment and many more.
Also read: Seed Funding and Ways to Get Investors for Startups
Bootstrapping Advantages and Disadvantages
Startup’s bootstrapping illustration (source: Freepik).
Each funding method, including bootstrapping, certainly has its own advantages and disadvantages. Before deciding to bootstrap, founders need to know the following advantages and disadvantages.
Advantages of bootstrapping
1. Only your own money is at stake
While running their business, entrepreneurs can gain a lot of experience. Most of the money at stake would be their own, with exceptions to some additional loans. On the other hand, if successful, business owners can save capital and attract investors to level up their business.
2. More creativity
Business owners who lack initial funding are forced to think outside the box to find solutions, offer their products to the market, and keep their businesses afloat. The bootstrapping method teaches founders to be more creative since they’re not getting hefty funds.
3. Independence from investor’s interests
In startups developed with bootstrapping method, all decisions can be made independently by the business owners without much interference so that they can create something unique, test their strengths, and make their dreams come true instead of relying on investors’ instructions.
This is not the case for investor-funded startups. In this type of startup, business owners are unable to make decisions independently without considering their investors’ opinions.
Disadvantages of bootstrapping
1. Growth limitation
Business growth can be hampered when, for example, product demand exceeds the company’s production capacity while there are no sufficient funds to increase production capacity.
2. Personal risks
If you experience a loss in a bootstrapped startup, as the business owner, you will inevitably bear all the risks by yourselves. On the contrary, if supported by investors, losses are shared.
3. Capital limitation
As explained earlier, bootstrapping is a method of business development without involving investors. Automatically, the capital used is much more limited when compared to other businesses that rely on capital from startup investors.
Also read: Lean Startup Method: Purpose, and The Basic Principles
How to Begin Bootstrapping for a Startup
Finally, prospective startup founders who choose to bootstrap their startup would want to pay attention to the following steps.
1. Find a mentor
To do bootstrapping successfully, startup founders must be willing to learn from mentors who are dedicated and experienced in their field. Mentors will help broaden your perspective and way of thinking and even provide tips and tricks to be applied along the process.
2. Prepare a business plan
Don’t just make a plan in your mind! Write it down in the form of a business proposal. That way, you will get a clear picture of the business potential. Don’t forget to provide a backup plan in case your business doesn’t go as expected.
3. Focus on company operations
When still bootstrapping, startup founders need to limit their focus to important things, such as products, marketing, human resources, and accounting. Founders can get to other business development and expansion plan when additional funds start to come in.
Also read: Best Venture Capital Firms in the World
4. Look for alternative funding
New businesses are at risk of experiencing losses at the beginning of their establishment. Therefore, alternative funding, for instance from small business loans, must be prepared.
Do not let the business’ progress be held back in the middle of the process because of a lack of preparation.
5. Form a solid team
The team’s shared vision and mission have a huge influence on business sustainability. For that reason, always recruit people whose vision and mission align with the company. Do not hesitate to recruit quality talent so that the results obtained will not disappoint.
That’s a little bit about bootstrapping from the definition to the execution. Remember, before deciding to bootstrap, make sure that the funds, including reserve funds, are secured so the business can continuously operate and grow.
