A prospective small business owner may get lost in the array of possible funding options: grants, bank loans, microloans, angel investors, venture capital, and crowdfunding.
And then there’s bootstrapping, in which entrepreneurs use their own funds to start a business. Whether it starts as a small side project or as a full-on endeavor, bootstrapping is the ultimate do-it-yourself approach. The entrepreneur takes on the full financial burden, and often puts early profits right back into the business.
That can translate to a heavy dose of pressure and stress in a startup’s early days. Yet there are plenty of positives in this form of self-reliance — both in how a business develops and in the skills gained by the owner. As Ryan Smith writes for Harvard Business Review, “When you bootstrap, you are forced to get good fast.”
“As humans, we prefer to put in only as much effort as we need to, but whether we recognize it or not, we all have extra gears,” Smith says. “Sometimes it’s not until things get really tough that we find the gears that allow us to shift into overdrive — that is what bootstrapping does for you. Admittedly, it is hard, but it forces you to get creative with your strategy and come up with solutions you would never have thought of.”
Here’s a look at some of the benefits of bootstrapping.
This is one of the biggest draws to starting a small business. Being your own boss is a dream for many professionals, and the freedom that comes with it can create enormous personal satisfaction. Yet that appeal can be somewhat reduced when there are obligations owed to funding sources. Andrew Gazdecki explores this in a story for Small Business Trends.
“One of the negatives of choosing to use venture capital funding is that you give away a small amount of control,” he explains. “This can cause your business problems because investors make demands that perhaps cannot be met. Bootstrapping removes issues surrounding control and answering to investors and this means you can make decisions on your terms. If you want to take a risk then go ahead and take a risk, or if you want to create a certain product then feel free to take the reins and run with it. After all, bootstrapping allows you to be your own person.”
Being resourceful is an important attribute for a small business owner. With bootstrapping and having limited funding on hand, it’s essential. Pinching pennies will help to ensure that the startup stays on track, and that it’s a lean, efficient track. Zach Cutler writes about this for Entrepreneur.
“When you don’t have loans or [venture capital] money to lean on, you build a strong sense of scrappiness, which can benefit you greatly in the long run,” he says. “After surviving the early years on super-tight budgets, after barely scraping by, you develop a street-smart mindset about business that will prevent you from becoming reckless with spending. That’s important once the business is bigger and the stakes are higher.”
A bootstrapped business likely won’t have the luxury of dabbling in a great variety of products or services in its early stages. That may seem restricting, but it can also allow the owner to fully concentrate on what the business’ main offerings should be, and not be distracted by other ideas. Jay Wu calls this “another advantage of a limited budget” in a Young Entrepreneur Council piece for Forbes.
“The pressure of a shorter runway will force you to get your products right,” he explains. “When every last dollar matters, you need to pay attention to your customers and their needs by building a superior offering. That insight and dedication will increase the likelihood of generating revenue and building a brand more quickly.”
Problems will arise for any startup, in a variety of areas of the business. With bootstrapping, owners may be more limited in how they can handle these issues. Spending can’t always be the solution. As Cutler writes, “Not having funds to throw at problems forces you to come up with cost-effective, creative ways to solve them.”
“It makes you a better problem-solver,” he says. “It makes you look for less conventional answers to conventional problems. There have likely been months when you could barely make payroll and were worried about closing the doors. This kind of pressure forces you to think creatively, to come up with solutions that are out-of-the-box; these are also problems that the luxury of VC money would potentially save you from grappling with — to your detriment. I personally find that some of the greatest ideas and light-bulb moments are born during these times.”
Prioritize cash flow
This is a key part of bootstrapping, and understanding the importance of it is a valuable lesson for small business owners. In a story for the Small Business Administration, Caron Beesley calls cash flow “the lifeblood of a business and critical in its growth.”
With bootstrapping, there’s no safety net. The money used to get started comes straight from the owner. So creating a positive cash flow is vital to give the business a chance to succeed long-term. As Kelly Hoey writes for Inc.com, “When bootstrapped entrepreneurs don’t have a false security cushion of investors’ money to fall back on, they need to prioritize making money themselves.”
“Bootstrapping pressures entrepreneurs to perform; if they don’t reach their sales targets, the company will not grow,” she explains. “… Bootstrapped businesses are forced to count each dollar they bring in and put out, staying in complete control of their money and keeping their companies financially healthy.”
Strength and wisdom
The challenges involved in starting a business without outside financial backing are significant. For those owners that can endure the rough early days, the wisdom gained from being smart with money and building a client base can help to make the business sustainable. As Anita Campbell writes for Small Business Trends, bootstrappers “learn lessons the hard way.”
“As a result they often become better business people,” she notes. “Many bootstrappers become walking examples of the old adage, ‘That which does not kill me makes me stronger.’ Bootstrapping brings out the best in entrepreneurs and the best in those they work with, too. They are enthusiastic, passionate and relentless. They don’t give up on their dreams and they never stop learning. They also end up learning a lot more about themselves along the way and end up accomplishing a lot more than they might have originally thought possible.”