Bootstrapping is likely to be part of the history of nearly every successful company, where, in many cases, it was entirely bootstrapped before accepting venture capital or other means of outside funding.
Entrepreneurs who are self-made -- bootstrapped their way to success -- are a rare breed. To start a business and bring it to a successful fruition takes a sound mix of confidence, risk tolerance, self-discipline, determination and competitiveness. By taking an idea – and using talent and professionalism – to build a worthwhile business, without backing from investors or having little or no starting capital, takes great dedication, sound work ethics and pure single-mindedness to achieve this. (See Investopedia's fun slide show, "The 10 Greatest Entrepreneurs.")
The origin of bootstrapping is unclear, but a couple of sayings that apply are:
1."Pull oneself over a fence by one's bootstraps" – originated in early 19th century United States – insinuates that it is an impossible action,
2.“Pulling oneself up by one’s bootstraps” – which refers to 19th century high-top boots that were pulled on by tugging at ankle straps—generally means doing something on your own, without outside help, and in many cases, the hard way.
To gain an insight into the meaning of bootstrapping this definition provides some concept:
Bootstrapping is the minimalistic business culture approach to starting a company – which is characterized by extreme sparseness and simplicity. It usually refers to the starting of a self-sustaining process that is supposed to proceed without external input.
In other words, bootstrapping is a process whereby an entrepreneur starts a self-sustaining business, markets it, and grows the business by using limited resources or money – this is accomplished without the use of venture capital firms or even significant angel investment.
By using a collection of methods to minimize the amount of outside debt and equity financing needed from banks and investors, companies that are bootstrapping will look at:
- Owner Financing: personal income, savings
- Personal Debt: usually incurring personal credit card debt
- Sweat Equity: a party's contribution to the company in the form of effort
- Joint Utilization
- Operating Costs as low as possible
- Inventory Minimization: fast turnaround
- Subsidy Finance
- Selling: cash-only approach
Bootstrapping a Business/Company
A bootstrapped company usually grows through various stages:
1. Beginning Stage: Normally starts with some personal savings, or borrowed or investment money from friends and family, or as a side business – the founder continues to work a day job as well as start the business on the side.
2. Customer-funded Stage: Where money from customers is used to keep the business operating and, eventually, funds growth. Once operating expenses are met, growth will speed up.
3. Credit Stage: Wherein the entrepreneur must focus on the funding of specific activities, such as improving equipment, hiring staff, etc. At this stage, the company takes out loans or may be even find venture capital, for expansion.
To be a successful bootstrapped company, the following is necessary:
- Lowering Expectations – With a big idea, it is best to break it into a series of ideas, and then execute the startup on the best portion. Then you follow up on other sections later. In most instances, a company can be determined successful on its execution of a business idea, rather than the idea itself.
- Focus on Profits – This is what funds the business. A very different mindset must be employed for bootstrapped startups compared to the management mindset in a venture-funded or angel-funded company. Usually bootstrapped businesses expect to be around for a long time, slowly and quietly growing, developing paying customers to meet the business costs; whereas, companies involved with outside funding will be expected to have high growth so that the investor can have a profitable exit strategy.
- Development of Skills – People starting a business must develop a wide variety of skills, as well as passion, resilience, perseverance and courage, are usually required to make a bootstrapped company workable.
- Becoming a Better Business Person – Improving one's core values matters too, including being resourceful, accountable and careful, as well as enthusiastic, passionate and relentless in the advancement of the company.
Companies Suitable for Bootstrapping
There are generally two types of companies that can bootstrap:
- Early stage companies, which do not require large influxes of capital, particularly from outside sources, which therefore allows for flexibility and time to grow.
- Serial entrepreneur companies, where the founder has money from the sale of a previous company to invest.
Advantages of Bootstrapping
- Bootstrapping is cheap – working with your own money means that super-efficiency is necessary. You are more aware of the costs involved in the day-to-day running of the business and start operating your company on a ‘lean’ business model.
- Having to solve problems without external funding means that bootstrappers have to become resourceful and develop a versatile skill set.
- Without any external investors (as only founders are investing in the business), the founders’ equity and control over the company is not diluted. The founders are their own bosses and are responsible for all crucial decisions in operating and growing the company. This can ensure that the business is moving in the direction desired, according to the founders’ vision and cultural values, without any investor influence, and when successful, ultimately means keeping the profits for themselves.
- The fact that raising external finance is not an issue, which can be a very stressful and time-consuming task, allows for full concentration on the core aspects of the business such as sales, product development, etc.
- Building the financial foundations of a business, on your own, is a huge attraction to future investors. Investors, such as banks and ventures companies are much more confident funding businesses that are already backed and have shown promise and commitment by their owners.
- Business glitches can be rectified with growth, such as product and service – therefore, perfection at the launch of the business is not a necessity.
- Alternative options, such as factoring, asset re-financing, and trade finance, become part of the norm when bootstrapping, due to the limited cash supply.
Disadvantages of Bootstrapping
- Lack of capital and cash flow – Problems can arise if a company doesn’t generate the capital it needs to develop products and grow.
- Lack of experience and know-how – Particularly in the fields of business acumen and leads – can lead to stagnation and disaster.
- An equity issue when there is more than one founder – the amount of capital invested, experience, time, etc. – could cause disharmony as well as adverse tax consequences.
- Commingling company funds and personal funds defeats one of the major reasons to incorporate, or setup an LLC. A record of founders’ capital provided to the business will help alleviate this problem. Also, consulting an attorney is beneficial for company startups.
- Although bootstrapping allows for greater control and the profits are yours, it also involves much more risk where losses and failures may be experienced.
- One reason some bootstrapped companies are unsuccessful is due to the lack of revenue: Profit is not sufficient to meet all costs.
- Starting a business most often requires very long hours of work just to keep your business going, let alone the fact that in many cases, there is no paycheck to go with this effort.
- All problems are yours, as hiring staff is not usually applicable; therefore solutions are limited to your ability, or friends and relatives.
- Stress issues: The ability to deal with stressful situations being tested regularly as unexpected issues arise.
- Financial debt to another person: This might be to family and friends or company. Understanding what is expected of you ( in return can become a difficult situation.
Successful Bootstrapped Companies
Building a strong business with a sound foundation and value takes time and many bootstrapped companies have achieved this by providing amazing products or services and eventually reached the point, through solid strategies and sustainable profit, where growth is so driven that the company grows to adopt a prolific and powerful position within the framework of businesses.
Many of the successful companies that we see today – Dell Computers, FaceBook Inc. (FB), Apple Inc. (AAPL), Clorox Co. (CLX), Coca Cola Co. (KO), Hewlett-Packard (HPQ), Microsoft Corp. (MSFT), Oracle Corp. ( ORCL), eBay Inc. (EBAY), Cisco Systems Inc. (CSCO), SAP (SAP) and Business Objects, to name a few, had their humble beginnings as a bootstrapped enterprise. Obviously there are entrepreneurs behind the scenes, such as Bill Gates, Steve Jobs, Michael Dell and Richard Branson.
Some less famous names, but nevertheless successful, in the entrepreneurial business are:
Brendan Synnott and Kelly Flatley – “Bear Naked Granola”
Mark Otero – “Mochi” – a frozen yoghurt company
Sara Blakely – “Spanx” – pantyhose
Drew Munster -- tennis e-commerce website, “Tennis Warehouse”
Nate Grahek – “StickyAlbums,” a mobile app for professional photographers
Moving forward, there are many more bootstrapped companies that are coming to the fore. One such company that has recently – June 26, 2014 – become a publicly traded company with an IPO value of $2.95 billion is…..
GoPro, Inc. (GPRO) which was formerly Woodman Labs, Inc is an American corporation that develops, manufactures and markets high-definition personal cameras.
Nick Woodman, an American from California, conceived the idea of a wrist strap that could tether already-existing cameras to surfers. His inspiration came after a 2002 Australia surfing trip, where he was hoping to capture quality action photos of his surfing. But he found he was unsuccessful as amateur photographer because he could not get close enough, or obtain quality equipment at accessible prices. He tested his first makeshift models but came to the realization that these were not good enough, therefore concluding that he would have to manufacture the camera, its housing and the strap all together.
The initial money raised to found the company, $10,000 dollars in bootstrapped cash, came from selling bead and shell belts out of Woodman’s VW van. He moved back in with his parents at age 26, and working many long hours to develop his product. He scraped by doing many different types of work -- from emailing to truck driving – so that he could design his product, which he did by hand because he didn’t have enough computer design experience to do so electronically.
In 2004, the company sold its first camera system, which was a 35mm analog camera, but eventually evolved to digital. As new adopters discovered the camera, the cameras have branched out from the surf scene to be used for auto racing, skiing, bicycling, snowboarding, skydiving, base jumping, white-water rafting and skateboarding, up close.
At the end of 2004, GoPro had $150,000 in revenue; at the end of 2005 GoPro made $350,000 in sales, and has been doubling revenue every year since then, now having grown to be worth over $2.5 billion.
Although it has taken 10 years for GoPro to reach its zenith today, there has been a great deal of aggressive marketing, social media strategy, as well as constant consumer technology advancements, and of course being in the right place at the right time by taking advantage of a situation when smartphones were making traditional digital cameras and camcorders obsolete.
It is important to note that Woodman was not a success the first time round. Previously, he had built two companies: The first was a website called “EmpowerAll.com” selling electronic products; the second, “Funbug," funded to the tune of $3.9 million was a gaming and marketing platform. Both had crashed. This marks the determination of a person who wishes to succeed, coming back a third time to pursue his dreams.
From a simple idea of improving the way action sports were captured, a great product used in all facets of life, and a billionaire, were born.
Other Bootstrapped Companies
Most companies have a bit of bootstrap in their past before moving to the next step and accepting outside funding. The decision to go the road of bootstrapping and create a self-funding business has been known to provide rewards that can be both immediate and lasting, such as found with these companies:
37Signals, also known as Basecamp, is a web application company that produces simple, focused software and has become a highly successful business which started as a cash strapped startup. It was founded in 1999 by Jason Fried and David Heinemeier Hansson (or DHH), who have co-written three bestselling books: “Getting Real”, “Rework”, and “Remote.”
37Signals, in the early years up until around 2005, was primarily a consulting agency, basically helping to create and improve company website designs and presence for companies such as Panera Bread and Meetup.com.
Since launch, the company has developed many new products -- producing both free and paid versions -- but in 2005 Basecamp, a powerful business tool for large and small businesses looking to get an amazing project management app, became the flagship product of the company.
GitHub, a web-based hosting service for software development projects that uses the Git revision control system, was founded by Tom Preston-Werner, who turned down $300,000 from Microsoft in 2008 in order to go full-time on GitHub, along with Chris Wanstrath and PJ Hyett.
This started as a weekend project, with the founders covering the costs involved to buy a domain, and when the decision was made to bring GitHub into fulltime operation they funded the setup costs themselves.
This perfect creation for developers which functions as a social network, portfolio space and co-working platform took off, and by 2013 GitHub had hit the 4 million user mark.
As the platform became accepted by programmers, requests for private repositories, or safe places to store their codes where others couldn’t view or steal them were being received. After this, the founders left their day jobs and focused full-time on the business by working various hours and locations, and began to release products that may not have been perfect at the start, but with customer feedback they corrected the issues, and the business grew.
Early in 2012 GitHub, finally chose to take an investment of $100 million dollars in funding at a valuation of $750 million from Andreessen Horowitz.
TechCrunch, a technology website, was founded in 2005 by a successful serial entrepreneur, Mike Arrington, along with Keith Teare. TechCrunch became the epitome of technology blogs online and basically transformed the space of blogging into great works of journalism. This enormous growth and trust among the cyberspace was achieved by putting out high quality, consistent content by sharing stories about the latest happenings in the tech and entrepreneurship world.
To further enhance their presence TechCrunch also created its powerful CrunchBase database with over half a million startups and high caliber entrepreneurs in the space. In 2010, TechCrunch was sold to AOL for a rumored $30 million. At the time, Arrington personally owned 85% of the company.
Gawker Media, a powerful and popular blog network, was originally formed in 2003 by Nick Denton. The money to fund the startup came from an earlier startup in the event industry, ‘First Tuesday”.
The early years saw Denton’s home as the base for the company, with a rented storefront for bloggers, until moving to a proper office in 2008.
It is reported that Gawker Media was worth $300 million in 2009, with its combination of advertising profits and relatively low costs.
As of March 2012, it was the parent company for several different weblogs -- Gawker.com, Lifehacker, Gizmodo, Jezebel, Deadspin, Lifehacker, io9, Kotaku and Jalopnik.
Gawker has survived, as well as caused numerous scandals due to its reporting techniques and controversial stories. Nonetheless, it has certainly been successful.
PlentyofFish, one of the largest and most popular dating sites in the world, founded by Markus Frind, became a full-time business in 2004. Until 2008 Frind conducted his business from his apartment, and then eventually acquired a new Vancouver headquarters where he began hiring other employees.
The site, as of February, 2014, had over 76 million registered users, with over 2 billion page views a month, as of April 2012, and the service is free. The company makes quite a bit of money via advertising as well as offering premium services as part of their upgraded membership.
PlentyofFish has grown into a billion dollar company without outside investment.
Lessons to draw
There are many companies that have been successfully bootstrapped; Braintree, TechSmith, Envato, AnswerLab, Litmus, iData, BigCommerce, Campaign Monitor, Nasty Gal, Indeed, Behance, Thrillist, Lead411, Office Divvy, Goldstar, Carbonmade, FastSpring, SparkFun, Grasshopper, Clicky, WooThemes, AppSumo, MailChimp, Burt’s Bees, Patagonia, Craigslist and Cheekd.com, just to name a few.
Bootstrapping companies, when seemingly doing the impossible, must constantly be looking for ways to improve their processes, even without hindsight or millions of dollars at hand. One area to take particular note of is the financial management of a growing company, as cash-flow surprises can be the-nail-in-the-coffin of a startup company – sloppy practices and shortcuts will, at times, be disastrous.
When building a business from the bottom-up, it is always preferable to be prepared for anything, which is not impossible as seen by the number of successful bootstrapped companies surrounding us.
The Bottom Line
Bootstrapping is likely to be part of the history of nearly every successful company, where, in many cases, it was entirely bootstrapped before accepting venture capital or other means of outside funding.
EntrepreneurshipThe term bootstrap refers to launching and building a business with little capital and no funding from outside sources.
InvestingAfter the success of Google Ventures, corporate venture capital is an increasingly popular diversification and hedging tool for many large corporations.
Mutual Funds & ETFsLearn about the best ways to gain exposure to startups. Startup investing has become quite popular and is slowly being democratized.
InvestingThe EU is turning up the heat on Google. What effect will it have on the company's bottom line?
Stock AnalysisMillionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
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EntrepreneurshipLearn why Denver is one of the hottest markets in America for startups, and identify five of the top startups that are emerging from the Denver market.
EntrepreneurshipLearn about the startup scene in the Research Triangle hub of Raleigh, North Carolina. Discover which startups are the hottest to emerge from this tech city.
EntrepreneurshipFind out how ClassPass makes money, how the company aims to help both businesses and consumers, and why it has been so successful.
EntrepreneurshipUnderstand why the startup scene has grown, and discover why it has become a large part of New York City. Learn about the top 10 New York City startups.
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