Bootstrapping is likely to be part of the history of nearly every successful company. In many cases, these companies are entirely bootstrapped before management accepts venture capital or other means of outside funding.
Entrepreneurs who are self-made—that is, they bootstrapped their way to success—are a rare breed. To start a business and bring it to successful fruition takes a sound mix of confidence, risk tolerance, self-discipline, determination, and competitiveness. Bootstrappers take an idea—and using talent and professionalism—build a worthwhile business without the backing from investors and having little or no starting capital. It takes great dedication, sound work ethics, and pure single-mindedness to achieve success this way. Some of the greatest entrepreneurs—such as Sam Walton and Steve Jobs—exemplify these characteristics.
- Entrepreneurs who bootstrap their companies start with very little money and no outside investments to build their business.
- Instead, these entrepreneurs might rely on sweat equity, customer funding, personal debt, or personal savings to provide initial capital.
- For new companies, bootstrapping might be an effective model because it encourages simplicity and flexibility during the early-growth phase.
- Software development platform company, GitHub, launched as a bootstrapped startup in 2008 and was bought by Microsoft for $7.5 billion in 2018.
The Origin of Bootstrapping
The origin of bootstrapping is unclear, but a couple of sayings that apply are:
- "Pull oneself over a fence by one's bootstraps." This saying originated in the early 19th century United States and implies that it is an impossible action,
- “Pulling oneself up by one’s bootstraps.” This refers to 19th-century high-top boots that were pulled on by tugging at ankle straps. It generally means doing something on your own, without outside help, and in many cases, the hard way.
This definition provides additional insight:
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: The use of personal income and savings.
- Personal Debt: Usually incurring personal credit card debt.
- Sweat Equity: A party's contribution to the company in the form of effort.
- Operating Costs: Keep costs as low as possible.
- Inventory Minimization: Requires a fast turnaround of inventory.
- Subsidy Finance: Government cash payments or tax reductions.
- Selling: Cash to run the business comes from sales.
Bootstrapping a Business/Company
A bootstrapped company usually grows through three funding stages: 1) beginning stage, 2) customer-funded stage, and 3) credit stage.
This 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.
In this stage, money from customers is used to keep the business operating and, eventually, funds growth. Once operating expenses are met, growth will speed up.
In the credit stage, 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 even find venture capital, for expansion.
What's Needed to Bootstrap a Company
To run a successful bootstrapped company, an entrepreneur must execute a big idea, focus on profits, develop skills, and become a better business person.
Execute on Big Idea
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 will be successful in 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. These 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
Low Cost of Entry
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.
You Call the Shots
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.
Concentrate on Building the Business
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 and product development. Additionally, due to the limited cash supply—alternative options, such as factoring, asset re-financing, and trade finance—become part of the norm with bootstrapping.
Building the financial foundations of a business, on your own, is a huge attraction to future investors. Investors, such as banks and venture 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.
Disadvantages of Bootstrapping
Cash Flow Issues
Because of the lack of capital and cash flow, problems can arise if a company doesn’t generate the capital it needs to develop products and grow. An entrepreneur's lack of experience and know-how—particularly in the fields of business acumen and leads—can cause stagnation and disaster.
Equity Issues Among Multiple Founders
When there is more than one founder, equity issues can become a problem. If there is an imbalance between the founders regarding the amount of capital invested, experience, or time, this could cause disharmony as well as adverse tax consequences.
Commingling company funds and personal funds can defeat one of the major reasons to incorporate or set up 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.
Risk of Failure Can Be High
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 the abilities of friends and relatives who might be willing to help.
You'll need to become adept at handling stressful situations that might crop up if you finance your company using debt to another person, such as family members and friends. Understanding what is expected of you and communicating this clearly to others can help you cope with the stress of the 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. Eventually, they reach the point, through solid strategies and sustainable profit, where the company grows to have a powerful position within their industry.
Many of the successful companies that we see today had their humble beginnings as a bootstrapped enterprise. Examples of these include:
Obviously, there are entrepreneurs behind the scenes of successfully bootstrapped companies, such as Bill Gates, Steve Jobs, Michael Dell, and Richard Branson.
Example of a Bootstrapped Company
GoPro, Inc. (GPRO), which was formerly Woodman Labs, Inc, is an American corporation that develops, manufactures, and markets high-definition personal cameras. The company manufactures small, body-worn cameras that record the user's experiences. These cameras became popular among sports enthusiasts because of their ability to record hands-free, high-definition footage.
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 an amateur photographer because he could not 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 himself.
The initial money Woodman raised to found the company—$10,000 dollars in bootstrapped cash—came from selling bead and shell belts out of his VW van. He moved back in with his parents at age 26 and worked 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, which eventually evolved to digital. As new adopters discovered the product, the cameras branched out from the surf scene to be used for auto racing, skiing, bicycling, snowboarding, skydiving, base jumping, white-water rafting, and skateboarding.
Sales Drive Growth
At the end of 2004, GoPro had $150,000 in revenue. At the end of 2005, GoPro made $350,000 in sales. The company consistently grew revenue and in 2014 GoPro went public with an initial public offering (IPO) valued at $2.96 billion.
Although it took 10 years for GoPro to reach its zenith, there had been a great deal of aggressive marketing, social media strategy, as well as constant consumer technology advancements going on throughout this time. And, of course, the company benefitted from 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.
However, Woodman was not a success the first time around. 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 failed. Determined to succeed, Woodman came back a third time to pursue his dreams with GoPro.
The Ups and Downs of Business
It's important to note that like all businesses, a company that starts out as a bootstrap venture will face the same headwinds that all companies face once they mature past the early stages. GoPro is no exception to this. Since trading at a high of around $85 a share in Oct. 2014, the company's stock has plummetted to around $4.25 a share as of Jan. 2020.
The business model that made the company successful began to falter when GoPro faced competition from other action-camera companies and from the new technology that made smartphones the camera of choice for many consumers. Over the years, GoPro's competitive advantage over its rivals has decreased. Going forward, the company looks to recapture market share by introducing new cameras that feed the demand for high-quality social media content.
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.
Basecamp (which started out as 37Signals) is a web application company that produces simple, focused software. It has become a highly successful business that 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.
In the early years up until around 2005, the company was primarily a consulting agency, basically helping to create and improve company website designs for companies such as Panera Bread and Meetup.com.
Since its launch, the company has developed many new products—producing both free and paid versions. In 2005, Basecamp—a powerful business tool for large and small businesses looking to get a 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, 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 platform for developers—which functions as a social network, portfolio space, and co-working space—took off. 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. As of Aug. 2019, 40 million developers worldwide use the company's software development platform.
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. The site achieved enormous growth and a loyal readership by putting out high quality, consistent content and by sharing stories about the latest happenings in the tech and entrepreneurship worlds.
To further enhance their presence, TechCrunch also created its powerful CrunchBase database with over half a million startups and high caliber entrepreneurs. In 2010, TechCrunch was sold to AOL for a rumored $30 million. At the time, Arrington personally owned 85% of the company.
Plenty of Fish
Plenty of Fish, 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 startup from his apartment, and then eventually acquired a new Vancouver, Canada headquarters where he began hiring other employees.
As of Feb. 2020, Plenty of Fish had over 150 million registered users worldwide and is adding an average of 65,000 new users every day. The free app is available in 11 languages and more than 20 countries on iOS and Android devices. The company makes money via advertising as well as offering premium services as part of their upgraded membership. In 2015, Plenty of Fish was acquired by Match Group.
The Bottom Line
There are many companies that have been successfully bootstrapped: Braintree, TechSmith, Envato, AnswerLab, Litmus, iData, BigCommerce, Campaign Monitor, Indeed, Behance, Thrillist, Lead411, Office Divvy, Goldstar, Carbonmade, FastSpring, SparkFun Electronics, Grasshopper, Clicky, WooThemes, AppSumo, MailChimp, Burt’s Bees, Patagonia, and Craigslist are just 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. Bootstrapping is likely to continue to be part of the history of many successful companies.