What Is Bootstrapping?
Bootstrapping is building a company from the ground up with nothing but personal savings and, with luck, the cash coming in from the first sales. The term is also used as a noun: A bootstrap is a business launched by an entrepreneur with little or no outside cash or other support.
The word bootstrapping has come to be used for a variety of other self-starting processes. It describes the creation of complex software programs in successive and interdependent stages. The term "booting up" for starting up a computer's operating system may come from bootstrapping.
Bootstrapping has its origin in the early 19th century with the term "pulling up by one's own bootstraps." Initially, it implied an obviously impossible feat. Later, it became a metaphor for achieving success with no outside assistance.
Important: More than 80% of startup operations are funded by the founders' personal finances. The median in start-up capital is about $10,000.]
How Bootstrapping Works
Bootstrapping is a tough way to go. It places all the financial risk on the entrepreneur. Extremely limited resources can inhibit growth, prevent promotion, and even undermine the quality and integrity of the product or service that is envisioned.
On the other hand, the entrepreneur is able to maintain total control over all decisions and the business itself. And all the energy goes into the product itself, not into pitching venture capitalists and other potential sources of capital investment.
Studies show that more than 80% of startup operations are funded by the founders' personal finances. The median in start-up capital is about $10,000.
Examples of Bootstrapping
Keep in mind that 90% of all startups fail, according to a 2015 survey by Forbes. Still, like the lottery, somebody's got to win, and bootstrapping has its big winners. It wasn't luck. They had great ideas and they ran with them.
- Sarah Blakely founded Spanx, the company devoted to slimming undergarments, with $5,000 of her personal savings in 2000. The company's first headquarters was her apartment in Atlanta. She even wrote and filed her own patent application to save on legal fees. In 2016, Blakely made Forbes' first list of the richest self-made women. Blakely still owns 100 percent of Spanx. Her personal fortune is estimated at about $1 billion.
- Tough Mudder, the endurance race event series, was co-founded by Will Dean and Guy Livingstone in 2010. Their total expenditure was $300 for a website and $8,000 on Facebook ads. More than 5,000 people participated in the first Tough Mudder event. Since then, more than two million people have run the company's races in 10 countries. The founders have made more than $100 million through registration fees and sponsorship deals.
- In 1962, Ross Perot founded Electronic Data Systems, a pioneer in information technology management, with $1,000 in personal savings. By 1979, the company had $270 million in annual revenues and 8,000 employees. The company was sold to General Motors for $2.5 billion in 1982.
Advantages and Disadvantages of Bootstrapping
It's rarely a quick way to turn a profit, but bootstrapping can be a way to start slowly bringing in revenue and establishing a safety net that will fund future investments in the business.
Bootstrapping allows business owners to experiment more with their brand, as there is no pressure from investors to get the product right the first time. There is another kind of pressure, though, and that comes from the fact that the entrepreneur has personal assets, and maybe family assets as well, on the line.
Another downside to bootstrapping can be a lack of credibility. The backing of respected investors can automatically give a business higher visibility and greater respect from vendors and customers.
- Extremely limited resources can inhibit growth, prevent promotion, and even undermine the quality of the bootstrapped product.
- The bootstrap entrepreneur retains total control of the business and makes all of the decisions.