What is Bootstrap
Bootstrap is a situation in which an entrepreneur starts a company with little capital. An individual is said to be bootstrapping when he or she attempts to found and build a company from personal finances or from the operating revenues of the new company.
Compared to using venture capital, boot strapping can be beneficial, as the entrepreneur is able to maintain control over all decisions. On the downside, however, this form of financing may place unnecessary financial risk on the entrepreneur. Furthermore, boot strapping may not provide enough investment for the company to become successful at a reasonable rate.
BREAKING DOWN Bootstrap
The term boostrap itself originates from the phrase "pulling oneself up by one's bootstraps," and professionals who engage in bootstrapping are known as bootstrappers. These individuals typically rely on personal savings and the earliest instances of revenue to begin funding their own startup companies. This contrasts with other entrepreneurial actions, which may include contacting external investors and other business professionals to begin funding their operations. Studies show that more than 80% of new startup operations are funded through the founders' personal finances. The recorded median in start-up capital is reported at approximately $10,000.
Pros & Cons of Bootstrapping
Though not as quick in turning profits, bootstrapping is a steady way to begin compiling revenue and to support future investments by providing the business with a safety net for long-term cost management. Bootstrapping provides professionals with the peace of mind they need to focus on building relations with customers and other professionals.
Because the business does not have to rely on other sources of funding, initial business owners do not have to worry about diluting ownership between investors. Entrepreneurs do not need to issue equity, and they can focus debt on personal sources. Bootstrapping allows business owners to experiment with their brand more, as there is not as much pressure for them to get their product right the first time. With personal startup funds, they can experiment with focus groups until they are satisfied with the results of their venture.
However, this also increases the degree of risk for the starter, because they may need to micromanage their source of income as well as their business venture. When a startup is launched with the starter's own funds, generating revenue is essential in order to keep the business afloat. A successful profit plan must be operational early, which can lead to growth models that weren't part of the original plan. Additionally, without large amounts of money from outside investors, some startups might not be able to develop and expand as quickly as desired. For instance, a certain amount of revenue is essential for expanding the team and for adequate marketing. Milestone could take longer to reach.
Another downside to bootstrapping could be a lack of credibility. Not having outside investors could hurt a company's credibility in the beginning, because it could seem as though no investors were interested, even if that isn't case. Being backed by well-respected investors can give potential customers the reassurance to buy in, which self-funding could potentially highlight a company's lack of resources and experience.
Examples of Successfully Bootstrapped Businesses
One example of a successfully bootstrapped business is Electronic Data Systems. Ross Perot first started EDS, an information technology equipment and services company, in 1962 with $1,000 he saved up in personal funds from previous employment arrangements. Through persistence and careful networking, he turned his small startup operation into a multi-billion-dollar company.
Another example of a successfully bootstrapped business is Spanx. Founded by Sara Blakely, Spanx was launched out of Atlanta with $5,000 of Blakley's personal savings; she even wrote a patent application for the now-famous women's undergarment and filed it herself to save on legal fees. Blakely still owns 100 percent of Spanx, which has an estimated $400 million in sales, and has never taken money from outside investors.
One last example of a successful business started with personal funds is Tough Mudder. Co-founded by Will Dean and Guy Livingstone in 2010 with only $8,300, the boot-camp-style race features challenging obstacles and tapped into a market of athletic competitions. They spent $300 on a website and $8,000 on Facebook ads to promote the race, and proved successful when more than 5,000 people participated in the first Tough Mudder. The company made more than $100 million in revenue through registration fees and sponsorship deals, and more than two million people have run the company's races in 10 countries since its founding eight years ago. To this day, they still haven't accepted any outside investments.