What is Bootstrapping?
Bootstrapping describes a situation in which an entrepreneur starts a company with little capital, relying on money other than outside investments. An individual is said to be bootstrapping when he attempts to found and build a company from personal finances or the operating revenues of the new company. Bootstrapping also describes a procedure used to calculate the zero-coupon yield curve from market figures.
How Bootstrapping Works
Bootstrapping a company occurs when a business owner starts a company with little to no assets. This is in contrast to starting a company by first raising capital through angel investors or venture capital firms. Instead, bootstrapped founders rely on personal savings, sweat equity, lean operations, quick inventory turnover and a cash runway to become successful. For example, a bootstrapped company may take preorders for its product, thereby using the funds generated from the orders to actually build and deliver the product itself. In investment finance, bootstrapping is a method that builds a spot rate curve for a zero-coupon bond.
Example of How Bootstrapping Is Used for Spot Rates
This methodology is essentially used to fill in the gaps between yields for Treasury securities or Treasury coupon strips. For example, since the T-bills offered by the government are not available for every time period, the bootstrapping method is used to fill in the missing figures to derive the yield curve. The bootstrap method uses interpolation to determine the yields for Treasury zero-coupon securities with various maturities.
An Example of Bootstrapping a Business
Compared to using venture capital, bootstrapping can be beneficial because the entrepreneur is able to maintain control over all decisions. On the downside, this form of financing may place unnecessary financial risk on the entrepreneur. Furthermore, bootstrapping may not provide enough investment for the company to become successful at a reasonable rate.
However, there have been many successful companies that started as a bootstrapped operation. For example, the home search platform Estately was bootstrapped by its two founders, Galen Ward and Douglas Cole. Ward quit his job in 2007 to start the company and convinced his partner to drop out of graduate school to join him. With enough personal finances to live on for a year, the two co-founders invested $4,000 total to purchase a cheap server, pay for incorporation fees and maintain a runway that could cover miscellaneous expenses.
The company grew from the $4,000 personal investment to a reported $1 million in revenue as of Feb 26, 2014. It was also reported to have 17 employees. Additionally, bootstrapped companies, even if they become successful, can still decide to take on future investments. In fact, this is often the case when a successful company hits a growth plateau and uses outside investments to accelerate its business.