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.

BREAKING DOWN 'Bootstrapping'

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.

RELATED TERMS
  1. Accretive Acquisition

    An accretive acquisition is one that will increase the acquiring ...
  2. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, ...
  3. Airdrop (Cryptocurrency)

    Airdrop gives community members free cryptocoins as a promotion.
  4. Normal Yield Curve

    The normal yield curve is a yield curve in which short-term debt ...
  5. On-The-Run Treasury Yield Curve

    The on-the-run Treasury yield curve is derived from on-the-run ...
  6. Riding the Yield Curve

    Riding the Yield Curve is a trading strategy that involves buying ...
Related Articles
  1. Small Business

    Companies That Succeeded With Bootstrapping

    Bootstrapping is likely to be part of the history of nearly every successful company. Here are a few success stories.
  2. Insights

    Understanding The Treasury Yield Curve Rates

    Treasury yield curves are a leading indicator for the future state of the economy and interest rates.
  3. Small Business

    How Starting A Business at 40+ Is Different

    Pluses and maybes to consider before you leap – or before you dig yourself deeper into the hole where you’ve landed.
  4. Small Business

    10 Characteristics of Successful Entrepreneurs

    Being a successful entrepreneur requires more than just an idea or a lot of money. Here are 10 things that set successful entrepreneurs apart.
  5. Financial Advisor

    How to Manage Entrepreneurial Risk

    Entrepreneurs face many risks that general employees don't. Understand these entrepreneurial risks and find out how to mitigate some of them.
  6. Small Business

    How Financial Planning Differs for Entrepreneurs

    There are a number of ways in which financial planning differs for entrepreneurs.
  7. Managing Wealth

    Build Your Wealth Like a Serial Entrepreneur

    Investing wisely is one way to build wealth. But serial entrepreneurs are rethinking the way they build their portfolios.
  8. Small Business

    3 Personal Finance Tips for Entrepreneurs

    Entrepreneurs, use these three personal financial tips to get you on the right track.
  9. Investing

    How Do I Calculate Yield To Maturity Of A Zero Coupon Bond?

    Yield to maturity is a basic investing concept used by investors to compare bonds of different coupons and times until maturity.
RELATED FAQS
  1. What is the difference between a zero-coupon bond and a regular bond?

    A zero-coupon bond does not pay coupons or interest payments like a typical bond does; instead, a zero-coupon holder receives ... Read Answer >>
  2. What risks does an entrepreneur face?

    Find out if you have what it takes to overcome the challenges and risks associated with starting a business and becoming ... Read Answer >>
  3. Who coined the term "entrepreneur"?

    Entrepreneur is a French word coined by an economist, Jean-Baptiste Say, and usually is translated as "adventurer." Read Answer >>
  4. How do I calculate yield to maturity of a zero-coupon bond?

    Find out how to calculate the yield to maturity of a zero-coupon bond, and learn why this calculation is simpler than one ... Read Answer >>
Trading Center